<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR ABOUT OCTOBER 16,
1998
REGISTRATION NOS. 333-
811-5195
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 537-7000
WITH A COPY TO:
<TABLE>
<S> <C>
KATHRYN L. QUIRK, VICE PRESIDENT DAVID A. STURMS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 SOUTH RIVERSIDE PLAZA 222 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60606 CHICAGO, ILLINOIS 60601
(NAME AND ADDRESS OF AGENT FOR SERVICE)
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
CROSS-REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROSPECTUS/PROXY
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<S> <C> <C>
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus/Proxy Statement................ Outside front cover page of Prospectus/Proxy
Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement................ Outside back cover page of Prospectus/Proxy
Statement
Item 3. Fee Table, Synopsis Information and Risk
Factors................................... Summary; Risk Factors
Item 4. Information about the Transaction......... Summary; The Proposed Reorganization
Item 5. Information about the Registrant.......... Outside front cover page of Prospectus/Proxy
Statement; Summary; The Proposed
Reorganization; Other Information; Prospectus
and Statement of Additional Information of
the Adjustable Rate Fund (incorporated by
reference)
Item 6. Information about the Company Being
Acquired.................................. Outside front cover page of Prospectus/Proxy
Statement; Summary; Prospectus and Statement
of Additional Information of the
Short-Intermediate Fund (incorporated by
reference)
Item 7. Voting Information........................ Other Information; Voting Information and
Requirements
Item 8. Interest of Certain Persons and Experts... Summary; The Proposed Reorganization
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters.............................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page................................ Cover Page
Item 11. Table of Contents......................... Table of Contents
Item 12. Additional Information about the
Registrant................................ Additional Information about the Adjustable
Rate Fund; Incorporation of Documents by
Reference
Item 13. Additional Information about the Company
Being Acquired............................ Additional Information about the Short-
Intermediate Fund; Incorporation of Documents
by Reference
Item 14. Financial Statements...................... Financial Statements; Incorporation of
Documents by Reference
</TABLE>
PART C OTHER INFORMATION
<TABLE>
<S> <C>
Items 15-17.
Information required to be included in Part C is set forth
under the appropriate item, so numbered, in Part C of this
Registration Statement.
</TABLE>
- -------------------------
* References are to captions within the part of the Registration Statement to
which the particular item relates except as otherwise indicated.
<PAGE> 3
IMPORTANT INFORMATION FOR
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
YOUR FUND WILL HOST A JOINT SPECIAL MEETING OF SHAREHOLDERS ON WEDNESDAY,
DECEMBER 16, 1998, IN BOSTON, MASSACHUSETTS. THE PURPOSE IS TO VOTE ON CERTAIN
IMPORTANT PROPOSALS AFFECTING YOUR FUND.
THE FIRST FEW PAGES OF THIS BOOKLET SUMMARIZE THE PROPOSALS AND EXPLAIN THE
PROXY PROCESS -- INCLUDING HOW TO CAST YOUR VOTES. BEFORE YOU VOTE, PLEASE READ
THE FULL TEXT OF THE PROXY STATEMENT FOR A COMPLETE UNDERSTANDING OF THE
PROPOSALS.
Q. WHAT ARE SHAREHOLDERS BEING ASKED TO VOTE ON AT THE UPCOMING SPECIAL
SHAREHOLDER MEETING ON DECEMBER 16, 1998?
A. The Board of Trustees for the Kemper Short-Intermediate Government Fund (the
"Short-Intermediate Fund") has called a Special Shareholder Meeting for
December 16, 1998 at which you will be asked to vote on the approval of a
new investment management agreement and a reorganization (the
"Reorganization") of your fund into the Kemper Adjustable Rate U.S.
Government Fund (the "Adjustable Rate Fund"). As part of the Reorganization,
Adjustable Rate Fund shareholders will be asked to vote on a new investment
objective and revisions to certain investment policies. The Adjustable Rate
Fund would then be renamed as the Kemper Short-Term U.S. Government Fund
(the "Combined Fund"). Consummation of the Reorganization is contingent upon
the approval of shareholders of the Adjustable Rate Fund of a new investment
objective and policies.
Q. ARE THERE ANY DIFFERENCES BETWEEN THE FUNDS?
A. The Short-Intermediate 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. The Adjustable Rate Fund
currently seeks high current income consistent with low volatility of
principal from a portfolio composed primarily of adjustable rate U.S.
Government securities. The Combined Fund will seek high current income and
preservation of capital from a portfolio composed primarily of short-term
U.S. Government securities and have a target maturity of less than three
years.
Q. WHAT ADVANTAGES WILL THE REORGANIZATION PRODUCE FOR FUND SHAREHOLDERS?
A. We expect the proposed Reorganization to (i) lower operating expenses as a
percentage of net assets due to the Combined Fund's larger net assets and
greater economies of scale; (ii) reduce interest rate risk as the Combined
Fund will have a maturity range of 1-3 years versus a maturity of 2-5 years
for the Short-Intermediate Fund, and (iii) potentially increase income and
total return potential as the Combined Fund will have the ability to invest
a portion of its assets in lower quality non-U.S. Government securities.
Q. WHAT IS THE TIMETABLE FOR THE REORGANIZATION?
A. The Joint Special Meeting is scheduled for December 16, 1998. Shareholders
of record as of September 22, 1998 will be eligible to vote their shares at
the Joint Special Meeting. If approved, the Reorganization is expected to
close as soon as practicable after the Joint Special Meeting of
Shareholders.
Q. WILL I RECEIVE NEW SHARES IN EXCHANGE FOR MY CURRENT SHARES?
A. Yes. Upon approval and completion of the Reorganization, shareholders of the
Short-Intermediate Fund will exchange their shares for shares of the
Adjustable Rate Fund based upon a specified exchange ratio determined by the
ratio of the respective net asset values of the funds. You will receive
Adjustable Rate Fund shares whose aggregate value at the time of issuance
will equal the aggregate value of your Short-Intermediate Fund shares on
that date.
<PAGE> 4
Q. IF I OWN SHARES IN CERTIFICATE FORM, WILL I NEED TO EXCHANGE THEM FOR
CERTIFICATES OF MY NEW FUND?
A. Certificates for Adjustable Rate Fund shares will not be issued
automatically as part of the Reorganization, although we will send you
certificates upon request. If you currently own Short-Intermediate Fund
shares in certificate form, you will need to return these certificates to
Kemper in order to receive new certificates for your Adjustable Rate Fund
shares.
If you prefer, however, you may exchange your certificates for book entry
shares. These shares are held in a convenient computerized system that
enables shareholders to receive a complete and accurate record of their
holdings without having to worry about the safekeeping of certificates or
the expense involved with replacing a lost or stolen certificate.
Regardless of the way you choose to hold your shares after the
Reorganization, certificates should be returned to the fund's shareholder
service agent by certified mail as soon as possible.
Q. WILL I HAVE TO PAY ANY FEES OR EXPENSES IN CONNECTION WITH THE
REORGANIZATION?
A. No. The expenses associated with the Reorganization will be borne by Scudder
Kemper Investments, Inc., the investment adviser for the Funds.
Q. HOW DO MANAGEMENT FEES AND OTHER FUND OPERATING EXPENSES COMPARE BETWEEN THE
TWO FUNDS?
A. The investment management fee schedules for the funds are the same. Fund
management expects that the overall expenses, as a percentage of net assets,
will decrease reflecting the larger net assets and greater economies of
scale of the Combined Fund.
Q. WILL THIS REORGANIZATION CREATE A TAXABLE EVENT FOR ME?
A. The Reorganization is intended to be done on a tax-free basis for federal
income tax purposes. Therefore, you will recognize no gain or loss for
federal income tax purposes as a result of the Reorganization. In addition,
the tax basis and holding period of the Adjustable Rate Fund shares you
receive will be the same as the tax basis and holding period of your
Short-Intermediate Fund shares.
Q. CAN I EXCHANGE OR REDEEM MY SHORT-INTERMEDIATE FUND SHARES BEFORE THE
REORGANIZATION TAKES PLACE?
A. You may exchange your Short-Intermediate Fund shares for shares of any other
Kemper Fund, or redeem your shares, at any time. If you choose to do so,
your request will be treated as a normal exchange or redemption of shares
(subject to any applicable deferred sales charge) and will be a taxable
transaction for federal income tax purposes.
Q. WHAT ELSE WILL I BE VOTING ON?
A. You will also be asked to vote on the approval of a new investment
management agreement.
Q. WHY AM I BEING ASKED TO VOTE ON A NEW INVESTMENT MANAGEMENT AGREEMENT?
A. Zurich Insurance Company ("Zurich"), which is the majority owner of your
Fund's adviser, Scudder Kemper Investments, Inc. ("Scudder Kemper"), has
combined its businesses with the financial services businesses of B.A.T.
Industries p.l.c. ("B.A.T"). The resulting company, Zurich Financial
Services ("Zurich Financial Services"), has become Zurich's parent company.
Although this transaction will not affect the operations of Scudder Kemper
or your Fund, we are asking the Fund's shareholders to approve a new
investment management agreement to assure that there is no interruption in
the services Scudder Kemper provides to your Fund.
As a result of the Zurich-B.A.T transaction, the former shareholders of
B.A.T indirectly own a 43% interest in Zurich through a new holding company,
Allied Zurich p.l.c. This change in ownership of Zurich may be deemed to
have caused a "change in control" of Scudder Kemper, even though Scudder
Kemper's operations will not change as a result. The Investment Company Act
of 1940, which regulates investment companies such as your Fund, requires
that fund shareholders approve a new investment management agreement
whenever there is a change in control of a fund's adviser (even in the most
technical, definitional sense). Pursuant to an exemptive order issued by the
<PAGE> 5
Securities and Exchange Commission, your Fund entered into a new investment
management agreement, subject to receipt of shareholder approval within 150
days. Accordingly, we are seeking shareholder approval of the new investment
management agreement with your Fund.
Q. HOW WILL THE ZURICH-B.A.T TRANSACTION AFFECT ME AS A FUND SHAREHOLDER?
A. We do not expect the transaction to affect you as a Fund shareholder. The
new investment management agreement is identical to the former investment
management agreement, except for the dates of execution and termination.
Similarly, the other service arrangements between your Fund and Scudder
Kemper or affiliates of Scudder Kemper will not be affected. If shareholders
do not approve the new investment management agreement, the agreement will
terminate and the Board Members of your Fund will take such action as they
deem to be in the best interests of your Fund and its shareholders.
Q. HAS THE FUND'S BOARD OF TRUSTEES APPROVED THE PROPOSAL?
A. The Board of Trustees for the Short-Intermediate Fund has unanimously agreed
that the new investment management agreement and the Reorganization are in
your best interests and recommends that you vote in favor of them.
Q. HOW DO I VOTE MY SHARES?
A. You can vote your shares by completing and signing the enclosed proxy
card(s), and mailing them in the enclosed postage-paid envelope. If you need
any assistance, or have any questions regarding the proposals or how to vote
your shares, please call your financial adviser or Kemper at (800) -
weekdays from 7:00 a.m. to 7:00 p.m. Central time.
Q. WILL KEMPER CONTACT ME?
A. You may receive a call to verify that you received your proxy materials and
to answer any questions you may have about the Reorganization.
THE BOARD MEMBERS OF YOUR FUND, INCLUDING THOSE WHO ARE NOT AFFILIATED WITH
THE FUND, SCUDDER KEMPER OR ZURICH, RECOMMEND THAT YOU VOTE FOR APPROVAL OF
THE REORGANIZATION AND FOR APPROVAL OF THE NEW INVESTMENT MANAGEMENT
AGREEMENT.
<PAGE> 6
IMPORTANT INFORMATION FOR
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
YOUR FUND WILL HOST A JOINT SPECIAL MEETING OF SHAREHOLDERS ON WEDNESDAY,
DECEMBER 16, 1998, IN BOSTON, MASSACHUSETTS. THE PURPOSE IS TO VOTE ON CERTAIN
IMPORTANT PROPOSALS AFFECTING YOUR FUND.
THE FIRST FEW PAGES OF THIS BOOKLET SUMMARIZE THE PROPOSALS AND EXPLAIN THE
PROXY PROCESS -- INCLUDING HOW TO CAST YOUR VOTES. BEFORE YOU VOTE, PLEASE READ
THE FULL TEXT OF THE PROXY STATEMENT FOR A COMPLETE UNDERSTANDING OF THE
PROPOSALS.
Q. WHAT ARE SHAREHOLDERS BEING ASKED TO VOTE ON AT THE UPCOMING SPECIAL
SHAREHOLDER MEETING ON DECEMBER 16, 1998?
A. The Board of Trustees for the Kemper Adjustable Rate U.S. Government Fund
(the "Adjustable Rate Fund") has called a Special Shareholder Meeting for
December 16, 1998 at which you will be asked to vote on the approval of a
new investment management agreement and, in connection with a reorganization
of the Kemper Short-Intermediate Government Fund (the "Short-Intermediate
Fund") into the Adjustable Rate Fund, a new investment objective and
policies.
Q. WHY AM I BEING ASKED TO VOTE ON A NEW INVESTMENT MANAGEMENT AGREEMENT?
A. Zurich Insurance Company ("Zurich"), which is the majority owner of your
Fund's Adviser, Scudder Kemper Investments, Inc. ("Scudder Kemper"), has
combined its businesses with the financial services businesses of B.A.T.
Industries p.l.c. ("B.A.T"). The resulting company, Zurich Financial
Services ("Zurich Financial Services"), has become Zurich's parent company.
Although this transaction will not affect the operations of Scudder Kemper
or your Fund, we are asking the Fund's shareholders to approve a new
investment management agreement to assure that there is no interruption in
the services Scudder Kemper provides to your Fund.
As a result of the Zurich-B.A.T transaction, the former shareholders of
B.A.T indirectly own a 43% interest in Zurich through a new holding company,
Allied Zurich p.l.c. This change in ownership of Zurich may be deemed to
have caused a "change in control" of Scudder Kemper, even though Scudder
Kemper's operations will not change as a result. The Investment Company Act
of 1940, which regulates investment companies such as your Fund, requires
that fund shareholders approve a new investment management agreement
whenever there is a change in control of a fund's adviser (even in the most
technical, definitional sense). Pursuant to an exemptive order issued by the
Securities and Exchange Commission, your Fund entered into a new investment
management agreement, subject to receipt of shareholder approval within 150
days. Accordingly, we are seeking shareholder approval of the new investment
management agreement with your Fund.
Q. HOW WILL THE ZURICH-B.A.T TRANSACTION AFFECT ME AS A FUND SHAREHOLDER?
A. We do not expect the transaction to affect you as a Fund shareholder. The
new investment management agreement is identical to the former investment
management agreement, except for the dates of execution and termination.
Similarly, the other service arrangements between your Fund and Scudder
Kemper or affiliates of Scudder Kemper will not be affected. If shareholders
do not approve the new investment management agreement, the agreement will
terminate and the Board Members of your Fund will take such action as they
deem to be in the best interests of your Fund and its shareholders.
Q. WHAT IS HAPPENING WITH THE REORGANIZATION?
A. The Board of Trustees for the Short-Intermediate Fund has called a Special
Shareholder Meeting for December 16, 1998 at which its shareholders will be
asked to vote on the approval of a new investment management agreement and a
reorganization (the "Reorganization") of the Short-Intermediate Fund into
the Adjustable Rate Fund. Consummation of the Reorganization is contingent
upon shareholders of the Adjustable Rate Fund approving changes to its
investment objective and policies. As a part of these changes, the
Adjustable Rate Fund would be renamed as the Kemper Short-Term U.S.
Government Fund (the "Combined Fund").
<PAGE> 7
Q. WHAT ADVANTAGES WILL THE REORGANIZATION PRODUCE FOR FUND SHAREHOLDERS?
A. We expect the proposed Reorganization to lower operating expenses as a
percentage of net assets due to the Combined Fund's larger net assets and
greater economies of scale.
Q. WHAT IS THE TIMETABLE FOR THE REORGANIZATION?
A. The Joint Special Meeting of Shareholders is scheduled for December 16,
1998. Shareholders of record as of September 22, 1998 will be eligible to
vote their shares at the Joint Special Meeting. If approved, the
Reorganization is expected to close as soon as practicable after the Joint
Special Meeting of Shareholders.
Q. WILL I HAVE TO PAY ANY FEES OR EXPENSES IN CONNECTION WITH THE
REORGANIZATION?
A. No. The expenses associated with the Reorganization will be borne by Scudder
Kemper Investments, Inc., the investment adviser for the Funds.
Q. WHAT ARE THE PROPOSED NEW INVESTMENT OBJECTIVES AND POLICIES?
A. In connection with the Reorganization, you are being asked to approve a new
investment objective and policies that will give the Adjustable Rate Fund
greater flexibility to invest in fixed rate U.S. government securities and,
to a limited extent, in other lower quality non-U.S. government securities.
The Adjustable Rate Fund's new investment objective will be to seek high
current income and preservation of capital.
Q. WHAT ADVANTAGES WILL THE CHANGING OF THE INVESTMENT OBJECTIVE AND POLICIES
PRODUCE FOR FUND SHAREHOLDERS?
A. The new investment policies of the Adjustable Rate Fund would provide more
diversification of investment choice and give the Adviser greater
flexibility to invest in short-term fixed income U.S. Government securities
and, to a limited extent, in lower quality non-U.S. Government securities.
While this change in approach may result in more volatility of principal,
the Adviser believes that the greater flexibility to invest in lower quality
non-U.S. Government securities could potentially increase income and total
return.
Q. HAS THE FUND'S BOARD OF TRUSTEES APPROVED THE PROPOSALS?
A. The Board of Trustees for the Adjustable Rate Fund has unanimously agreed
that the new investment management agreement and the new investment
objective and policies are in your best interests and recommends that you
vote in favor of them.
Q. HOW DO I VOTE MY SHARES?
A. You can vote your shares by completing and signing the enclosed proxy
card(s), and mailing them in the enclosed postage-paid envelope. If you need
any assistance, or have any questions regarding the proposals or how to vote
your shares, please call your financial adviser or Kemper at (800) -
weekdays from 7:00 a.m. to 7:00 p.m. Central time.
Q. WILL KEMPER CONTACT ME?
A. You may receive a call to verify that you received your proxy materials and
to answer any questions you may have about the proposal.
THE BOARD MEMBERS OF YOUR FUND, INCLUDING THOSE WHO ARE NOT AFFILIATED WITH
THE FUND, SCUDDER KEMPER OR ZURICH, RECOMMEND THAT YOU VOTE FOR APPROVAL OF
THE NEW INVESTMENT MANAGEMENT AGREEMENT AND FOR APPROVAL OF A NEW INVESTMENT
OBJECTIVE AND POLICIES.
<PAGE> 8
, 1998
DEAR KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND SHAREHOLDER:
Enclosed is a proxy asking you to vote on the approval of a new investment
management agreement and the reorganization of your Fund into the Kemper
Adjustable Rate U.S. Government Fund, which will change its name to Kemper
Short-Term U.S. Government Fund, a mutual fund that pursues a similar investment
objective. Subject to shareholder approval, you would become a shareholder of
the Adjustable Rate Fund.
The enclosed Prospectus/Proxy Statement contains information you will need to
make an informed decision. For your convenience, we also have provided a brief
question and answer section, which we hope you will find useful as you review
your materials before voting. For more detailed information about the
reorganization, please refer to the Prospectus/Proxy Statement.
The proposals have been approved by the Trustees for your Fund, who recommend
you vote "FOR" the proposals. Please give this matter your prompt attention. We
will need to receive your proxy card before the shareholder meeting scheduled
for December 16, 1998. YOUR IMMEDIATE RESPONSE WILL HELP SAVE ON THE COSTS OF
ADDITIONAL SOLICITATIONS. We look forward to your participation, and we thank
you for your continued confidence in Kemper.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Sincerely,
Daniel Pierce
Chairman of the Board
<PAGE> 9
, 1998
DEAR KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND SHAREHOLDER:
Enclosed is a proxy asking you to vote on the approval of a new investment
management agreement and a new investment objective and policies for your Fund.
The new objective of the Fund will be to seek high current income and
preservation of capital and the Fund will be renamed the Kemper Short-Term U.S.
Government Fund.
The enclosed Prospectus/Proxy Statement contains information you will need to
make an informed decision. For your convenience, we also have provided a brief
question and answer section, which we hope you will find useful as you review
your materials before voting. For more detailed information about the proposal,
please refer to the Prospectus/Proxy Statement.
The proposals have been approved by the Trustees for your Fund, who recommend
you vote "FOR" the proposals. Please give this matter your prompt attention. We
will need to receive your proxy card before the shareholder meeting scheduled
for December 16, 1998. YOUR IMMEDIATE RESPONSE WILL HELP SAVE ON THE COSTS OF
ADDITIONAL SOLICITATIONS. We look forward to your participation, and we thank
you for your continued confidence in Kemper.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Sincerely,
Daniel Pierce
Chairman of the Board
<PAGE> 10
NOTICE OF JOINT SPECIAL MEETING 222 South Riverside Plaza
of Shareholders Chicago, Illinois 60606
December 16, 1998 (800) 621-1048
, 1998
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Notice is hereby given that a Joint Special Meeting of shareholders of the
Kemper Short-Intermediate Government Fund (the "Short-Intermediate Fund" or a
"Fund"), a series of the Kemper Portfolios (the "Trust"), a Massachusetts
business trust, and the Kemper Adjustable Rate U.S. Government Fund (the
"Adjustable Rate Fund" or a "Fund"), an open-end management investment company
organized as a Massachusetts business trust, will be held at the offices of
Scudder Kemper Investments, Inc., 13th Floor, Two International Place, Boston,
Massachusetts 02110 on December 16, 1998 at 10:00 a.m., Eastern Time (the
"Special Meeting"), for the following purposes:
1. To approve the new investment management agreement created by the
consummation of the Zurich-B.A.T Transaction. (Both Funds)
2. To approve an Agreement and Plan of Reorganization pursuant to which the
Short-Intermediate Fund would (i) transfer all of its assets to the
Adjustable Rate Fund in exchange for Class A, B and C shares of
beneficial interest of the Adjustable Rate Fund and the Adjustable Rate
Fund's assumption of the liabilities of the Short-Intermediate Fund,
(ii) distribute such shares of the Adjustable Rate Fund to the holders
of shares of the Short-Intermediate Fund, (iii) be liquidated, dissolved
and terminated as a series of the Kemper Portfolios in accordance with
the Trust's Declaration of Trust and (iv) the Adjustable Rate Fund would
change its name to the Kemper Short-Term U.S. Government Fund.
(Short-Intermediate Fund only)
3. To approve a new investment objective and the revision of certain
investment policies. (Adjustable Rate Fund only)
4. To transact such other business as may properly come before the Special
Meeting.
Shareholders of record as of the close of business on September 22, 1998 are
entitled to notice of and to vote at the Special Meeting or any adjournment
thereof.
IN ORDER TO AVOID DELAY AND ADDITIONAL EXPENSE, AND TO ASSURE THAT YOUR SHARES
ARE REPRESENTED, IF YOU DO NOT EXPECT TO BE PRESENT IN PERSON AT THE SPECIAL
MEETING, YOU ARE REQUESTED TO FILL IN, SIGN AND MAIL THE ENCLOSED PROXY AS
PROMPTLY AS POSSIBLE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
Philip J. Collora
VICE PRESIDENT AND SECRETARY
<PAGE> 11
PROSPECTUS/PROXY STATEMENT
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
This Prospectus/Proxy Statement is being furnished to shareholders of the Kemper
Short-Intermediate Government Fund (the "Short-Intermediate Fund" or a "Fund"),
a series of the Kemper Portfolios (the "Trust"), a Massachusetts business trust,
and the shareholders of the Kemper Adjustable Rate U.S. Government Fund, an
open-end management investment company organized as a Massachusetts business
trust (the "Adjustable Rate Fund" which may also sometimes be referred to as a
"Fund" or a "Trust") and relates to the special meeting of shareholders of the
Funds to be held at the offices of Scudder Kemper Investments, Inc., 13th Floor,
Two International Place in Boston, Massachusetts on Wednesday, December 16, 1998
at 10:00 a.m., Eastern Time and at any and all adjournments thereof (the
"Special Meeting"). Shareholders of record as of the close of business on
September 22, 1998 are entitled to vote at the Special Meeting or any
adjournment thereof. A primary purpose of the Special Meeting is to approve or
disapprove the proposed reorganization of the Short-Intermediate Fund into the
Adjustable Rate Fund (the "Reorganization"). The Reorganization would result in
shareholders of the Short-Intermediate Fund in effect exchanging their Class A,
B and C shares of the Short-Intermediate Fund for corresponding Class A, B and C
shares of the Adjustable Rate Fund. The purpose of the Reorganization is to
permit the shareholders of the Short-Intermediate Fund to (i) lower gross
operating expenses as a percentage of net assets due to the combined funds'
larger net assets and greater economies of scale; (ii) reduce interest rate risk
as the new fund will have a maturity range of 1-3 years versus a maturity of 2-5
years for the Short-Intermediate Fund, and (iii) potentially increase income and
total return as the new fund will have the ability to invest a portion of its
assets in lower quality non-U.S. Government securities.
At the Special Meeting, shareholders of both Funds will also vote on the
approval of a new investment management agreement created by consummation of the
B.A.T Transaction and shareholders of the Adjustable Rate Fund will vote on a
new investment objective and the revision of certain investment policies.
The investment objective of the Adjustable Rate Fund is to provide high current
income consistent with low volatility of principal. In connection with the
Reorganization, shareholders of the Adjustable Rate Fund will be asked to
approve a change in the Fund's investment objective. If approved, the new
investment objective of the Fund will be to seek high current income and
preservation of capital and the Fund will be renamed the Kemper Short-Term U.S.
Government Fund. There can be no assurance that the Adjustable Rate Fund will
achieve its investment objective. The address, principal executive office and
telephone number of the Funds is 222 South Riverside Plaza, Chicago, Illinois
60606, (312) 437-7000 or (800) 621-1048. The enclosed proxy and this
Prospectus/Proxy Statement are first being sent to shareholders of the funds on
or about 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the Short-Intermediate Fund should know before voting on the
Reorganization (in effect, investing in Class A, B or C shares of the Adjustable
Rate Fund) and constitutes an offering of Class A, B or C shares of beneficial
interest, of the Adjustable Rate Fund only. Please read it carefully and retain
it for future reference. A Statement of Additional Information dated
, 1998, relating to this Prospectus/Proxy Statement (the
"Reorganization SAI") has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated herein by reference. A Prospectus (the
"Adjustable Rate Fund Prospectus") and Statement of Additional Information
containing additional information about the Adjustable Rate Fund, each dated
i
<PAGE> 12
December 30, 1997, have been filed with the SEC and are incorporated herein by
reference. A copy of the Adjustable Rate Fund Prospectus accompanies this
Prospectus/Proxy Statement. A Prospectus (the "Short-Intermediate Fund
Prospectus") and Statement of Additional Information containing additional
information about the Short-Intermediate Fund, each dated December 30, 1997,
have been filed with the SEC and are incorporated herein by reference. Copies of
the foregoing may be obtained without charge by calling or writing the Funds at
the telephone number or address shown above. If you wish to request the
Reorganization SAI, please ask for the "Reorganization SAI." IN ADDITION, EACH
FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT AND
SUBSEQUENT SEMI-ANNUAL REPORT TO A SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST
SHOULD BE DIRECTED TO THE RESPECTIVE FUND BY CALLING (800) 621-1048 OR BY
WRITING THE RESPECTIVE FUND AT 222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS
60606.
No person has been authorized to give any information or make any representation
not contained in this Prospectus/Proxy Statement and, if so given or made, such
information or representation must not be relied upon as having been authorized.
This Prospectus/Proxy Statement does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation.
Both Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as
amended (the "1940 Act"), and in accordance therewith file reports and other
information with the SEC. Such reports, other information and proxy statements
filed by the Funds can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its Regional Office at 500 West Madison Street, Chicago, Illinois.
Copies of such material can also be obtained from the SEC's Public Reference
Branch, Office of Consumer Affairs and Information Services, Washington, D.C.
20549, at prescribed rates. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains reports, other information and proxy
statements filed by the Funds, such information is filed electronically with the
SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval system
(EDGAR).
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS , 1998.
ii
<PAGE> 13
PROSPECTUS/PROXY STATEMENT
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PROPOSAL 1. APPROVAL OF NEW INVESTMENT MANAGEMENT AGREEMENTS...... 1
PROPOSAL 2. APPROVAL OF THE REORGANIZATION (SHORT-INTERMEDIATE
FUND ONLY)...................................................... 10
A. Summary..................................................... 10
The Reorganization.......................................... 10
Reasons for the Proposed Reorganization..................... 10
Comparison of the Combined Fund with the Short-Intermediate
Fund........................................................ 11
B. Risk Factors................................................ 21
Similarity of Risks......................................... 21
Differences in Risks........................................ 21
C. The Proposed Reorganization................................. 22
Terms of the Agreement...................................... 22
Description of Securities to be Issued...................... 23
Continuation of Shareholder Accounts and Plans; Share
Certificates................................................ 24
Certain Federal Income Tax Consequences..................... 24
Expenses.................................................... 25
Legal Matters............................................... 25
Financial Statements........................................ 25
D. Recommendation of the Board................................. 26
PROPOSAL 3. APPROVAL OF NEW INVESTMENT OBJECTIVE AND THE REVISION
OF CERTAIN FUNDAMENTAL INVESTMENT POLICIES (ADJUSTABLE
RATE FUND ONLY)....................................... 27
A. New Investment Objective and Policies and Elimination of
Shareholder Approval Requirement to Amend Investment
Objective and Certain Fundamental Policies.................. 28
B. Elimination of Shareholder Approval to Amend Investment
Policies.................................................... 29
C. Revision of Certain Fundamental Investment Policies Mandated
by the 1940 Act............................................. 29
D. Elimination of Shareholder Approval to Change Other
Fundamental Policies........................................ 32
OTHER INFORMATION................................................. 34
A. Shareholders of the Adjustable Rate Fund and the
Short-Intermediate Fund..................................... 34
B. Shareholder Proposals....................................... 34
C. Voting Information and Requirements......................... 35
Exhibits
Form of New Investment Management Agreement Exhibit A
Investment Objectives and Advisory Fees for Funds Not
Included in this Proxy Statement and Advised by Scudder
Kemper Investments, Inc. Exhibit B
Financial Highlights Exhibit C
Adjustable Rate Fund's Fundamental Policies Exhibit D
Enclosures
Adjustable Rate Fund and Short-Intermediate Fund Prospectus
</TABLE>
iii
<PAGE> 14
PROPOSAL 1. APPROVAL OF NEW INVESTMENT MANAGEMENT AGREEMENTS
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF NEW INVESTMENT
MANAGEMENT AGREEMENTS.
INTRODUCTION.
Scudder Kemper Investments, Inc. acts as the Adviser to both Funds (the
"Adviser") pursuant to investment management agreements entered into by both
Funds and the Adviser. The investment management agreement in effect between
each Fund and the Adviser prior to the consummation of the transaction between
Zurich Insurance Company ("Zurich") and B.A.T Industries plc ("B.A.T") (the
"Zurich-B.A.T Transaction" or the "Transaction"), which is described below, is
referred to in this Proxy Statement as a "Former Investment Management
Agreement." The investment management agreement currently in effect between both
Funds and the Adviser was executed as of the consummation of the Zurich-B.A.T
Transaction and is referred to in this Proxy Statement as a "New Investment
Management Agreement," collectively, the "New Investment Management Agreements"
and, together with Former Investment Management Agreements, the "Investment
Management Agreements."
On June 26, 1997, one of the Adviser's predecessors, Scudder, Stevens & Clark,
Inc. ("Scudder"), entered into an agreement with Zurich pursuant to which
Scudder and Zurich agreed to form an alliance. On December 31, 1997, Zurich
acquired a majority interest in Scudder, and Zurich Kemper Investments, Inc.
("Kemper"), a Zurich subsidiary and Adviser of both Funds, became part of
Scudder. Scudder's name was changed to Scudder Kemper Investments, Inc. The
transaction between Scudder and Zurich (the "Scudder-Zurich Transaction")
resulted in the termination of each Fund's investment management agreement with
Kemper. However, the Former Investment Management Agreement between both Funds
and Scudder Kemper was approved by the Board of each Fund and by each Fund's
shareholders.
THE ZURICH-B.A.T TRANSACTION.
On December 22, 1997, Zurich and B.A.T entered into a definitive agreement (the
"Merger Agreement") pursuant to which businesses of Zurich (including Zurich's
almost 70% ownership interest in the Adviser) were to be combined with the
financial services businesses of B.A.T. On October 12, 1997, Zurich and B.A.T
had confirmed that they were engaged in discussions concerning a possible
business combination; on October 16, 1997, Zurich and B.A.T announced that they
had entered into an Agreement in Principle, dated as of October 15, 1997. The
Merger Agreement superseded the Agreement in Principle.
In order to effect this combination, Zurich and B.A.T first reorganized their
operations. Zurich became a subsidiary of a new Swiss holding company, Zurich
Allied AG, and Zurich shareholders became Zurich Allied AG shareholders. At the
same time, B.A.T separated its financial services business from its tobacco-
related businesses by spinning off to its shareholders a new British company,
Allied Zurich p.l.c., which now holds B.A.T's financial services businesses.
Zurich Allied AG then contributed its interest in Zurich, and Allied Zurich
p.l.c. contributed the B.A.T financial services businesses, to a jointly owned
company, Zurich Financial Services ("Zurich Financial Services"). As a result,
upon the completion of the Transaction, the former Zurich shareholders initially
became the owners (through Zurich Allied AG) of 57% of the voting stock of
Zurich Financial Services, and former B.A.T shareholders now own (through Allied
Zurich p.l.c.) 43% of the voting stock of Zurich Financial Services. Zurich
Financial Services now owns Zurich and the financial services businesses
previously owned by B.A.T.
CORPORATE GOVERNANCE.
At the closing of the Zurich-B.A.T Transaction, the parties entered into a
governing agreement that establishes the corporate governance structure for
Zurich Allied AG, Allied Zurich p.l.c. and Zurich Financial Services (the
"Governing Agreement").
The Board of Directors of Zurich Financial Services consists of ten members,
five of whom were initially selected by Zurich and five by B.A.T. Mr. Rolf
Hueppi, Zurich's current Chairman and Chief Executive Officer, became Chairman
and Chief Executive Officer of Zurich Financial Services. In addition to his
vote
1
<PAGE> 15
by virtue of his position on the Board of Directors, as Chairman Mr. Hueppi will
have a tie-breaking vote on all matters except recommendations of the Audit
Committee, recommendations of the Remuneration Committee in respect of the
remuneration of the Chairman and the CEO, appointment and removal of the
Chairman and CEO, appointments to the Nominations, Audit and Remuneration
Committees and nominations to the Board of Directors not made through the
Nominations Committee.
The Group Management Board of Zurich Financial Services has been given
responsibility by the Board of Directors for the executive management of Zurich
Financial Services and has wide authority for such purpose. Of the 11 initial
members of the Group Management Board, eight are current members of the
Corporate Executive Board of Zurich (including Mr. Edmond D. Villani, CEO of the
Adviser, who is responsible for Global Asset Management for Zurich Financial
Services), and three are current B.A.T executives.
The Board of Directors of Zurich Allied AG initially consists of 11 members,
eight of whom are current Zurich directors and three of whom were proposed by
B.A.T. The Board of Directors of Allied Zurich p.l.c. also initially consists of
11 members, eight of whom are current B.A.T directors and three of whom were
proposed by Zurich. The parties have agreed that, as soon as possible, the Board
of Directors of Zurich Financial Services, Zurich Allied AG and Allied Zurich
p.l.c. will have identical membership.
Shareholder resolutions of Zurich Financial Services in general require approval
by at least 58% of all shares outstanding.
The Governing Agreement also contains provisions relating to dividend
equalization and provisions intended to ensure equal treatment of Zurich Allied
AG and Allied Zurich p.l.c. shareholders in the event of a takeover bid for
either company.
The B.A.T financial services businesses, which, since the closing of the
Transaction, are owned by Zurich Financial Services, include: the Farmers Group
of Insurance companies; the Eagle Star insurance business, primarily in the
U.K.; Allied-Dunbar, one of the leading U.K. unit-linked life insurance and
pensions companies; and Threadneedle Asset Management, which was formed
initially to manage the investment assets of Eagle Star and Allied-Dunbar, and
which, at December 31, 1997, had $58.8 billion under management. Overall, at
year-end 1997, the financial services businesses of B.A.T had $79 billion in
assets under management, including $18 billion in third party assets.
Zurich has informed each Fund that the financial services businesses of B.A.T do
not include any of B.A.T's tobacco businesses and that, after careful review,
Zurich has concluded that the tobacco-related liabilities connected with B.A.T's
tobacco business should not adversely affect Zurich or the present Zurich
subsidiaries, including the Adviser.
Governance arrangements that were put in place at the time of acquisition of
Zurich's 70% interest in the Adviser (which are discussed below under "Adviser")
remain unaffected by the Transaction. These arrangements preclude the making of
certain major decisions affecting the Adviser without the approval of the
directors of the Adviser elected by the non-Zurich shareholders of the Adviser.
Consummation of the Zurich-B.A.T Transaction may be deemed to have constituted
an "assignment," as that term is defined in the 1940 Act, of each Fund's Former
Investment Management Agreement with the Adviser. As required by the 1940 Act,
each of the Former Investment Management Agreements provided for its automatic
termination in the event of its assignment. Accordingly, a New Investment
Management Agreement between each Fund and the Adviser was approved by the Board
members of each Fund and is now being proposed for approval by shareholders of
both Funds. The Adviser has received an exemptive order from the Securities and
Exchange Commission (the "SEC" or the "Commission"), permitting it to implement,
without prior shareholder approval, the New Investment Management Agreements for
a period of up to 150 days after the consummation of the Transaction, which
occurred on September 7, 1998. A copy of the master form of the New Investment
Management Agreement is attached hereto as Exhibit A. In accordance with the
exemptive order, the advisory fees paid by both Funds to the Adviser under a New
Investment Management Agreement have been held in an interest-bearing escrow
account, and both Funds will continue to deposit such fees in escrow until
shareholder approval of a New
2
<PAGE> 16
Investment Management Agreement. If an agreement is not approved, the fees shall
be returned to the applicable Fund. THE NEW INVESTMENT MANAGEMENT AGREEMENT IS
SUBSTANTIALLY IDENTICAL TO THE FORMER INVESTMENT MANAGEMENT AGREEMENT, EXCEPT
FOR THE DATES OF EXECUTION AND TERMINATION. The material terms of the Former
Investment Management Agreements are described under "Description of the
Investment Management Agreements" below.
BOARD RECOMMENDATION.
On July 16, 1998, the Boards of both Funds met and the Board members, including
the Board members who are not parties to such agreement or "interested persons"
(as defined under the 1940 Act) (the "Non-Interested Trustees" or
"Non-Interested Board members") of any such party, voted to approve the New
Investment Management Agreements and to recommend approval to the shareholders
of each applicable Fund.
For information about Board deliberations and the reasons for their
recommendation, please see "Board Evaluation" near the end of this Item 1.
DESCRIPTION OF THE INVESTMENT MANAGEMENT AGREEMENTS.
Under the Investment Management Agreements, the Adviser provides both Funds with
continuing investment management services. The Adviser also determines which
securities should be purchased, held, or sold, and what portion of both Funds'
assets should be held uninvested, subject to each Declaration of Trust, By-Laws,
investment objectives, policies and restrictions, the provisions of the 1940
Act, and such policies and instructions as the Trustees may have determined.
Both Investment Management Agreements provide that the Adviser will provide
continuing management of the assets of both Funds in accordance with each Fund's
investment objectives, policies and restrictions, furnish at its expense office
space and facilities to both Funds and render administrative services on behalf
of each Fund necessary for both Funds' operations and not provided by persons
not parties to the agreement including, but not limited to, preparing reports to
and meeting materials for the Board and reports and notices to Fund
shareholders; supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of various third-party and
affiliated service providers to both Funds (such as both Funds' accounting
agents, custodians, depositories, transfer agents and pricing agents,
accountants, attorneys, printers, underwriters, brokers and dealers, insurers
and others) and other persons in any capacity deemed necessary or desirable to
Fund operations; preparing and making filings with the SEC and other regulatory
and self-regulatory organizations, including but not limited to, preliminary and
definitive proxy materials, post-effect amendments to the registration
statement, semi-annual reports on Form N-SAR; overseeing the tabulation of
proxies by both Funds' transfer agent; assisting in the preparation and filing
of both Funds' federal, state and local tax returns; preparing and filing both
Funds' federal excise tax returns pursuant to Section 4982 of the Internal
Revenue Code of 1986, as amended; providing assistance with investor and public
relations matters; monitoring the valuation of portfolio securities and the
calculation of net asset value; monitoring the registration of shares of both
Funds under applicable federal and state securities laws; maintaining or causing
to be maintained for both Funds all books, records and reports and any other
information required under the 1940 Act, to the extent such books, records and
reports and other information are not maintained by both Funds' custodian or
other agents of both Funds; assisting in establishing accounting policies of
both Funds; assisting in the resolution of accounting issues that may arise with
respect to both Funds' operations and consulting with both Funds' independent
accountants, legal counsel and other agents as necessary in connection
therewith; establishing and monitoring both Fund's operating expense budgets;
reviewing both Funds' bills; processing the payment of bills that have been
approved by an authorized person; assisting both Funds in determining the amount
of dividends and distributions available to be paid by both Funds to their
respective shareholders, preparing and arranging for the printing of dividend
notices to shareholders, and providing the transfer and dividend paying agent,
the custodian, and the accounting agent with such information as was required
for such parties to effect the payment of
3
<PAGE> 17
dividends and distributions; and otherwise assisting both Funds in the conduct
of their business, subject to the direction and control of the Board.
Both Funds are responsible for other expenses, including organizational expenses
(including out-of-pocket expenses, but not including the Adviser's overhead or
employee costs); brokers' commissions or other costs of acquiring or disposing
of any portfolio securities of both Funds; legal, auditing and accounting
expenses; payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; taxes and governmental fees;
the fees and expenses of both Funds' transfer agent; expenses of preparing share
certificates and any other expenses, including clerical expenses, of issuance,
offering, distribution, sale, redemption or repurchase of shares; the fees and
expenses of Non-Interested Board members; the costs of printing and distributing
reports, notices and dividends to current shareholders; and the fees and
expenses of both Funds' custodians, subcustodians, accounting agent, dividend
disbursing agents and registrars. Both Funds may arrange to have third parties
assume all or part of the expenses of sale, underwriting and distribution of
shares of both Funds. Both Funds are also responsible for expenses of
shareholders' and other meetings, and their expenses incurred in connection with
litigation and the legal obligation they may have to indemnify officers and
Trustees with respect thereto. Both Funds are also responsible for the
maintenance of books and records which are required to be maintained by both
Funds' custodian or other agents; telephone, telex, facsimile, postage and other
communications expenses; any fees, dues and expenses incurred by both Funds in
connection with membership in investment company trade organizations; expenses
of printing and mailing prospectuses and statements of additional information of
both Funds and supplements thereto to current shareholders; costs of stationery;
fees payable to the Adviser; expenses relating to investor and public relations;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of both Funds' portfolio
securities; and other expenses.
The Adviser is responsible for the payment of the compensation and expenses of
all Trustees, officers and executive employees of both Funds (including both
Funds' share of payroll taxes) affiliated with the Adviser and making available,
without expense to either Fund, the services of such Trustees, officers and
employees as may duly be elected officers of both Funds, subject to their
individual consent to serve and to any limitations imposed by law. Both Funds
are responsible for the fees and expenses (specifically including travel
expenses relating to Fund business) of Trustees not affiliated with the Adviser.
Under the Investment Management Agreements, the Adviser also pays both Funds'
share of payroll taxes, as well as expenses, such as travel expenses (or an
appropriate portion thereof), of Trustees and officers of both Funds who are
directors, officers or employees of the Adviser.
For the services and facilities furnished, both Funds pay a monthly investment
management fee based upon the value of each Fund's average daily net assets. See
"PROPOSAL 2. APPROVAL OF THE REORGANIZATION -- Comparison of the Combined Fund
with the Short-Intermediate Fund -- ADVISORY AND OTHER FEES." During the fiscal
year ended August 31, 1998, the Adjustable Rate Fund paid $415,000 and during
the fiscal year ended September 30, 1998, the Short-Intermediate Fund paid
$920,000 to the Adviser.
Each Investment Management Agreement further provides that the Adviser shall be
liable for any error of judgement or mistake of law suffered by either Fund or
of any loss resulting from willful misfeasance, bad faith or gross negligence on
the part of the Adviser in the performance of its duties under such agreement.
The Investment Management Agreements also provide that purchase and sale
opportunities, which are suitable for more than one client of the Adviser, will
be allocated by the Adviser in an equitable manner.
Each Investment Management Agreement may be terminated without penalty upon
sixty (60) days written notice by either party. Both Funds may agree to
terminate their Investment Management Agreement either by a vote of a majority
of the outstanding voting securities of both Funds, or by a vote of their Board.
An Investment Management Agreement may also be terminated at any time without
penalty by the vote of a majority of the outstanding voting securities of either
Fund or by a vote of the Board if a court establishes that the Adviser or any of
its officers or Trustees has taken any action resulting in a breach of the
Adviser's
4
<PAGE> 18
covenants under the Investment Management Agreement. As stated above, an
Investment Management Agreement automatically terminates in the event of its
assignment.
The Adviser has acted as Adviser for both Funds since December 31, 1997. Each
Former Investment Management Agreement is dated December 31, 1997, and was last
approved for continuance by the respective Board on January 20, 1998. The
shareholders of both Funds approved a Former Investment Management Agreement on
December 3, 1997. Each Former Investment Management Agreement continues until
March 1, 1999. Each Former Investment Management Agreement was last submitted to
shareholders for approval in connection with the Zurich/Scudder alliance.
NEW INVESTMENT MANAGEMENT AGREEMENTS.
The New Investment Management Agreement for both Funds is dated as of the
consummation of the Transaction, which occurred on September 7, 1998. Both New
Investment Management Agreements will be in effect for an initial term ending on
March 1, 1999, and may continue thereafter from year to year only if
specifically approved at least annually by the vote of "a majority of the
outstanding voting securities" of the respective Fund, or by its Board and, in
either event, the vote of a majority of the Non-interested Board members, cast
in person at a meeting called for such purpose. At meetings held on September
18, 1998 the Board of both Funds, including a majority of the Non-Interested
Trustees, approved the continuance of both New Investment Management Agreements
through September 30, 1999. In the event that shareholders of a Fund do not
approve a New Investment Management Agreement, it will terminate. In such event,
the Board of such Fund will take such action as it deems to be in the best
interests of the Fund and its shareholders.
DIFFERENCES BETWEEN THE FORMER AND NEW INVESTMENT MANAGEMENT AGREEMENT.
The New Investment Management Agreements are substantially identical to the
Former Investment Management Agreements, except for the dates of execution and
termination.
THE ADVISER.
Scudder Kemper Investments, Inc. (the "Adviser"), 345 Park Avenue, New York, New
York 10154, which resulted from the combination of the businesses of Scudder and
Kemper is one of the largest and most experienced investment counsel firms in
the United States. Scudder was established in 1919 as a partnership and was
restructured as a Delaware corporation in 1985. Scudder launched its first fund
in 1928. Kemper launched is first fund in 1948. Since December 31, 1997, the
Adviser has served as investment adviser to both Scudder and Kemper funds. As of
July 31, 1998, the Adviser has more than $230 billion in assets under
management. The principal source of the Adviser's income is professional fees
received from providing continuing investment advise. The Adviser provides
investment counsel for many individuals and institutions, including insurance
companies, endowments, industrial corporations and financial and banking
organizations.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world. Zurich owns approximately 70% of the Adviser, with the balance owed
by the Adviser's officers and employees.
5
<PAGE> 19
As stated above, the Adviser is a Delaware corporation. The names, addresses and
principal occupations of the Directors of the Adviser are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION
---------------- --------------------
<S> <C>
Stephen R. Beckwith.......................... Treasurer and Chief Financial Officer of the
345 Park Avenue, New York, New York Adviser
Lynn S. Birdsong,............................ Managing Director of the Adviser
345 Park Avenue, New York, New York
Lawrence Cheng,.............................. Senior Partner of Capital Z Partners
345 Park Avenue, New York, New York
Kathryn L. Quirk............................. General Counsel of the Adviser
Cornelia M. Small,........................... Managing Director of the Adviser
345 Park Avenue, New York, New York
Edmond D. Villani,........................... President and Chief Executive Officer of the
345 Park Avenue, New York, New York Adviser
Rolf Hueppi,................................. Chairman of the Board and Chief Executive
Mythenquai 2, Zurich, Switzerland Officer of Zurich
</TABLE>
The outstanding voting securities of the Adviser are held of record 36.63% by
Zurich Holding Company of America ("ZHCA"), a subsidiary of Zurich; 32.85% by
ZKI Holding Corp. ("ZKIH"), a subsidiary of Zurich; 20.86% by Stephen R.
Beckwith, Lynn S. Birdsong, Kathryn L. Quirk, Cornelia M. Small and Edmond D.
Villani, in their capacity as representatives (the "Management Representatives")
of the Adviser's management holders and retiree holders pursuant to a Second
Amended and Restated Security Holders Agreement (the "Security Holders
Agreement") among the Adviser, Zurich, ZHCA, ZKIH, the Management
Representatives, the management holders, the retiree holders and Edmond D.
Villani, as trustee of Scudder Kemper Investments, Inc. Executive Defined
Contribution Plan Trust (the "Plan"); and 9.66% by the Plan. There are no
outstanding non-voting securities of the Adviser.
In connection with the Scudder-Zurich Transaction (described above), pursuant to
which Zurich acquired a two-thirds interest in Scudder for $866.7 million in
cash in December 1997, Daniel Pierce, a Director of both Funds, sold 85.4% of
his holdings in Scudder to Zurich in cash.
Pursuant to the Security Holders Agreement which was entered into in connection
with Scudder-Zurich transaction), the Board of Directors of the Adviser consists
of four directors designated by ZHCA and ZKIH and three directors designated by
Management Representatives.
The Security Holders Agreement requires the approval of a majority of the
Scudder-designated Trustees for certain decisions, including changing the name
of the Adviser, effecting an initial public offering before April 15, 2005,
causing the Adviser to engage substantially in non-investment management and
related business, making material acquisitions or divestitures, making material
changes in the Adviser's capital structure, dissolving or liquidating the
Adviser, or entering into certain affiliated transactions with Zurich. The
Security Holders Agreement also provides for various put and call rights with
respect to Adviser's stock held by persons who were employees of the Adviser at
the time of the Scudder-Zurich Transaction, limitations on Zurich's ability to
purchase other asset management companies outside of the Adviser, rights of
Zurich to repurchase the Adviser's stock upon termination of employment of the
Adviser's personnel, and registration rights for stock held by stockholders of
Scudder continuing after the Scudder-Zurich Transaction.
Directors, officers and employees of the Adviser from time to time may enter
into transactions with various banks, including both Funds' custodian bank. It
is Adviser's opinion that the terms and conditions of those transactions will
not be influenced by existing or potential custodial or other Fund
relationships.
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas City,
Missouri 64105, is both Funds' transfer agent and dividend-paying agent.
Pursuant to a services agreement with IFTC, Kemper
6
<PAGE> 20
Service Company ("KSvC"), an affiliate of the Adviser, serves as Shareholder
Service Agent of both Funds for which IFTC serves as transfer and
dividend-paying agent 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 plus account set up, maintenance, transaction and
out-of-pocket expense reimbursement. Kemper Distributors, Inc. ("KDI"), a
subsidiary of the Adviser, provides information and administrative services for
shareholders of both Funds pursuant to administrative services agreements. KDI
is also the principal underwriter and distributor of both Funds' shares and acts
as agent of both Funds in the sale of its shares. For the Class B shares and
Class C shares of each Fund, KDI receives a Rule 12b-1 distribution fee of 0.75%
of average daily net assets of each such class.
KSvC and KDI will continue to provide transfer agency and underwriting,
administrative and distribution services, respectively, to the Funds, as
described above, under the current arrangements if the New Investment Management
Agreements are approved.
Exhibit B sets forth (for both Funds' last fiscal year end, unless otherwise
noted) the fees and other information regarding investment companies advised by
the Adviser.
BROKERAGE COMMISSIONS ON PORTFOLIO TRANSACTIONS.
To the maximum extent feasible, the Adviser places orders for portfolio
transactions through Scudder Investors Services, Inc. ("SIS"), Two International
Place, Boston, Massachusetts 02110, which in turn places orders on behalf of the
Funds with issuers, underwriters or other brokers and dealers. SIS is a
corporation registered as a broker/dealer and a subsidiary of the Adviser. In
selecting brokers and dealers with which to place portfolio transactions for a
Fund, the Adviser may consider sales of shares of the Funds and of other funds
managed by the Adviser or its affiliates. When it can be done consistently with
the policy of obtaining the most favorable net results, the Adviser may place
such orders with brokers and dealers who supply research, market and statistical
information to a Fund or to the Adviser. SIS does not receive any commissions,
fees or other remuneration from the Funds for this service. Allocation of
portfolio transactions is supervised by the Adviser.
BOARD EVALUATION.
Both Boards met on July 21, 1998 to consider the Transaction and its effects on
its Fund. The Boards met with senior management personnel of the Adviser. Both
Boards had the assistance of legal counsel, who prepared, among other things, an
analysis of the Board's fiduciary obligations. As a result of their review and
consideration of the Transaction and the proposed new investment management
agreement, the Board of both Funds voted unanimously to approve a New Investment
Management Agreement and to recommend it to the shareholders of their respective
Funds for approval.
In connection with its review, the Adviser represented to the Boards that: the
Transaction will have no effect on the operational management of either Fund;
the Transaction will not result in any change in the management or operations of
the Adviser; there will not be any increase in the advisory fee or any change in
any other provision, other than the term of the investment management agreement
as a result of the Transaction; the Transaction will not adversely affect the
Adviser's financial condition; and the Transaction should expand the Adviser's
global asset management capabilities and enhance the Adviser's research
capabilities, particularly with respect to the United Kingdom and Europe.
In connection with its deliberations, both Boards obtained certain assurances
from Zurich, including the following:
- Zurich has provided to the Board such information as is reasonably
necessary to evaluate a New Investment Management and other agreements.
- Zurich looks upon the Adviser as the core of Zurich's global asset
management strategy. With that focus, Zurich will devote to the Adviser
and its affairs all attention and resources that are necessary to provide
for its respective fund top quality investment management, shareholder,
administrative and product distribution services.
7
<PAGE> 21
- The Transaction will not result in any change in either Fund's investment
objectives or policies.
- The Transaction will not result in any change in either management or
operations of the Adviser or its subsidiaries.
- The Transaction is not expected to result in any adverse change in the
investment management or operations of its respective fund; and Zurich
neither plans nor proposes, for the foreseeable future, to make any
material change in the manner in which investment advisory services or
other services are rendered to such Fund which has the potential to have
a material adverse affect upon such Fund.
- Zurich is committed to the continuance, without interruption, of services
to the Funds of the type and quality currently provided by the Adviser
and its subsidiaries, or superior thereto.
- Zurich plans to maintain or enhance the Adviser facilities and
organization.
- In order to retain and attract key personnel, Zurich intends for the
Adviser to maintain overall compensation policies and practices at market
levels or better.
- Zurich intends to maintain the distinct brand identity of the Kemper and
Scudder Funds and is committed to strengthening and enhancing both brands
and the distribution channels for both families of Funds, while
maintaining their separate brand identity.
- Zurich will promptly advise the Boards of decisions materially affecting
the Adviser organization as they relate to its respective Fund. Neither
this, nor any of the other above commitments will be altered by Zurich
without the Board's prior consideration.
Zurich assured both Boards that it intends to comply with Section 15(f) of the
1940 Act. Section 15(f) provides a non-exclusive safe harbor for an investment
adviser to an investment company or any of its affiliated persons to receive any
amount or benefit in connection with a change in control of the investment
adviser so long as two conditions are met. First, for a period of three years
after the Transaction, at least 75% of the board members of the investment
company must not be "interested persons" of such investment adviser. The
composition of the Board of both Funds, currently and as proposed, would be in
compliance with this provision of Section 15(f). Second, an "unfair burden" must
not be imposed upon the investment company as a result of such transaction or
any express or implied terms, conditions or understandings applicable thereto.
The term "unfair burden" is defined in Section 15(f) to include any arrangement
during the two-year period after the Transaction whereby the investment adviser,
or any interested person of any such adviser, receives or is entitled to receive
any compensation, directly or indirectly, from the investment company or its
shareholders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than bona fide ordinary compensation as principal underwriter for such
investment company). Zurich has advised the Boards that it is not aware of any
express or implied term, condition, arrangement or understanding that would
impose an "unfair burden" on any Fund as a result of the Transaction. Zurich has
agreed that it, and its affiliates, will take no action that would have the
effect of imposing an "unfair burden" on any Fund as a result of the
Transaction. In furtherance thereof, Zurich has undertaken to pay the costs of
preparing and distributing proxy materials to and of holding the meeting of each
Fund's shareholders as well as other fees and expenses in connection with the
Transaction, including the fees and expenses of legal counsel to both Funds and
the Non-Interested Board members.
Both Boards also considered whether tobacco-related liability connected with
B.A.T's tobacco business could adversely affect the Adviser and the services
provided to the Funds (See "Corporate Governance" above).
In evaluating the New Investment Management Agreements, both Boards took into
account that the fees and expenses payable by its Fund under a New Investment
Management Agreement are the same as under the Former Investment Management
Agreements, that the services provided to both Funds are the same and that the
other terms, except for the dates of execution and termination, are
substantially similar. Both
8
<PAGE> 22
Boards also took into consideration that the portfolio managers and research
personnel would continue their functions with the Adviser after the Transaction.
Both Boards noted that, in previously approving the Former Investment Management
Agreements, both Boards had considered a number of factors, including: the
nature and quality of services provided by the Adviser; investment performance,
both of each Fund itself and relative to that of competitive investment
companies; investment management fees and expense ratios of both Funds and
competitive investment companies; the Adviser profitability from managing both
Funds; fall-out benefits to the Adviser from its relationship to both Funds,
including revenues derived from services provided to both Funds by affiliates of
the Adviser; and the potential benefits to the Adviser and to both Funds and its
shareholders of receiving research services from broker/dealer firms in
connection with the allocation of portfolio transactions to such firms.
Both Boards discussed the Transaction with the senior management of the Adviser
and Zurich and among themselves. Both Boards considered that Zurich is a large,
well-established company with substantial resources, and, as noted above, has
undertaken to devote such resources to the Adviser as are necessary to provide
both Funds with top quality services.
As a result of their review and consideration of the Transaction and the New
Investment Management Agreements, at is meeting on July 16, 1998, the Board of
both Funds voted unanimously to approve the New Investment Management Agreements
and to recommend it to the shareholders of both Funds for their approval.
FUND ACCOUNTING AGENT.
Scudder Fund Accounting Corporation is responsible for determining the net asset
value per share and maintaining the portfolio and general accounting records of
both Funds. Scudder Fund Accounting Corporation currently provides such services
at no fee.
9
<PAGE> 23
PROPOSAL 2. APPROVAL OF THE REORGANIZATION (SHORT-INTERMEDIATE FUND ONLY)
A. SUMMARY
THE FOLLOWING IS A SUMMARY OF, AND IS QUALIFIED BY REFERENCE TO, THE MORE
COMPLETE INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND THE
INFORMATION ATTACHED HERETO OR INCORPORATED HEREIN BY REFERENCE (INCLUDING THE
AGREEMENT AND PLAN OF REORGANIZATION). AS DISCUSSED MORE FULLY BELOW AND
ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, THE BOARD OF TRUSTEES FOR THE
SHORT-INTERMEDIATE FUND (THE "BOARD") BELIEVES THE PROPOSED REORGANIZATION (AS
DEFINED HEREIN) IS IN THE BEST INTERESTS OF SHAREHOLDERS OF THE
SHORT-INTERMEDIATE FUND AND WOULD NOT RESULT IN DILUTION OF SHAREHOLDERS'
INTEREST. AS A RESULT OF THE REORGANIZATION, SHAREHOLDERS OF THE
SHORT-INTERMEDIATE FUND WOULD ACQUIRE AN INTEREST IN THE COMBINED FUND (AS
DEFINED HEREIN).
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with the Adjustable Rate Fund Prospectus incorporated herein by
reference and accompanying this Prospectus/Proxy Statement. This
Prospectus/Proxy Statement constitutes an offering of Class A, B and C shares of
the Combined Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the
Short-Intermediate Fund in connection with the proposed combination of the Fund
with and into the Adjustable Rate Fund pursuant to the terms and conditions of
the Agreement and Plan of Reorganization dated September 18, 1998 between the
Trust and the Adjustable Rate Fund (the "Agreement"). The Agreement provides
that the Short-Intermediate Fund would (i) transfer all of its assets to the
Adjustable Rate Fund in exchange solely for Class A, B and C shares of the
Adjustable Rate Fund and the Adjustable Rate Fund's assumption of the
liabilities of the Short-Intermediate Fund, (ii) distribute to each shareholder
of the Short-Intermediate Fund shares of the respective class of shares of the
Adjustable Rate Fund equal in value to their existing shares of the Fund as a
distribution in liquidation of the Fund, (iii) be liquidated, dissolved and
terminated as a series of the Kemper Portfolios in accordance with the Trust's
Declaration of Trust promptly following the Closing (as defined herein) and (iv)
the Adjustable Rate Fund would change its name to the Kemper Short-Term U.S.
Government Fund (the "Reorganization"). The Agreement also provides that the
Reorganization is contingent upon the approval of the shareholders of the
Adjustable Rate Fund of a new investment objective and policies. The Adjustable
Rate Fund as modified and combined with the Short-Intermediate Fund will be
referred to as the "Combined Fund."
The Board of Trustees of the Kemper Portfolios has determined that the
Reorganization is in the best interests of the Short-Intermediate Fund and that
the interests of existing shareholders of the Short-Intermediate Fund will not
be diluted as a result of the Reorganization. The Board of Kemper Portfolios
unanimously approved the Reorganization and the Agreement on September 18, 1998.
The Adviser will pay all of the Funds' costs associated with the Reorganization.
The Board is asking shareholders of the Short-Intermediate Fund to approve the
Reorganization at the Special Meeting to be held on December 16, 1998. If
shareholders of the Short-Intermediate Fund approve the Reorganization, it is
expected that the Closing of the Reorganization will be after the close of
business on , but it may be at a different time as
described herein.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE REORGANIZATION. FOR THE
SHORT-INTERMEDIATE FUND, APPROVAL OF THE REORGANIZATION REQUIRES THE FAVORABLE
VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES ENTITLED TO VOTE.
SEE "VOTING INFORMATION AND REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
The Board believes that the proposed Reorganization would be in the best
interests of the Short-Intermediate Fund because it would permit the
shareholders of the Fund to (i) lower operating expenses as a percentage of net
assets due to the Combined Fund's larger net assets and greater economies of
scale;
10
<PAGE> 24
(ii) reduce interest rate risk as the Combined Fund will have a maturity range
of 1-3 years versus a maturity of 2-5 years for the Short-Intermediate Fund, and
(iii) potentially increase income and total return as the Combined Fund will
have the ability to invest a portion of its assets in lower quality non-U.S.
Government securities.
In determining whether to recommend approval of the Reorganization to
shareholders of the Short-Intermediate Fund, the Board considered a number of
factors, including, but not limited to: (i) the expenses and advisory fees
applicable to the Short-Intermediate Fund and the Adjustable Rate Fund before
the Reorganization and the estimated expense ratios of the Combined Fund after
the Reorganization; (ii) the investment performance of the Short-Intermediate
Fund compared to the Adjustable Rate Fund; (iii) the terms and conditions of the
Agreement and whether the Reorganization would result in dilution of the
Short-Intermediate Fund's shareholder interests; (iv) the economies of scale
potentially realized through the combination of the Funds; (v) the compatibility
of the Funds' investment objectives; (vi) the compatibility of the Funds'
service features available to shareholders, including the retention of
applicable holding periods and exchange privileges; (vii) the future growth
prospects of the Short-Intermediate Fund; and (viii) the anticipated federal
income tax consequences of the Reorganization.
In this regard, the Board reviewed information provided by the Adviser relating
to the anticipated impact on the shareholders of the Short-Intermediate Fund as
a result of the Reorganization. The Board considered the probability that the
increase in asset levels of the combined fund after the Reorganization would
result in the following potential benefits for shareholders of the
Short-Intermediate Fund, although there can, of course, be no assurances in this
regard:
A.ECONOMIES OF SCALE. The combination is expected to create a Fund with total
assets of approximately $230 million, with greater potential for increased
assets and lower expenses.
B.PORTFOLIO MANAGEMENT PROCESS. The current managers of both the
Short-Intermediate Fund and the Adjustable Rate Fund would be retained as the
portfolio management team.
C.TRACK RECORD. For reporting purposes, the Combined Fund would retain the
Adjustable Rate Fund track record, which extends back to 1987.
Based upon these and other factors, the Board unanimously determined that the
Reorganization is in the best interests of the Short-Intermediate Fund.
COMPARISON OF THE COMBINED FUND WITH THE SHORT-INTERMEDIATE FUND
INVESTMENT OBJECTIVES. The investment objective of the Combined Fund will be to
seek high current income and preservation of capital. The investment objective
of the Short-Intermediate Fund is to seek, with equal emphasis, high current
income and preservation of capital from a portfolio composed primarily of short
and intermediate-term U.S. Government securities.
INVESTMENT POLICIES. The Combined Fund will invest 100% of its total assets in
U.S. dollar-denominated securities and at least 65% of its total assets in
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including repurchase agreements of such securities ("U.S.
Government Securities"). Under normal conditions, the Combined Fund would
maintain a dollar-weighted average portfolio maturity of less than three years.
The remaining 35% of the Combined Fund's assets could be invested in non-U.S.
Government Securities, including private collateralized mortgage obligations or
asset-backed securities rated investment grade quality (Baa or higher) by
Moody's Investor Service, Inc. ("Moody's") or (BBB or higher) by Standard &
Poor's Corporation ("S&P") and other fixed income securities (including debt and
preferred stock issues, convertibles and assignments and participations in
loans) with ratings of single-B or higher by Moody's or S&P or non-rated of
comparable quality in the opinion of the Adviser, with a 10% maximum limitation
on non-investment grade corporate debt securities. The Combined Fund would be
able to engage in financial futures, options, swaps (including caps, floors and
collars) and forward contracts transactions.
11
<PAGE> 25
The Short-Intermediate Fund, as a fundamental policy, invests at least 65% of is
total assets in U.S. Government Securities and repurchase agreements of U.S.
Government Securities. Under normal market conditions, the Fund will maintain a
dollar-weighted average portfolio maturity of more than two years but less than
five years. Up to 35% of the assets of the Short-Intermediate 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); 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.
CREDIT QUALITY. A comparison of the credit qualities of the respective
portfolios of the Adjustable Rate Fund and the Short-Intermediate Fund, as of
August 31, 1998, is set forth in the table below.
<TABLE>
<CAPTION>
PORTFOLIO CREDIT QUALITY
--------------------------------------------------------
ADJUSTABLE RATE SHORT-
CREDIT RATING FUND INTERMEDIATE FUND COMBINED FUND(1)
------------- --------------- ----------------- ----------------
<S> <C> <C> <C>
U.S. Governments and Repurchase Agreements.....
Aaa/AAA/Pre-refunded...........................
Aa/AA..........................................
A/A............................................
Baa/BBB........................................
Unrated........................................
TOTAL.......................................... 100.00% 100.00% 100.00%
</TABLE>
- -------------------------
(1) Reflects the effect of the Reorganization.
As of August 31, 1998, the Short-Intermediate Fund was invested in [more/less]
higher-rated securities than the Adjustable Rate Fund. Generally, on August 31,
1998, the average portfolio credit quality was for the Short-Intermediate
Fund and for the Adjustable Rate Fund. As discussed above, higher-rated
securities generally have less credit risk than lower rated securities.
MATURITY AND DURATION. A comparison of the maturity and duration of the
respective portfolios of the Adjustable Rate Fund and the Short-Intermediate
Fund as of August 31, 1998, is set forth in the table below.
<TABLE>
<CAPTION>
PORTFOLIO MATURITY INFORMATION
-------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
FUND MATURITY MODIFIED DURATION
---- ---------------- -----------------
<S> <C> <C>
Adjustable Rate.............................................
Short-Intermediate..........................................
Combined Fund(1)............................................
</TABLE>
- -------------------------
(1) Reflects the effect of the Reorganization.
The Combined Fund has a targeted maturity average of less than three years.
Funds with longer average maturities and durations will generally be subject to
greater interest rate risks.
12
<PAGE> 26
PERFORMANCE INFORMATION. A comparison of the total returns for the Adjustable
Rate Fund and the Short-Intermediate Fund for the periods ending August 31, 1998
is set forth in the table below. Performance is computed without adjustment for
any sales charges.
<TABLE>
<CAPTION>
TOTAL RETURNS
----------------------
INCEPTION CUMULATIVE AVERAGE ANNUAL TOTAL RETURNS
---------------------- ---------------------------------------
FUND CLASS DATE YTD RETURN 1 YEAR 3 YEAR 5 YEAR INCEPTION
---- ----- ---- ---------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate......................... A
B
C
Short-Intermediate...................... A
B
C
</TABLE>
The following table is a comparison of the yield of the Adjustable Rate Fund and
the Short-Intermediate Fund as of August 31, 1998.
<TABLE>
<CAPTION>
SEC YIELD
-------------------------------------------
ADJUSTABLE SHORT-
CLASS RATE FUND INTERMEDIATE FUND PROFORMA
- ----- ---------- ----------------- --------
<C> <S> <C> <C> <C>
A ....................................................... 4.25% 4.73% 4.68%
B ....................................................... 3.75% 3.94% 3.12%
C ....................................................... 3.78% 4.18% 4.17%
</TABLE>
- -------------------------
(1) The SEC 30-Day Yield is computed in accordance with SEC rules by dividing
the net investment income per share (computed in accordance with a
standardized method prescribed by the rules) earned during the 30-day period
by the maximum offering price.
The total returns and yields are not necessarily indicative of future results.
The performance of an investment company is the result of conditions in the
securities markets, portfolio management and operating expenses. Although
information such as that shown above is useful in reviewing a fund's performance
and in providing some basis for comparison with other investment alternatives,
it should not be used for comparison with other investments using different
reinvestment assumptions or time periods and would not be representative of the
Combined Fund operating with a different objective and policies.
INVESTMENT ADVISER. The Combined Fund will be, and the Short-Intermediate Fund
is, managed by the Adviser. The Adviser's principal office is located at 345
Park Avenue, New York, New York 10154. The Adviser is described fully above in
Proposal 1.
ADVISORY AND OTHER FEES. The contractual advisory fees of the Combined Fund will
be the same as those of the Short-Intermediate Fund. Pursuant to an investment
management agreement the Combined Fund will pay the Adviser an annual management
fee at the rates set forth below, which rates are the same rates currently being
paid by the Short-Intermediate Fund:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSET
VALUE ($000) MANAGEMENT FEE
----------------------- --------------
<S> <C>
0-250,000................................................... .55 of 1%
250,000-999,999............................................. .52 of 1%
1,000,000-2,499,999......................................... .50 of 1%
2,500,000-4,999,999......................................... .48 of 1%
5,000,000-7,499,999......................................... .45 of 1%
7,500,000-9,999,999......................................... .43 of 1%
10,000,000-12,499,999....................................... .41 of 1%
More than 12,500,000........................................ .40 of 1%
</TABLE>
13
<PAGE> 27
For the fiscal year ended August 31, 1998 the Adjustable Rate Fund paid the
Adviser $415,000. For a complete description of the advisory services provided
to the Adjustable Rate Fund, see the section of the Adjustable Rate Fund
Prospectus entitled "INVESTMENT MANAGER AND UNDERWRITER -- Investment Manager."
For the fiscal year ended September 30, 1998 the Short-Intermediate Fund paid
the Adviser $920,000. For a complete description of the advisory services
provided to the Short-Intermediate Fund, see the section of the
Short-Intermediate Fund Prospectus entitled "INVESTMENT MANAGER AND UNDERWRITER
- --Investment Manager."
UNDERWRITING AND DISTRIBUTION. The Combined Fund has distribution and service
plans which are substantially identical to those adopted by the
Short-Intermediate Fund (the "Distribution and Service Plans"). Pursuant to an
underwriting and distribution services agreement ("distribution agreement") with
the Combined Fund, Kemper Distributors, Inc. ("KDI"), 222 South Riverside Plaza,
Chicago, Illinois 60606, a wholly owned subsidiary of the Adviser, is the
principal underwriter and distributor of the Combined Fund's shares and acts as
agent of the Combined Fund in the sale of its shares. KDI will bear 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 will bear the cost of qualifying and
maintaining the qualification of Combined Fund shares for sale under the
securities laws of the various states and the Combined Fund will bear 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.
CLASS A SHARES. KDI will receive no compensation from the Combined Fund as
principal underwriter for Class A shares and will pay all expenses of
distribution of the Combined Fund's Class A shares under the distribution
agreements not otherwise paid by dealers or other financial services firms.
KDI will retain the sales charge upon the purchase of shares and will pay
or allow concessions or discounts to firms for the sale of the Combined
Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI will
receive a fee from the Combined Fund, payable monthly, at the annual rate
of .75% of average daily net assets of the Combined Fund attributable to
Class B shares. This fee will be accrued daily as an expense of Class B
shares. KDI will also receive any contingent deferred sales charges. 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 will
receive a fee from the Combined Fund, payable monthly, at the annual rate
of .75% of average daily net assets of each Fund attributable to Class C
shares. This fee will be accrued daily as an expense of Class C shares. KDI
will advance 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 will also receive any contingent
deferred sales charges.
RULE 12B-1 PLAN. The Combined Fund will have Rule 12b-1 plans that provide 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, which are
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.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of each Fund pursuant to administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various broker-dealer firms and other service or
administrative firms ("firms"), that provide services and facilities for their
customers or clients who are investors of the Funds. Such administrative
services and assistance may include, but are not limited to, establishing and
maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries
14
<PAGE> 28
regarding each Fund and its special features and such other administrative
services as may be agreed upon from time to time and permitted by applicable
statute, rule or regulation. KDI bears all its expenses of providing services
pursuant to the administrative agreement, including the payment of any service
fees. For services under the administrative agreements, each Fund pays KDI a
fee, payable monthly, at an annual rate of up to .25% of average daily net
assets of Class A, B and C shares of such Fund. With respect to Class A shares,
KDI then pays each firm a service fee at an annual rate of (a) in the case of
the Short-Intermediate Fund up to .25% of net assets and in the case of the
Adjustable Rate Fund up to .15% of net assets of those accounts that it
maintains and services for each Fund attributable to shares acquired prior to
October 1, 1993, and (b) up to .25% of net assets of those accounts that it
maintains and services for each Fund attributable to Class A shares acquired on
or after October 1, 1993. With respect to Class B shares and Class C shares, KDI
pays each firm a service fee, normally payable quarterly, at an annual rate of
up to .25% of net assets of those accounts in the Fund that it maintains and
services attributable to Class B shares and Class C shares, respectively. Firms
to which service fees may be paid include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service
fee based on assets in the accounts in the month following the month of
purchase and the fee continues until terminated by KDI or a Fund. The fees
are calculated monthly and normally paid quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first year
service fee at a rate of up to .25% of the purchase price of such shares.
For periods after the first year, KDI currently intends to pay firms a
service fee at a rate of up to .25% (calculated monthly and normally paid
quarterly) of the net assets attributable to Class B and Class C shares
maintained and serviced by the firm and the fee continues until terminated
by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from each
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of each Fund while this procedure is
in effect will depend upon the proportion of Fund assets that is in accounts for
which a firm provides administrative services as well as, with respect to Class
A shares (except for the Short-Intermediate Fund), the date when shares
representing such assets were purchased. In addition, KDI may, from time to
time, from its own resources, pay certain firms additional amounts for ongoing
administrative services and assistance provided to their customers and clients
who are shareholders of the Funds.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of both Funds. IFTC also is the Funds' transfer agent and dividend-paying agent.
Pursuant to a services agreement with IFTC, Kemper Service Company ("KSvC") an
affiliate of the Adviser, serves as "Shareholder Service Agent" of the Funds and
as such, performs all of IFTC's duties as transfer agent and dividend-paying
agent. The Combined Fund has adopted the same arrangements. For a description of
shareholder service agent fees payable to the Shareholder Service Agent, see
"INVESTMENT MANAGER AND UNDERWRITER -- Custodian, Transfer Agent and Shareholder
Service Agent" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. The Adviser places all orders for purchases and sales of
a Fund's securities. Subject to seeking best execution of orders, the Adviser
may consider sales of shares of a Fund and other funds managed by the Adviser or
its affiliates as a factor in selecting broker-dealers. See "PORTFOLIO
TRANSACTIONS" in the Statement of Additional Information.
The tables below set forth (i) the fees and expenses paid by the Adjustable Rate
Fund and the Short-Intermediate Fund for their last fiscal year, which was
August 31, 1998 for the Adjustable Rate Fund and September 30, 1998 for the
Short-Intermediate Fund and (ii) pro forma expenses for the Combined Fund for
Class A, B and C shares.
15
<PAGE> 29
EXPENSE COMPARISON TABLE
CLASS A SHARES
<TABLE>
<CAPTION>
SHORT- COMBINED
ADJUSTABLE INTERMEDIATE FUND
RATE FUND FUND PRO FORMA(1)
---------- ------------ ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)...................... 3.50% 3.50% 2.75%
Contingent Deferred Sales Charge (CDSC)
(as a percentage of the lower of the original purchase
price or redemption proceeds)(2)......................... None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................ .55% .55% .55%
Rule 12b-1 Fees............................................
Other Expenses............................................. .80% .58% .56%
Total Fund Operating Expenses.............................. 1.35% 1.13% 1.11%
EXPENSE EXAMPLE OF TOTAL OPERATING EXPENSES ASSUMING
REDEMPTION AT THE END OF THE PERIOD(3)
One Year................................................... $ 48 $ 46 $ 46
Three Years................................................ $ 76 $ 70 $ 69
Five Years................................................. $106 $ 95 $ 94
Ten Years.................................................. $192 $168 $165
</TABLE>
- -------------------------
Notes to Expense Comparison Table
(1) The Pro Forma column reflects expenses estimated for the Combined Fund
subsequent to the Reorganization and reflects the effect of the
Reorganization.
(2) Class A shares purchased under the Large Order NAV Purchase Privilege have a
1% contingent deferred sales charge for the first year and .50% for the
second year.
(3) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return and the reinvestment of all dividends.
16
<PAGE> 30
EXPENSE COMPARISON TABLE
CLASS B SHARES
<TABLE>
<CAPTION>
SHORT- COMBINED
ADJUSTABLE INTERMEDIATE FUND
RATE FUND FUND PRO FORMA(1)
---------- ------------ ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)...................... None None None
Contingent Deferred Sales Charge (CDSC)
(as a percentage of the lower of the original purchase
price or redemption proceeds)(2)......................... 4.00 - 0% 4.00 - 0% 4.00 - 0%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................ .55% .55% .55%
Rule 12b-1 Fees............................................ .75% .75% .75%
Other Expenses............................................. .68% .81% .81%
Total Fund Operating Expenses.............................. 1.98% 2.11% 2.11%
EXPENSE EXAMPLE OF TOTAL OPERATING EXPENSES ASSUMING
REDEMPTION AT THE END OF THE PERIOD(3)
One Year................................................... $ 60 $ 61 $ 61
Three Years................................................ $ 92 $ 96 $ 96
Five Years................................................. $127 $133 $133
Ten Years.................................................. $199 $196 $195
</TABLE>
- -------------------------
Notes to Expense Comparison Table
(1) The Pro Forma column reflects expenses estimated to be paid for the Combined
Fund subsequent to the Reorganization and reflects the effect of the
Reorganization.
(2) Issuers conversion to Class A shares six years after purchase. Contingent
deferred sales charges on Class B shares are 4% in the first year, 3% in the
second and third year, 2% in the fourth and fifth year, and 1% in the sixth
year.
(3) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return and the reinvestment of all dividends.
17
<PAGE> 31
EXPENSE COMPARISON TABLE
CLASS C SHARES
<TABLE>
<CAPTION>
SHORT- COMBINED
ADJUSTABLE INTERMEDIATE FUND
RATE FUND FUND PRO FORMA(1)
---------- ------------ ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)...................... None None None
Contingent Deferred Sales Charge (CDSC)
(as a percentage of the lower of the original purchase
price or redemption proceeds)(2)......................... 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................ .55% .55% .55%
Rule 12b-1 Fees............................................ .75% .75% .75%
Other Expenses............................................. .64% .54% .56%
Total Fund Operating Expenses.............................. 1.94% 1.84% 1.86%
EXPENSE EXAMPLE OF TOTAL OPERATING EXPENSES ASSUMING
REDEMPTION AT THE END OF THE PERIOD(3)
One Year................................................... $ 30 $ 29 $ 29
Three Years................................................ $ 61 $ 58 $ 58
Five Years................................................. $105 $100 $101
Ten Years.................................................. $226 $216 $218
</TABLE>
- -------------------------
Notes to Expense Comparison Table
(1) The Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization and
reflects the effect of the Reorganization.
(2) The contingent deferred sales charge for Class C shares is 1% for the first
year.
(3) Expense examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return and the reinvestment of all dividends.
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. The
Adjustable Rate Fund and the Short-Intermediate Fund offer three classes of
shares. The Class A shares of the Adjustable Rate Fund and the
Short-Intermediate Fund are each subject to an initial sales charge and annual
service fees of .25%. The following Class A sales charges and commissions apply
to the Adjustable Rate Fund and the Short-Intermediate Fund.
18
<PAGE> 32
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED
DEALER
SALES CHARGE COMMISSION
---------------------- ----------
AS % OF AS % OF
PUBLIC AS % OF PUBLIC
OFFERING YOUR NET OFFERING
PURCHASE AMOUNT PRICE INVESTMENT PRICE
--------------- -------- ---------- --------
<S> <C> <C> <C>
Less than $100,000.......................................... 3.50% 3.63% 3.00%
$100,000 - $249,999......................................... 3.00% 3.09% 2.50%
$250,000 - $499,999......................................... 2.50% 2.56% 2.25%
$500,000 - $999,999......................................... 2.00% 2.04% 1.75%
$1 million and over......................................... --(1) --(1) --(2)
</TABLE>
- -------------------------
(1) Class A shares purchased under the Large Order NAV Purchase Privilege have a
1% contingent deferred sales charge for the first year and .50% for the
second year.
(2) Commission is payable by KDI.
The Combined Fund will offer three classes of shares. The Class A shares of the
Combined Fund will be subject to an initial sales charge and annual service fees
of .25%. The following Class A sales charges and commissions will apply to the
Combined Fund.
CLASS A SALES CHARGES AND COMMISSIONS
<TABLE>
<CAPTION>
AUTHORIZED
DEALER
SALES CHARGE COMMISSION
------------ ----------
AS % OF AS % OF
PUBLIC PUBLIC
OFFERING OFFERING
PURCHASE AMOUNT PRICE PRICE
--------------- -------- --------
<S> <C> <C>
Less than $100,000.......................................... 2.75% 2.25%
$100,000 - $249,999......................................... 2.50% 2.00%
$250,000 - $499,999......................................... 2.00% 1.75%
$500,000 - $999,999......................................... 1.50% 1.25%
$1,000,000 - $4,999,999..................................... --(1) 1.00%(2)
$5,000,000 - $49,999,999.................................... --(1) 0.50%(2)
$50,000,000 - and over...................................... --(1) 0.25%(2)
</TABLE>
- -------------------------
(1) Class A shares purchased under the Large Order NAV Purchase Privilege have a
1% contingent deferred sales charge for the first year and .50% for the
second year.
(2) Dealer commission is payable by KDI.
The initial sales charge applicable to Class A shares of the Combined Fund will
be waived for Class A shares acquired in the Reorganization. Any subsequent
purchases of Class A shares of the Combined Fund after the Reorganization will
be subject to the initial sales charge, excluding Class A shares purchased
through the dividend reinvestment plan.
The Class B shares of the Combined Fund will not, and the Short-Intermediate
Fund do not, incur an initial sales charge when purchased, but are subject to a
.25% annual service fee and a Rule 12b-1 distribution fee. Class B shares are
also subject to a contingent deferred sales charge of 4% in the first year, 3%
in the second and third year, 2% in the fourth and fifth year, and 1% in the
sixth year.
19
<PAGE> 33
Class C shares of the Combined Fund and the Short-Intermediate Fund have no
initial sales charges but are subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within one year of
purchase.
No contingent deferred sales charge will be imposed on Class B and Class C
shares of the Short-Intermediate Fund in connection with the Reorganization. The
holding period and conversion period for Class B and Class C shares of the
Combined Fund received in connection with the Reorganization will be measured
from the earlier of the time (i) the holder purchased such shares from the
Short-Intermediate Fund or (ii) the holder purchased such shares from any other
Kemper Fund and subsequently exchanged them for shares of the Short-Intermediate
Fund.
For a complete description of the Class A, B and C shares, see the sections of
the Adjustable Rate Fund and the Short-Intermediate Fund Prospectuses and
Statements of Additional Information entitled "PURCHASE OF SHARES" and "PURCHASE
AND REDEMPTION OF SHARES", respectively.
Shares of the Combined Fund and the Short-Intermediate Fund may be purchased
through a financial adviser, by check, by electronic transfer, and by exchange
from certain other open-end mutual funds distributed by KDI. For a complete
description regarding purchase of shares and exchange of shares of the Funds,
see the sections of the Prospectuses and Statements of Additional Information
entitled "PURCHASE OF SHARES" and "PURCHASE AND REDEMPTION OF SHARES",
respectively.
Shares of the Adjustable Rate Fund and the Short-Intermediate Fund properly
presented for redemption may be redeemed or exchanged at the next determined net
asset value per share (subject to any applicable deferred sales charge). Shares
of either the Adjustable Rate Fund or the Short-Intermediate Fund may be
redeemed or exchanged through a financial adviser by mail or by special
redemption privileges (telephone exchange, telephone redemption, by check or by
electronic transfer) subject to limitations described in the prospectus.
The stock transfer books of the Short-Intermediate Fund will be permanently
closed as of the date of Closing. Only redemption requests and transfer
instructions received in proper form by the close of business on the day prior
to the date of Closing will be fulfilled by the Short-Intermediate Fund.
Redemption requests or transfer instructions received by the Short-Intermediate
Fund after that date will be treated by the Fund as requests for the redemption
or instructions for transfer of the shares of the Combined Fund credited to the
accounts of the shareholders of the Short-Intermediate Fund. Redemption requests
or transfer instructions received by the Short-Intermediate Fund after the close
of business on the day prior to the date of Closing will be forwarded to the
Combined Fund. For a complete description of the redemption arrangements for the
Funds, see the sections of the Adjustable Rate Fund and Short-Intermediate Fund
Prospectuses entitled "REDEMPTION OR REPURCHASE OF SHARES."
20
<PAGE> 34
CAPITALIZATION. The following table sets forth the capitalization of the
Adjustable Rate and the Short-Intermediate Fund as of August 31, 1998, and the
pro forma capitalization of the Combined Fund as if the Reorganization had
occurred on that date. These numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF AUGUST 31, 1998
<TABLE>
<CAPTION>
SHORT-
ADJUSTABLE RATE INTERMEDIATE PRO
FUND FUND FORMA(1)
--------------- ------------ --------
<S> <C> <C> <C>
NET ASSETS
Class A shares.................................. $60,856,000 $85,961,000 $146,817,000
Class B shares.................................. $ 7,108,000 $74,961,000 $ 82,069,000
Class C shares.................................. $ 1,343,000 $ 6,126,000 $ 7,469,000
NET ASSET VALUE PER SHARE
Class A shares.................................. $8.19 $7.82 $8.19
Class B shares.................................. $8.21 $7.77 $8.21
Class C shares.................................. $8.22 $7.79 $8.22
SHARES OUTSTANDING
Class A shares.................................. 7,431 10,998 17,932
Class B shares.................................. 865 9,645 9,993
Class C shares.................................. 163 786 908
SHARES AUTHORIZED
Class A shares.................................. Unlimited Unlimited Unlimited
Class B shares.................................. Unlimited Unlimited Unlimited
Class C shares.................................. Unlimited Unlimited Unlimited
</TABLE>
- -------------------------
(1) The pro forma figures reflect the effect of the Short-Intermediate Fund
Reorganization.
B. RISK FACTORS
SIMILARITY OF RISKS
The Combined Fund, as a non-fundamental policy, will invest 100% of its total
assets in U.S. dollar-denominated securities and 65% of its total assets in U.S.
Government Securities and repurchase agreements of such securities. The
Short-Intermediate Fund, as a fundamental policy, invests at least 65% of is
total assets in U.S. Government Securities and repurchase agreements of U.S.
Government Securities. U.S. Government Securities of the type in which the Funds
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
Funds' 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 Funds' investment varies inversely with changes in interest
rates. For example, as interest rates rise the value of the Funds' investments
will tend to decline, and as interest rates fall the value of the Funds'
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.
DIFFERENCES IN RISKS
The remaining 35% of the Combined Fund's assets could be invested in private
collateralized mortgage obligations or asset-backed securities of investment
grade quality and other fixed income securities with ratings of single-B or
higher (or, if unrated, of comparable quality in the opinion of the Adviser)
with a 10% maximum limitation on non-investment grade securities. Lower-rated
and non-rated fixed-income securities, which are commonly referred to as "junk
bonds," have widely varying characteristics and quality. These lower rated
securities are considered, on balance, as predominantly speculative with respect
21
<PAGE> 35
to capacity to pay interest and repay principal in accordance with the terms of
the obligations and generally will involve more credit risk than securities in
the higher rating categories.
Up to 35% of the assets of the Short-Intermediate 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); 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.
The Combined Fund will be able to engage in financial futures, options, swaps
(including caps, floors and collars) and forward contracts transactions. The
Short-Intermediate Fund may engage in options or financial futures transactions
in connection with attempts to hedge its portfolio investments and not for
speculation. For a description of the risks associated with such investments see
the section of the Funds' Prospectus entitled "INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS -- ADDITIONAL INFORMATION."
The Combined Fund will have a targeted average maturity of less than three
years. The Short-Intermediate Fund has a targeted average maturity of two to
five years. For more information on the actual maturity of the
Short-Intermediate Fund see "Comparison of the Combined Fund with the
Short-Intermediate Fund -- MATURITY AND DURATION." Funds with longer average
maturities and durations will generally be subject to greater interest rate
risk.
C. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Funds at (800) 621-1048 and asking for the "Reorganization
SAI."
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Adjustable Rate Fund, an open-end management
investment company organized as a business trust, would acquire all of the
assets and the liabilities of the Short-Intermediate Fund on the date of the
Closing in consideration for Class A, B and C shares of the Adjustable Rate
Fund.
Subject to the Short-Intermediate Fund's shareholders approving the
Reorganization and the approval by the shareholders of the Adjustable Rate Fund
of a new investment objective and new investment policies, the closing (the
"Closing") will occur on [ ] or such later date as soon as
practicable thereafter as the Adjustable Rate Fund and the Short-Intermediate
Fund may mutually agree.
On the date of the Closing, the Short-Intermediate Fund will transfer to the
Adjustable Rate Fund all of its assets and liabilities. The Adjustable Rate Fund
will in turn transfer to the Short-Intermediate Fund a number of its Class A, B
and C shares equal in value to the value of the net assets of the Fund,
transferred to the Adjustable Rate Fund as of the date of the Closing, as
determined in accordance with the valuation method described in the Adjustable
Rate Fund's then current prospectus. In order to minimize any potential for
undesirable federal income and excise tax consequences in connection with the
Reorganization, the Adjustable Rate Fund and the Short-Intermediate Fund may
individually distribute on or before the Closing all or substantially all of
their respective undistributed net investment income (including net capital
gains) as of such date.
22
<PAGE> 36
The Short-Intermediate Fund will distribute in complete liquidation the Class A,
B and C shares of the Adjustable Rate Fund to the shareholders of the respective
class of the Fund promptly after the Closing and then will be liquidated,
dissolved and terminated as a series of the Trust in accordance with Kemper
Portfolios' Declaration of Trust.
The Short-Intermediate Fund has made certain standard representations and
warranties to the Adjustable Rate Fund regarding its capitalization, status and
conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by shareholders of the
Short-Intermediate Fund;
2. the approval by the shareholders of the Adjustable Rate Fund of a new
investment objective and new investment policies;
3. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
4. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
5. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
6. the effectiveness under applicable law of the registration statement of
the Adjustable Rate Fund of which this Prospectus/Proxy Statement forms
a part and the absence of any stop orders under the Securities Act of
1933, as amended, pertaining thereto; and
7. the receipt of opinions of counsel relating to, among other things, the
tax-free nature of the Reorganization for federal income tax purposes.
The Agreement may be terminated or amended with respect to the Reorganization by
the mutual consent of the parties either before or after approval thereof by the
shareholders of the Short-Intermediate Fund, provided that no such amendment
after such approval shall be made if it would have a material adverse affect on
the interests of the Fund's shareholders. The Agreement also may be terminated
by the non-breaching party if there has been a material misrepresentation,
material breach of any representation or warranty, material breach of contract
or failure of any condition to Closing.
The Board recommends that you vote to approve the Reorganization, as it believes
the Reorganization is in the best interests of the Short-Intermediate Fund and
that the interests of existing shareholders will not be diluted as a result of
consummation of the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST. Beneficial interests in the Adjustable Rate Fund
being offered hereby are represented by transferable Class A, B and C shares, no
par value per share. The Declaration of Trust of the Adjustable Rate Fund
permits the trustees, as they deem necessary or desirable, to create one or more
separate investment portfolios and to issue a separate series of shares for each
portfolio and, subject to compliance with the 1940 Act, to further subdivide the
shares of a series into one or more classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the Adjustable Rate Fund are
entitled to one vote per share on matters as to which they are entitled to vote;
however, separate votes generally are taken by each series on matters affecting
an individual series.
The Adjustable Rate Fund operates as an open-end management investment company
registered with the SEC under the 1940 Act. In addition to the specific voting
rights described above, shareholders of the Adjustable Rate Fund are entitled,
under current law, to vote with respect to certain other matters, including
changes in fundamental investment policies and restrictions and the ratification
of the selection
23
<PAGE> 37
of independent auditors. Moreover, under the 1940 Act, shareholders owning not
less than 10% of the outstanding shares of the Adjustable Rate Fund may request
that the board of trustees call a shareholders' meeting for the purpose of
voting upon the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the Adjustable Rate Fund will establish an
account for each Short-Intermediate Fund's shareholder containing the
appropriate number of shares of the Adjustable Rate Fund. The shareholder
services and shareholder programs of the Adjustable Rate Fund and the Short-
Intermediate Fund are substantially identical. Shareholders of the
Short-Intermediate Fund who are accumulating shares of the Short-Intermediate
Fund under the dividend reinvestment plan, or who are receiving payment under
the systematic withdrawal plan with respect to shares of the Short-Intermediate
Fund, will retain the same rights and privileges after the Reorganization in
connection with the Adjustable Rate Fund Class A, B or C shares received in the
Reorganization through substantially identical plans maintained by the
Adjustable Rate Fund. Investors Fiduciary Trust Company ("IFTC"), as custodian,
and State Street Bank and Trust Company, as sub-custodian, have custody of all
securities and cash of both Funds.
Upon approval of the Reorganization, shareholders of the Short-Intermediate Fund
who currently own shares in certificate form are asked to surrender these shares
to the Short-Intermediate Fund's shareholder service agent, KSvC.
Short-Intermediate Fund shareholders must submit a written request to IFTC in
order to receive certificates for their Adjustable Rate Fund shares. No
certificates for Adjustable Rate Fund shares will be issued as part of the
Reorganization except upon request.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the Short-Intermediate
Fund and shareholders of the Adjustable Rate Fund. The discussion set forth
below is for general information only and may not apply to a holder subject to
special treatment under the Internal Revenue Code of 1986, as amended (the
"Code"), such as a holder that is a bank, an insurance company, a dealer in
securities, a tax-exempt organization, a foreign person or that acquired its
Class A, B and C shares of the Short-Intermediate Fund pursuant to the exercise
of employee stock options or otherwise as compensation. It is based upon the
Code, legislative history, Treasury regulations, judicial authorities, published
positions of the Internal Revenue Service (the "Service") and other relevant
authorities, all as in effect on the date hereof and all of which are subject to
change or different interpretations (possibly on a retroactive basis). This
summary is limited to shareholders who hold their Short-Intermediate Fund shares
as capital assets. No advance rulings have been or will be sought from the
Service regarding any matter discussed in this Prospectus/Proxy Statement.
Accordingly, no assurances can be given that the Service could not successfully
challenge the intended federal income tax treatment described below.
Shareholders should consult their own tax advisers to determine the specific
federal income tax consequences of all transactions relating to the
Reorganization, as well as the effects of state, local and foreign tax laws and
possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to the Closing of
the Reorganization that the Kemper Portfolios and the Adjustable Rate Fund
receive an opinion from Vedder, Price, Kaufman & Kammholz ("Vedder Price")
substantially to the effect that for federal income tax purposes:
1. The acquisition by the Adjustable Rate Fund of the assets of the
Short-Intermediate Fund in exchange solely for Class A, B and C shares
of the Adjustable Rate Fund and the assumption by the Adjustable Rate
Fund of the liabilities of the Short-Intermediate Fund will qualify as
tax-free reorganization within the meaning of Section 368(a)(1)(C) of
the Code.
2. No gain or loss will be recognized by the Short-Intermediate Fund or the
Adjustable Rate Fund upon the transfer to the Adjustable Rate Fund of
the assets of the Short-Intermediate Fund in
24
<PAGE> 38
exchange solely for the Class A, B and C shares of the Adjustable Rate Fund and
the assumption by the Adjustable Rate Fund of the liabilities of the
Short-Intermediate Fund.
3. The Adjustable Rate Fund's basis in the Short-Intermediate Fund's assets
received in the Reorganization will equal the basis of such assets in
the hands of the Short-Intermediate Fund immediately prior to the
transfer, and the Adjustable Rate Fund's holding period of such assets
will, in each instance, include the period during which the assets were
held by the Short-Intermediate Fund.
4. No gain or loss will be recognized by the shareholders of the
Short-Intermediate Fund upon the exchange of their shares of the
Short-Intermediate Fund for the Class A, B and C shares of the
Adjustable Rate Fund.
5. The aggregate tax basis in the Class A, B and C shares of the Adjustable
Rate Fund received by the shareholders of the Short-Intermediate Fund
will be the same as the aggregate tax basis of the shares of the
Short-Intermediate Fund surrendered in exchange therefor.
6. The holding period of the Class A, B and C shares of the Adjustable Rate
Fund received by the shareholders of the Short-Intermediate Fund will
include the holding period of the shares of the Short-Intermediate Fund
surrendered in exchange therefor provided such surrendered shares of the
Short-Intermediate Fund are held as capital assets by such shareholder.
In rendering its opinions, Vedder Price will rely upon certain representations
of the management of the Adjustable Rate Fund and the Short-Intermediate Fund
and assume that the Reorganization will be consummated as described in the
Agreement and that redemptions of shares of the Short-Intermediate Fund
occurring prior to the Closing and post-Closing redemptions of shares of the
Short-Intermediate Fund that are received in the Reorganization will consist
solely of redemptions in the ordinary course of business.
The Adjustable Rate Fund intends to be taxed under the rules applicable to
regulated investment companies as defined in Section 851 of the Code, which are
the same rules currently applicable to the Short-Intermediate Fund and its
shareholders.
EXPENSES
Expenses for the Reorganization will be paid by the Adviser.
As noted above, shareholders of the Short-Intermediate Fund may redeem their
shares or exchange their shares for shares of certain other open-end mutual
funds distributed by KDI at any time prior to the closing of the Reorganization.
See the Section of the Adjustable Rate Fund and the Short-Intermediate Fund
Prospectus entitled "SPECIAL FEATURES". Redemptions and exchanges of shares
generally are taxable transactions for federal income tax purposes, unless your
account is not subject to taxation, such as an individual retirement account or
other tax-qualified retirement plan. Shareholders should consult with their own
tax advisers regarding the federal, state and local tax consequences of
potential transactions.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the Adjustable Rate
Fund will be passed on by Vedder, Price, Kaufman & Kammholz, 222 North LaSalle
Street, Chicago, Illinois 60601.
FINANCIAL STATEMENTS
The unaudited updated Financial Highlights for the Adjustable Rate Fund and the
Short-Intermediate Fund are attached hereto as Exhibit C.
In addition, incorporated by reference in their respective entireties are (i)
for the Adjustable Rate Fund, the unaudited financial statements for the six
months ended February 28, 1998 and the audited financial
25
<PAGE> 39
statements for the fiscal year ended August 31, 1997, attached as Exhibit C to
the Reorganization SAI; (ii) for the Short-Intermediate Fund, the unaudited
financial statements for the six months ended March 31, 1998 and the audited
financial statements for the fiscal year ended September 30, 1997, attached as
Exhibit D to the Reorganization SAI; and (iii) the pro forma financial
statements as of August 31, 1998 attached as Exhibit E to the Reorganization
SAI.
D. RECOMMENDATION OF THE BOARD
The Board of the Kemper Portfolios has unanimously approved the Agreement and
has determined that participation in the Reorganization is in the best interests
of the Short-Intermediate Fund. THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" THE PROPOSED REORGANIZATION.
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<PAGE> 40
PROPOSAL 3. APPROVAL OF NEW INVESTMENT OBJECTIVE AND THE REVISION OF CERTAIN
FUNDAMENTAL INVESTMENT POLICIES (ADJUSTABLE RATE FUND ONLY)
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF A NEW INVESTMENT
OBJECTIVE AND THE REVISION OF CERTAIN FUNDAMENTAL INVESTMENT POLICIES.
In connection with the reorganization of the Short-Intermediate Fund into the
Adjustable Rate Fund, you are being asked to approve a new investment objective
and policies that will give the Adjustable Rate Fund greater flexibility to
invest in fixed rate U.S. government securities and broaden the ability of the
Adjustable Rate Fund to invest in other lower quality non-U.S. government
securities. The Adviser believes that the proposed new investment policies of
the Adjustable Rate Fund will provide more diversification of investment choices
and could increase the potential for higher income and better total returns. If
Proposal 3 is approved these new investment objective and policies of the
Adjustable Rate Fund will be non-fundamental and the Adjustable Rate Fund will
change its name to the Kemper Short-Term U.S. Government Fund.
Also, you will be asked to approve other changes to the Adjustable Rate Fund's
fundamental policies. The 1940 Act requires an investment company to adopt
policies governing certain specified activities, which can be changed only by a
shareholder vote. Policies that cannot be changed or eliminated without a
shareholder vote are referred to in this Proxy Statement as "fundamental"
policies. The purposes of this Proposal are to eliminate the requirement of
shareholder approval to change policies except where required by the 1940 Act
and to provide the maximum permitted flexibility in those policies that do
require shareholder approval. Management has advised the Board that some of the
Adjustable Rate Fund's fundamental policies that are not required to be such
under the 1940 Act were adopted in the past as a result of now rescinded
regulatory requirements and no longer serve any useful purpose. Management
believes that other fundamental policies, as well as the classification of the
Adjustable Rate Fund's investment objective(s) as fundamental, are unnecessary
because the provisions of the 1940 Act or Federal tax law, together with the
disclosure requirements of the Federal securities laws, provide adequate
safeguards for a fund and its shareholders. The Proposal is described in more
detail below.
This Proposal is sub-divided into the following four sections:
(A) NEW INVESTMENT OBJECTIVE AND POLICIES AND ELIMINATION OF SHAREHOLDER
APPROVAL REQUIREMENT TO AMEND INVESTMENT OBJECTIVE AND CERTAIN FUNDAMENTAL
POLICIES. The first section of this Proposal seeks shareholder approval to
change the Adjustable Rate Fund's investment objective and policies. The new
investment objective and policies will eliminate the requirement that under
normal market conditions the Adjustable Rate Fund will invest at least 65% of
its total assets in adjustable rate securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Instead the new investment
objective and policies would give the Adjustable Rate Fund greater flexibility
to invest in fixed rate U.S. government securities and broaden the ability of
the Adjustable Rate Fund to invest in other lower quality non-U.S. government
securities. The Adviser believes that, while the change in approach may result
in more volatility of principal, the broadened investment flexibility to invest
in lower quality non-U.S. Government securities could provide the potential for
greater income and total returns. In addition, eliminating the shareholder vote
requirement for amending the investment objective and policies of the Adjustable
Rate Fund is intended to enhance the Adjustable Rate Fund's investment
flexibility in the event of changing circumstances.
(B) ELIMINATION OF SHAREHOLDER APPROVAL REQUIREMENT TO AMEND INVESTMENT
POLICIES. The Adjustable Rate Fund currently requires shareholder approval to
amend "investment objectives and fundamental policies." The second section of
this Proposal seeks shareholder approval of the elimination of the shareholder
vote requirement for amending "policies" which are not otherwise specifically
identified as fundamental. Management believes that categorizing all policies as
fundamental restricts the Adjustable Rate Fund's investment flexibility and its
ability to respond to changing regulatory and industry conditions.
27
<PAGE> 41
(C) REVISION OF CERTAIN FUNDAMENTAL INVESTMENT POLICIES MANDATED BY THE 1940
ACT. Each of the fundamental policies proposed for revision relates to an
activity that the 1940 Act requires be governed by a fundamental policy. Each
proposed revision is, in general, intended to provide the Adjustable Rate Fund's
Board with the maximum flexibility permitted under the 1940 Act, and to promote
simplicity among the Adjustable Rate Fund's policies.
(D) ELIMINATION OF SHAREHOLDER APPROVAL TO CHANGE OTHER FUNDAMENTAL
POLICIES. This Proposal seeks to eliminate certain policies that are
specifically designated as fundamental but which are not required to be
fundamental under the 1940 Act. The Board of the Adjustable Rate Fund
anticipates adopting certain of these policies as non-fundamental. Any policy
that is not designated as fundamental can be modified or eliminated by the
Board, and, as indicated below, management intends to recommend to the Board the
elimination of several of them as being inappropriate or unnecessary under
current conditions.
Each proposed policy is identified in bold-type below.
The Adjustable Rate Fund's current fundamental policies are set forth in Exhibit
D. Changes in fundamental policies that are approved by shareholders, as well as
changes in non-fundamental policies that are adopted by a Board, will be
reflected in the Adjustable Rate Fund's prospectus and other disclosure
documents. Any change in the method of operation of the Adjustable Rate Fund
will require prior Board approval. Except as specifically indicated below, the
Board of the Adjustable Rate Fund does not presently intend to change the
investment policies of the Adjustable Rate Fund.
Approval of each item of this Proposal with respect to the Adjustable Rate Fund
requires the affirmative vote of a majority of the outstanding voting
securities, as defined above, of the Adjustable Rate Fund. If the shareholders
of the Adjustable Rate Fund fail to approve the proposed revisions or
elimination of any fundamental policy, the current such policy will remain in
effect.
A. NEW INVESTMENT OBJECTIVE AND POLICIES AND ELIMINATION OF SHAREHOLDER APPROVAL
REQUIREMENT TO AMEND INVESTMENT OBJECTIVE AND CERTAIN FUNDAMENTAL POLICIES.
PROPOSAL 3.1:
The language in the current prospectus for the Adjustable Rate Fund provides
that "the Adjustable Rate Fund seeks high current income consistent with low
volatility of principal." -- is to be replaced by -- "THE ADJUSTABLE RATE FUND
SEEKS HIGH CURRENT INCOME AND PRESERVATION OF CAPITAL."
Currently the Adjustable Rate Fund Prospectus provides: "[u]nder normal market
conditions the [Adjustable Rate] 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 representatives ("U.S. Government
Securities")."
Currently the Adjustable Rate Fund Prospectus also provides: "the [Adjustable
Rate] Fund may also invest up to 35% of its total assets in securities other
than adjustable rate U.S. Government Securities including, without limitation,
primary issued mortgage-backed securities, commercial paper and other debt
obligations of corporations and other business organizations, certificates of
deposits, banker's 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 Investor 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 Adviser."
IF THIS ITEM IS APPROVED BY SHAREHOLDERS, THE ADJUSTABLE RATE FUND PROSPECTUS
WILL PROVIDE: "THE FUND WILL INVEST 100% OF ITS TOTAL ASSETS IN U.S.
DOLLAR-DENOMINATED SECURITIES AND NORMALLY AT LEAST 65% OF ITS TOTAL ASSETS IN
SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR
INSTRUMENTALITIES, INCLUDING REPURCHASE AGREEMENTS OF SUCH SECURITIES ("U.S.
GOVERNMENT SECURITIES"). UNDER NORMAL CONDITIONS, THE FUND WILL MAINTAIN A
DOLLAR WEIGHTED AVERAGE PORTFOLIO MATURITY OF LESS THAN THREE YEARS. THE FUND
MAY ALSO INVEST UP TO 35% OF ITS TOTAL ASSETS IN SECURITIES OTHER THAN U.S.
GOVERNMENT SECURITIES. SUCH NON-U.S. GOVERNMENT SECURITIES INCLUDE, BUT ARE NOT
LIMITED TO, PRIVATE CMO'S AND OTHER ASSET-BACKED
28
<PAGE> 42
SECURITIES RATED INVESTMENT GRADE (BA OR HIGHER) BY MOODY'S INVESTORS SERVICE,
INC. ("MOODY'S") OR (BB OR HIGHER) BY STANDARD & POOR'S CORPORATION ("S&P") AND
IN OTHER FIXED INCOME SECURITIES RATED SINGLE-B OR HIGHER BY MOODY'S OR S&P OR
UNRATED SECURITIES OF COMPARABLE QUALITY IN THE OPINION OF THE ADVISER, PROVIDED
THAT THE FUND WILL INVEST ONLY UP TO 10% OF ITS TOTAL ASSETS IN CORPORATE DEBT
SECURITIES RATED BELOW INVESTMENT GRADE. THE FUND MAY INVEST IN ANY NON-RATED
SECURITIES THAT ARE DETERMINED TO BE OF COMPARABLE QUALITY IN THE OPINION OF THE
ADVISER."
Management believes that the proposed new investment objective and policies of
the Adjustable Rate Fund will provide more diversification of investment choice.
While the Adjustable Rate Fund would still be allowed to invest in adjustable
rate securities, the Adviser would have greater flexibility to use other
short-term fixed income investments. Although the change in investment approach
may result in more volatility of principal, the Adviser believes that the
ability to invest in lower quality non-U.S. Government Securities could
potentially result in higher income and total returns.
IF THIS PROPOSAL IS APPROVED BY THE SHAREHOLDERS, THE INVESTMENT OBJECTIVE OF
THE ADJUSTABLE RATE FUND AND THE POLICIES IDENTIFIED ABOVE IN THE ADJUSTABLE
RATE FUND PROSPECTUS WILL NOT BE CLASSIFIED AS FUNDAMENTAL.
Management believes that leaving the power to modify investment objectives up to
the discretion of the Board would strengthen the Adjustable Rate Fund's ability
to respond to changing circumstances. The Board of the Adjustable Rate Fund does
not presently intend to further modify any investment objective, other than in
connection with this Proposal, and would disclose any such future changes to
applicable shareholders by amending the Adjustable Rate Fund's Prospectus and
Statement of Additional Information.
B. ELIMINATION OF SHAREHOLDER APPROVAL TO AMEND INVESTMENT POLICIES
PROPOSAL 3.2:
IF THIS PROPOSAL IS APPROVED BY THE SHAREHOLDERS OF THE ADJUSTABLE RATE FUND,
THE "INVESTMENT POLICIES" OF THE ADJUSTABLE RATE FUND WILL NOT BE CLASSIFIED AS
FUNDAMENTAL EXCEPT AS OTHERWISE PROVIDED IN THIS PROSPECTUS/PROXY STATEMENT.
This proposal is intended to provide the Adjustable Rate Fund with clarity of
disclosure and the investment flexibility necessary to respond to changing
circumstances by eliminating the shareholder vote requirement for amending
"investment policies" which are not specifically identified as fundamental. The
Adjustable Rate Fund's Prospectus currently contains a statement that
characterizes all "investment policies" as fundamental. Management believes that
this current statement is overbroad. The current statement unnecessarily
restricts the Adjustable Rate Fund's flexibility and may make it more difficult
to respond to changing conditions. Management believes that removing the
fundamental characterization of all policies not otherwise specifically
identified as fundamental is consistent with industry standards and would allow
the Adjustable Rate Fund and its Board to modify operating policies in light of
changes in the investment management industry, market conditions and the
regulatory environment, but only consistent with applicable law, the Adjustable
Rate Fund's investment objective and its clearly-identified fundamental
policies.
C. REVISION OF CERTAIN FUNDAMENTAL INVESTMENT POLICIES MANDATED BY THE 1940 ACT
DIVERSIFICATION
PROPOSAL 3.3:
IF THIS PROPOSAL IS APPROVED BY THE SHAREHOLDERS OF THE ADJUSTABLE RATE FUND,
THE ADJUSTABLE RATE FUND WILL REMAIN A "DIVERSIFIED" FUND UNDER THE 1940 ACT,
BUT WILL NOT BE SUBJECT TO ADDITIONAL REQUIREMENTS THAT ARE MORE RESTRICTIVE
THAN THE 1940 ACT.
The Adjustable Rate Fund is currently classified as a diversified open-end
investment company. Under the 1940 Act, a fund is "diversified" if, with respect
to 75% of its total assets, it may not invest more than 5% of the value of its
total assets in securities issued by any one issuer or purchase more than 10% of
the voting securities of any one issuer, except in each case in U.S. Government
securities or securities issued by
29
<PAGE> 43
other investment companies. Currently, the Adjustable Rate Fund has adopted
additional diversification policies.
Under the current diversification policies, the Adjustable Rate Fund may not
invest more than 5% of its assets in the securities of any one issuer, except
U.S. Government securities. The Adjustable Rate Fund's policies also contain a
separate restriction prohibiting the purchase of more than 10% of the voting
securities of any one issuer. Accordingly, the elimination of the separate
diversification policies for the Adjustable Rate Fund means that the Adjustable
Rate Fund must comply with only the 1940 Act diversification requirements. As a
result, the elimination of the separate diversification policies that apply to
100% of the value of the Adjustable Rate Fund total assets will cause the
Adjustable Rate Fund to have less restrictive diversification requirements.
BORROWING
PROPOSAL 3.4:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT BORROW MONEY, EXCEPT AS PERMITTED UNDER THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND AS INTERPRETED OR MODIFIED BY
REGULATORY AUTHORITY HAVING JURISDICTION, FROM TIME TO TIME.
The current policy of the Adjustable Rate Fund prohibits borrowing money, except
as a temporary measure for extraordinary or emergency purposes, in which case
the Adjustable Rate Fund may borrow up to one-third of the value of its total
assets. Additionally, the Adjustable Rate Fund may not borrow for leverage or
make investments while borrowings are outstanding.
The proposed policy would permit the Adjustable Rate Fund to engage in borrowing
in a manner and to the full extent permitted by applicable law. The 1940 Act
requires borrowings to have 300% assets coverage, which means, in effect, that a
Fund would be permitted to borrow up to an amount equal to 50% of its total
assets under the proposed borrowing policy. Additionally, under the proposed
policy, the Adjustable Rate Fund would not be limited to borrowing for temporary
or emergency purposes, could borrow for leverage, and could purchase securities
for investment while borrowings are outstanding. However, the Board has no
current intention of authorizing any of these practices. If the Board authorized
the Adjustable Rate Fund to borrow for leverage, such borrowings would increase
the Adjustable Rate Fund's volatility and the risk of loss in a declining
market.
SENIOR SECURITIES
PROPOSAL 3.5:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT ISSUE SENIOR SECURITIES, EXCEPT AS PERMITTED UNDER
THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, AND AS INTERPRETED OR MODIFIED
BY REGULATORY AUTHORITY HAVING JURISDICTION, FROM TIME TO TIME.
The current policy of the Adjustable Rate Fund prohibits the issuance of senior
securities (i.e., securities which are obligations or instruments evidencing
indebtedness) except as permitted under the 1940 Act. The proposed policy
re-words the current policy without making any material changes.
CONCENTRATION
PROPOSAL 3.6:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT CONCENTRATE ITS INVESTMENTS IN A PARTICULAR
INDUSTRY, AS THAT TERM IS USED IN THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED, AND AS INTERPRETED OR MODIFIED BY REGULATORY AUTHORITY HAVING
JURISDICTION, FROM TIME TO TIME.
While the 1940 Act does not define what constitutes "concentration" in an
industry, the staff of the Commission takes the position that investment of more
than 25% of a Fund's assets in an industry constitutes concentration. If a Fund
concentrates in an industry, it must at all times have more than 25%
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<PAGE> 44
of its assets invested in that industry, and if its policy is not to
concentrate, as is the case with each of the Adjustable Rate Funds, it may not
invest more than 25% of its assets in the applicable industry, unless, in either
case, the Fund discloses the specific conditions under which it will change from
concentrating to not concentrating or vice versa.
The Adjustable Rate Fund's current policy in effect prohibits the purchase of
securities if it would result in more than 25% of the Adjustable Rate Fund's
total assets being invested in the same industry. For the Adjustable Rate Fund,
there are expectations for U.S. Government securities, including collateralized
obligations. In some cases, what constitutes an industry for the purposes of
this restriction is included in the policy itself. A Fund is permitted to adopt
reasonable definitions of what constitutes an industry, or it may use standard
classifications promulgated by the Commission, or some combination thereof.
Because a Fund may create its own reasonable industry classifications,
management believes that it is not necessary to include such matters in the
fundamental policy of the Adjustable Rate Fund.
UNDERWRITING OF SECURITIES
PROPOSAL 3.7:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT ENGAGE IN THE BUSINESS OF UNDERWRITING SECURITIES
ISSUED BY OTHERS, EXCEPT TO THE EXTENT THAT A FUND MAY BE DEEMED TO BE AN
UNDERWRITER IN CONNECTION WITH THE DISPOSITION OF PORTFOLIO SECURITIES.
The proposed underwriting policy has been re-worded without making any material
changes.
INVESTMENT IN REAL ESTATE
PROPOSAL 3.8:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT PURCHASE OR SELL REAL ESTATE, WHICH TERM DOES NOT
INCLUDE SECURITIES OF COMPANIES WHICH DEAL IN REAL ESTATE OR MORTGAGES OR
INVESTMENTS SECURED BY REAL ESTATE OR INTERESTS THEREIN, EXCEPT THAT THE FUND
RESERVES FREEDOM OF ACTION TO HOLD AND TO SELL REAL ESTATE ACQUIRED AS A RESULT
OF THE FUND'S OWNERSHIP OF SECURITIES.
The proposed real estate policy re-words the current policies without making any
material changes.
PURCHASE OF COMMODITIES
PROPOSAL 3.9:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT PURCHASE PHYSICAL COMMODITIES OR CONTRACTS RELATING
TO PHYSICAL COMMODITIES.
The Adjustable Rate Fund's current policies prohibit the purchase or sale of
commodities or commodity contracts. These policies may contain exceptions for
financial futures contracts and options on such contracts. Under the proposed
policy, the Adjustable Rate Fund would be prohibited from purchasing only
physical commodities or contracts relating to physical commodities.
LENDING
PROPOSAL 3.10:
IF THIS PROPOSAL IS APPROVED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND MAY NOT MAKE LOANS EXCEPT AS PERMITTED UNDER THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED, AND AS INTERPRETED OR MODIFIED BY REGULATORY
AUTHORITY HAVING JURISDICTION FROM TIME TO TIME.
The Adjustable Rate Fund's current lending policy prohibits making loans to
others except that the Adjustable Rate Fund may purchase debt obligations or
repurchase agreements and it may lend its portfolio securities in accordance
with its investment objective and policies. The proposed policy, unlike the
current policy, does not specify the particular types of lending in which the
Adjustable Rate Fund is permitted to engage; instead, the proposed policy
permits the Adjustable Rate Fund to lend in a manner
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<PAGE> 45
and to an extent permitted by applicable law. The proposed change would,
therefore, permit the Adjustable Rate Fund, subject to the receipt of any
necessary regulatory approval and Board authorization, to enter into lending
arrangements, including lending agreements under which the Adjustable Rate Fund
advised by Scudder Kemper could for temporary purposes lend money directly to
and borrow money directly from each other through a credit facility. The
Adjustable Rate Fund believes that the flexibility provided by this policy
change could possibly reduce the Adjustable Rate Fund's borrowing costs and
enhance its ability to earn higher rates of interest on short-term lendings in
the event that the Board determines that such arrangements are warranted in
light of the Adjustable Rate Fund's particular circumstances.
D. ELIMINATION OF SHAREHOLDER APPROVAL TO CHANGE OTHER FUNDAMENTAL POLICIES
Certain of the policies listed below (Margin Purchases and Short Sales, Assets,
Pledging of Assets and Purchases of Voting Securities) were initially adopted by
the Adjustable Rate Fund due to state securities law requirements that are no
longer in effect. Except as otherwise stated, if shareholders approve the
elimination of these policies as fundamental, management will recommend to the
Board that they eliminate these policies entirely as being unnecessary.
MARGIN PURCHASES AND SHORT SALES
PROPOSAL 3.11:
IF THIS PROPOSAL IS ADOPTED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND WILL NOT HAVE A FUNDAMENTAL RESTRICTION ON MARGIN PURCHASES
AND SHORT SALES.
The Adjustable Rate Fund is currently either prohibited from (1) making
purchases on margin and/or making short sales, unless the Adjustable Rate Fund
has the right to obtain securities equivalent in kind and amount to those sold
and unless not more than 10% of the Adjustable Rate Fund's total assets is held
as collateral for such sales at any one time, or (2) making margin purchases and
short sales, except to obtain short-term credits necessary for clearance of
transactions, and in the case of margin deposits, in connection with financial
futures and options transactions. If elimination of this restriction is approved
by shareholders, the Adjustable Rate Fund's potential use of margin transactions
beyond transactions in futures and options and for the clearance of purchases
and sales of securities, including the use of margin in ordinary securities
transactions, would be generally limited by the current position taken by the
staff of the SEC that margin transactions with respect to securities are
prohibited under Section 18 of the 1940 Act because they create senior
securities. "Margin transactions" involve the purchase of securities with money
borrowed from a broker, with cash or eligible securities being used as
collateral against the loan. The Adjustable Rate Fund's ability to engage in
margin transactions is also limited by its borrowing policies, which permit the
Adjustable Rate Fund to borrow money only as permitted by applicable law.
PLEDGING OF ASSETS
PROPOSAL 3.12:
IF THIS PROPOSAL IS ADOPTED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND WILL NOT HAVE A FUNDAMENTAL RESTRICTION ON PLEDGING OF
ASSETS.
The Adjustable Rate Fund is currently prohibited from pledging, mortgaging or
hypothecating more than 15% of its total assets and then only to secure
borrowings. The collateral arrangements with respect to options, financial
futures and delayed delivery transactions and any margin payments in connection
with such transactions are not deemed to be pledges or other encumbrances.
Management believes that, in the interest of simplicity, elimination of these
policies is appropriate and will provide the Adjustable Rate Fund with greater
operational flexibility.
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<PAGE> 46
PURCHASES OF SECURITIES
PROPOSAL 3.13:
IF THIS PROPOSAL IS ADOPTED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND WILL NOT HAVE A FUNDAMENTAL RESTRICTION ON PURCHASES OF
SECURITIES.
The Adjustable Rate Fund is prohibited with respect to 100% of its assets from
purchasing more than 10% of the securities of a single issuer. Additionally, the
Adjustable Rate Fund is a "diversified" Fund and is therefore limited to
purchasing, with respect to 75% of its assets, not more than 10% of the voting
securities of a single issuer.
PURCHASES OF OPTIONS AND WARRANTS
PROPOSAL 3.14:
IF THIS PROPOSAL IS ADOPTED BY SHAREHOLDERS OF THE ADJUSTABLE RATE FUND, THE
ADJUSTABLE RATE FUND WILL NOT HAVE A FUNDAMENTAL RESTRICTION ON PURCHASES OF
OPTIONS AND WARRANTS.
The Adjustable Rate Fund is currently prohibited from writing, purchasing or
selling options on more than 25% of Fund's net assets and is restricted from
investing more than 5% of the Fund's net assets on premiums on put and call
options except for purchases and sales of options on financial contracts.
Management believes that, in the interest of simplicity, the elimination of
these policies is appropriate and will provide the Adjustable Rate Fund with
greater investment flexibility.
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<PAGE> 47
OTHER INFORMATION
A. SHAREHOLDERS OF THE ADJUSTABLE RATE FUND AND THE SHORT-INTERMEDIATE FUND
At the close of business on September 22, 1998, there were Class
A shares, Class B shares and Class C shares,
respectively, of the Adjustable Rate Fund. As of such date, the trustees and
officers of the Adjustable Rate Fund as a group own less than 1% of the shares
of the Adjustable Rate Fund. The following table sets forth the percentage of
each person who, as of , 1998, owns of record, or is known by the
Adjustable Rate to own of record or beneficially own 5% or more of any class of
shares of the Adjustable Rate Fund.
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
- ----- ------------------------- -------------
<S> <C> <C>
</TABLE>
At the close of business on September 22, 1998, the record date with respect to
the Special Meeting, there were Class A shares,
Class Shares and Class C shares, respectively, of the
Short-Intermediate Fund. As of such date, the trustees and officers of the
Short-Intermediate Fund as a group own less than 1% of the outstanding shares of
the Short-Intermediate Fund. The following table sets forth the percentage of
each person who, as of , 1998, owns of record, or is known by the
Kemper Portfolios to own of record or beneficially own 5% or more of any class
of shares of the Short-Intermediate Fund.
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS NAME AND ADDRESS OF OWNER OWNERSHIP
- ----- ------------------------- -------------
<S> <C> <C>
</TABLE>
B. SHAREHOLDER PROPOSALS
As a general matter, the Adjustable Rate Fund does not intend to hold future
regular annual or special meetings of its shareholders unless required by the
1940 Act. In the event the Reorganization is not consummated, the
Short-Intermediate Fund does not intend to hold future regular annual or special
meetings of its shareholders unless required by the 1940 Act. A shareholder
wishing to submit a proposal for inclusion in the Fund's proxy statement for the
next meeting of shareholders pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934 should send such written proposal to the Secretary of the
Fund within a reasonable time before the solicitation of proxies for such
meeting. The timely submission of a proposal, however, does not guarantee its
inclusion. A shareholder wishing to provide notice in the manner prescribed by
Rule 14a-4(c)(1) to the Fund of a proposal submitted outside of the process of
Rule 14a-8 must submit such written notice to the Secretary of the Fund within a
reasonable time before the solicitation of proxies for such meeting. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
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<PAGE> 48
C. VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the Short-Intermediate Fund are entitled to one vote per
share on matters as to which they are entitled to vote. The Short-Intermediate
Fund does not utilize cumulative voting. Holders of shares of the Adjustable
Rate Fund are entitled to one vote per share on matters as to which they are
entitled to vote. The Adjustable Rate Fund does not utilize cumulative voting.
Each valid proxy will be voted in accordance with the instructions on the proxy
and as the persons named in the proxy determine on such other business as may
come before the Special Meeting. If no instructions are given, the proxy will be
voted as recommended by the Board on each Proposal. Shareholders who execute
proxies may revoke them at any time before they are voted, either by writing to
the Funds or in person at the time of the Special Meeting. Proxies given by
telephone or electronically transmitted instruments may be counted if obtained
pursuant to procedures designed to verify that such instructions have been
authorized.
Proposal 1 (both Funds), approval of new investment management agreements, and
Proposal 3 (Adjustable Rate Fund only), approval of a new investment objective
and the revision of certain fundamental investment policies, require the
affirmative vote of a "majority of the outstanding voting securities", as
defined in the 1940 Act. The term "majority of the outstanding voting
securities" as defined in the 1940 Act means: the affirmative vote of the lesser
of (1) 67% of the voting securities of a Fund present at the meeting if more
than 50% of the outstanding voting securities of a fund are present in person or
by proxy or (2) more than 50% of the outstanding voting securities of a fund.
Proposal 2, approval of the Reorganization, requires the affirmative vote of a
majority of the outstanding shares of the Short-Intermediate Fund entitled to
vote. Approval of Proposal 2 by shareholders of the Short-Intermediate Fund is
conditional upon approval of Proposal 3 by shareholders of the Adjustable Rate
Fund.
In tallying shareholder votes, abstentions and broker non-votes (i.e., shares
held by brokers or nominees as to which (i) instructions have not been received
from the beneficial owners or persons entitled to vote and (ii) the broker or
nominee does not have discretionary voting power on a particular matter) will be
counted for determining whether a quorum is present for purposes of convening
the Special Meeting and will be considered present at the Special Meeting. On
Proposals 1 and 3, abstentions will have the effect of an "AGAINST" vote on each
Proposal. Broker non-votes will have the effect of an "AGAINST" vote on each
proposal if such vote is determined on the basis of obtaining the affirmative
vote of more than 50% of the outstanding voting securities. Broker non-votes
will not constitute "FOR" or "AGAINST" votes, and will be disregarded in
determining the voting securities "present" on each of these Proposals if such
vote is determined on the basis of the affirmative vote of 67% of the voting
securities of each of the Funds present at the Special Meeting. On Proposal 2,
abstentions and broker non-votes will have the effect of a "AGAINST" vote.
At least 30% of the shares of each Fund must be present, in person or by proxy,
in order to constitute a quorum. Thus the Special Meeting could not take place
on its scheduled date if less than 30% of the shares of each Fund were
presented. If, by the time scheduled for the meeting, a quorum of shareholders
of each Fund is not present or if a quorum is present but sufficient votes in
favor of any of the Proposals are not received, the persons named as proxies
currently intend to propose one or more adjournments of the meeting for the
Funds to permit further soliciting of proxies from shareholders. Any such
adjournment will require the affirmative vote of a majority of the shares of the
Funds present (in person or by proxy). The persons named as proxies will vote in
favor of any such adjournment if they determine that such adjournment and
additional solicitation are reasonable and in the interest of the Funds'
shareholders.
The cost of preparing, printing and mailing the enclosed proxy card and proxy
statement and all other costs incurred in connection with the solicitation of
proxies, including any additional solicitation made by letter, telephone or
telegraph, will be paid by Zurich or its affiliates. In addition to solicitation
by mail, certain officers and representatives of each Fund, officers and
employees of Scudder Kemper and certain financial services firms and their
representatives, who will receive no extra compensation for their services, may
solicit proxies by telephone, telegram or personally.
35
<PAGE> 49
Shareholder Communications Corporation ("SCC") has been engaged to assist in the
solicitation of proxies. As the Special Meeting date approaches, certain
shareholders of each Fund may receive a telephone call from a representative of
SCC if their votes have not yet been received. Authorization to permit SCC to
execute proxies may be obtained by telephonic or electronically transmitted
instructions from shareholders of each Fund. Proxies that are obtained
telephonically will be recorded in accordance with the procedures set forth
below. The Trustees believe that these procedures are reasonably designed to
ensure that the identity of the shareholder casting the vote is accurately
determined and that the voting instructions of the shareholder are accurately
determined.
In all cases where a telephonic proxy is solicited, the SCC representative is
required to ask for each shareholder's full name, address, social security or
employer identification number, title (if the shareholder is authorized to act
on behalf of an entity, such as a corporation), and the number of shares owned,
and to confirm that the shareholder has received the proxy materials in the
mail. If the information solicited agrees with the information provided to SCC,
then the SCC representative has the responsibility to explain the process, read
the Proposals on the proxy card, and ask for the shareholder's instructions on
the Proposals. The SCC representative, although he or she is permitted to answer
questions about the process, is not permitted to recommend to the shareholder
how to vote, other than to read any recommendation set forth in the proxy
statement. SCC will record the shareholder's instructions on the card. Within 72
hours, the shareholder will be sent a letter or mailgram to confirm his or her
vote and asking the shareholder to call SCC immediately if his or her
instructions are not correctly reflected in the confirmation.
If a shareholder wishes to participate in the Special Meeting, but does not wish
to give a proxy by telephone, the shareholder may still submit the proxy card
originally sent with the proxy statement or attend in person. Should
shareholders required additional information regarding the proxy or replacement
proxy cards, they may contact SCC toll-free at 1-800-733-8481, ext. 429. Any
proxy given by a shareholder, whether in writing or by telephone, is revocable
until voted at the Special Meeting.
THE BOARD OF DIRECTORS OF EACH FUND RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ALL
PROPOSALS FOR WHICH THEY ARE ENTITLED TO VOTE.
, 1998
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
36
<PAGE> 50
EXHIBIT A
FORM OF NEW
INVESTMENT MANAGEMENT AGREEMENT
[NAME OF FUND]
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
SEPTEMBER 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
INVESTMENT MANAGEMENT AGREEMENT
Ladies and Gentlemen:
[Name of Fund] (the "Fund") has been established as a Massachusetts
business trust to engage in the business of an investment company. The Fund has
issued shares of beneficial interest (the "Shares").
The Fund has selected you to act as the investment manager of the Fund and
to provide certain other services, as more fully set forth below, and you have
indicated that you are willing to act as such investment manager and to perform
such services under the terms and conditions hereinafter set forth. Accordingly,
the Fund agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of
investing and reinvesting its assets in the manner and in accordance with
its investment objectives, policies and restrictions. The Fund has
furnished you with copies properly certified or authenticated of each of
the following documents related to the Fund:
(a) The Declaration of Trust ("Declaration"), as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-
Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of
the Fund selecting you as investment manager and approving the form of
this Agreement.
The Fund will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to
the foregoing.
2. Portfolio Management Services. As manager of the assets of the
Fund, you shall provide continuing investment management of the assets of
the Fund in accordance with its investment objectives, policies and
restrictions;
A-1
<PAGE> 51
the applicable provisions of the Investment Company Act of 1940 (the "1940
Act") and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations
of which you have knowledge; subject always to policies and instructions
adopted by the Fund's Board of Trustees. In connection therewith, you shall
use reasonable efforts to manage the Fund so that it will qualify as a
regulated investment company under Subchapter M of the Code and regulations
issued thereunder. The Fund shall have the benefit of the investment
analysis and research, the review of current economic conditions and trends
and the consideration of long-range investment policy generally available
to your investment advisory clients. In managing the Fund in accordance
with the requirements set forth in this section 2, you shall be entitled to
receive and act upon advice of counsel to the Fund. You shall also make
available to the Fund promptly upon request all of the Fund's investment
records and ledgers as are necessary to assist the Fund in complying with
the requirements of the 1940 Act and other applicable laws. To the extent
required by law, you shall furnish to regulatory authorities having the
requisite authority any information or reports in connection with the
services provided pursuant to this Agreement which may be requested in
order to ascertain whether the operations of the Fund are being conducted
in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts
relating to investments to be purchased, sold or entered into by the Fund
and place orders with broker-dealers, foreign currency dealers, futures
commission merchants or others pursuant to your determinations and all in
accordance with Fund policies. You shall determine what portion of the
Fund's portfolio shall be invested in securities and other assets and what
portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on
the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such
additional reports and information as the Fund's officers or Board of
Trustees shall reasonably request.
3. Administrative Services. In addition to the portfolio management
services specified above in section 2, you shall furnish at your expense
for the use of the Fund such office space and facilities in the United
States as the Fund may require for its reasonable needs, and you (or one or
more of your affiliates designated by you) shall render to the Fund
administrative services on behalf of the Fund necessary for operating as a
closed-end investment company and not provided by persons not parties to
this Agreement including, but not limited to, preparing reports to and
meeting materials for the Fund's Board of Trustees and reports and notices
to Fund
A-2
<PAGE> 52
shareholders; supervising, negotiating contractual arrangements with, to
the extent appropriate, and monitoring the performance of, accounting
agents, custodians, depositories, transfer agents and pricing agents,
accountants, attorneys, printers, underwriters, brokers and dealers,
insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the
Securities and Exchange Commission (the "SEC") and other regulatory and
self-regulatory organizations, including, but not limited to, preliminary
and definitive proxy materials, post-effective amendments to the Fund's
Registration Statement, and semi-annual reports on Form N-SAR; overseeing
the tabulation of proxies by the Fund's transfer agent; assisting in the
preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to
Section 4982 of the Code; providing assistance with investor and public
relations matters; monitoring the valuation of portfolio securities and the
calculation of net asset value; monitoring the registration of Shares of
the Fund under applicable federal and state securities laws; maintaining or
causing to be maintained for the Fund all books, records and reports and
any other information required under the 1940 Act, to the extent that such
books, records and reports and other information are not maintained by the
Fund's custodian or other agents of the Fund; assisting in establishing the
accounting policies of the Fund; assisting in the resolution of accounting
issues that may arise with respect to the Fund's operations and consulting
with the Fund's independent accountants, legal counsel and the Fund's other
agents as necessary in connection therewith; establishing and monitoring
the Fund's operating expense budgets; reviewing the Fund's bills;
processing the payment of bills that have been approved by an authorized
person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders,
preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required
for such parties to effect the payment of dividends and distributions; and
otherwise assisting the Fund as it may reasonably request in the conduct of
the Fund's business, subject to the direction and control of the Fund's
Board of Trustees. Nothing in this Agreement shall be deemed to shift to
you or to diminish the obligations of any agent of the Fund or any other
person not a party to this Agreement which is obligated to provide services
to the Fund.
4. Allocation of Charges and Expenses. Except as otherwise
specifically provided in this section 4, you shall pay the compensation and
expenses of all Trustees, officers and executive employees of the Fund
(including the Fund's share of payroll taxes) who are affiliated persons of
you, and you shall make available, without expense to the Fund, the
services of such of your directors, officers and employees as may duly be
elected officers of the Fund, subject to their individual consent to serve
and
A-3
<PAGE> 53
to any limitations imposed by law. You shall provide at your expense the
portfolio management services described in section 2 hereof and the
administrative services described in section 3 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 4. In particular, but
without limiting the generality of the foregoing, you shall not be
responsible, except to the extent of the reasonable compensation of such of
the Fund's Trustees and officers as are directors, officers or employees of
you whose services may be involved, for the following expenses of the Fund:
organization expenses of the Fund (including out of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to
any other Fund advisors or consultants; legal expenses; auditing and
accounting expenses; maintenance of books and records which are required to
be maintained by the Fund's custodian or other agents of the Fund;
telephone, telex, facsimile, postage and other communications expenses;
taxes and governmental fees; fees, dues and expenses incurred by the Fund
in connection with membership in investment company trade organizations;
fees and expenses of the Fund's accounting agent for which the Fund is
responsible pursuant to the terms of the Fund Accounting Services
Agreement, custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services
to pricing agents, accountants, bankers and other specialists, if any;
expenses of preparing share certificates and, except as provided below in
this section 4, other expenses in connection with the issuance, offering,
distribution, sale, redemption or repurchase of securities issued by the
Fund; expenses relating to investor and public relations; expenses and fees
of registering or qualifying Shares of the Fund for sale; interest charges,
bond premiums and other insurance expense; freight, insurance and other
charges in connection with the shipment of the Fund's portfolio securities;
the compensation and all expenses (specifically including travel expenses
relating to Fund business) of Trustees, officers and employees of the Fund
who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Fund; expenses
of printing and distributing reports, notices and dividends to
shareholders; expenses of printing and mailing Prospectuses and statements
of additional information of the Fund and supplements thereto; costs of
stationery; any litigation expenses; indemnification of Trustees and
officers of the Fund; and costs of shareholders' and other meetings.
5. Management Fee. For all services to be rendered, payments to be
made and costs to be assumed by you as provided in sections 2, 3, and 4
hereof, the Fund shall pay you in United States Dollars on the last day of
each month the unpaid balance of a fee equal to the excess of (a) 1/12 of [
] of 1 percent of the average weekly net assets of the Fund for such month;
over (b) any compensation waived by you from time to time (as more fully
described below). You shall be entitled to receive during any
A-4
<PAGE> 54
month such interim payments of your fee hereunder as you shall request,
provided that no such payment shall exceed 75 percent of the amount of your
fee then accrued on the books of the Fund and unpaid.
The net asset value of the Fund shall be calculated at such time or
times as the Trustees may determine in accordance with the provisions of
the 1940 Act. On each day when net asset value is not calculated, the net
asset value shall be deemed to be the net asset value as of the close of
business on the last day on which such calculation was made for the purpose
of the foregoing computations.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your
services. You shall be contractually bound hereunder by the terms of any
publicly announced waiver of your fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were fully set forth herein.
6. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other
investments for the account of the Fund, neither you nor any of your
directors, officers or employees shall act as a principal or agent or
receive any commission. You or your agent shall arrange for the placing of
all orders for the purchase and sale of portfolio securities and other
investments for the Fund's account with brokers or dealers selected by you
in accordance with Fund policies. If any occasion should arise in which you
give any advice to clients of yours concerning the Shares of the Fund, you
shall act solely as investment counsel for such clients and not in any way
on behalf of the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement,
you shall be an independent contractor and not an agent of the Fund.
Whenever the Fund and one or more other accounts or investment companies
advised by you have available funds for investment, investments suitable
and appropriate for each shall be allocated in accordance with procedures
believed by you to be equitable to each entity. Similarly, opportunities to
sell securities shall be allocated in a manner believed by you to be
equitable. The Fund recognizes that in some cases this procedure may
adversely affect the size of the position that may be acquired or disposed
of for the Fund.
7. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Fund agrees
that you shall not be liable under this Agreement for any error of judgment
or mistake of law or for any loss suffered by the Fund in connection with
the matters to which this Agreement relates, provided that nothing in this
Agreement shall be deemed to protect or purport to protect you against any
liability to the Fund or its shareholders to which you would otherwise be
A-5
<PAGE> 55
subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of your duties, or by reason of your reckless disregard of
your obligations and duties hereunder.
8. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1999, and continue in force from year
to year thereafter, but only so long as such continuance is specifically
approved at least annually (a) by the vote of a majority of the Trustees
who are not parties to this Agreement or interested persons of any party to
this Agreement, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the Trustees of the Fund, or by the
vote of a majority of the outstanding voting securities of the Fund. The
aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in a manner consistent with
the 1940 Act and the rules and regulations thereunder and any applicable
SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of the Fund or by the Fund's Board of
Trustees on 60 days' written notice to you, or by you on 60 days' written
notice to the Fund. This Agreement shall terminate automatically in the
event of its assignment.
This Agreement may be terminated with respect to the Fund at any time
without the payment of any penalty by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund in the event that
it shall have been established by a court of competent jurisdiction that
you or any of your officers or directors has taken any action which results
in a breach of your covenants set forth herein.
9. Amendment of this Agreement. No provision of this Agreement may
be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought, and no amendment of
this Agreement shall be effective until approved in a manner consistent
with the 1940 Act and rules and regulations thereunder and any applicable
SEC exemptive order therefrom.
10. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of
the Secretary of the Commonwealth of Massachusetts, provides that the name
"[name of Fund]" refers to the Trustees under the Declaration collectively
as Trustees and not as individuals or personally, and that no shareholder
of the Fund, or Trustee, officer, employee or agent of the Fund, shall be
subject to claims against or obligations of the Fund to any extent
whatsoever, but that the Fund estate only shall be liable.
A-6
<PAGE> 56
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed
by the Fund pursuant to this Agreement shall be limited in all cases to the
Fund and its assets, and you shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund, or from
any Trustee, officer, employee or agent of the Fund.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject,
however, to such exemptions as may be granted by the SEC by any rule,
regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be
construed in a manner inconsistent with the 1940 Act, or in a manner which
would cause the Fund to fail to comply with the requirements of Subchapter
M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding
contract effective as of the date of this Agreement.
Yours very truly,
[Name of Fund]
By:
---------------------------------------------
Vice President
A-7
<PAGE> 57
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
---------------------------------------------
Name
---------------------------------------------
Title
A-8
<PAGE> 58
EXHIBIT B
INVESTMENT OBJECTIVES AND ADVISORY FEES
FOR FUNDS NOT INCLUDED IN THIS PROXY
STATEMENT AND ADVISED BY SCUDDER
KEMPER INVESTMENTS, INC.
SCUDDER FUNDS*
<TABLE>
<CAPTION>
FUND OBJECTIVE FEE RATE ASSETS
---- --------- -------- ------
<S> <C> <C> <C>
</TABLE>
KEMPER FUNDS*
<TABLE>
<CAPTION>
FUND OBJECTIVE FEE RATE ASSETS
---- --------- -------- ------
<S> <C> <C> <C>
</TABLE>
B-1
<PAGE> 59
EXHIBIT C
ADJUSTABLE RATE FUND
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 -------------------------
(UNAUDITED) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.31 8.22 8.30 8.33 8.68
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .45 .46 .48 .34
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.29)
- --------------------------------------------------------------------------------------------
Total from investment operations .16 .54 .37 .44 .05
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .22 .45 .45 .47 .40
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.25 8.31 8.22 8.30 8.33
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.97% 6.75 4.55 5.52 .59
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.28% 1.25 1.15 1.10 .93
- --------------------------------------------------------------------------------------------
Net investment income 5.16% 5.50 5.49 5.76 3.96
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
SIX MONTHS
ENDED YEAR ENDED AUGUST MAY 31
FEBRUARY 28, 31, TO
1998 ------------------ AUGUST 31,
(UNAUDITED) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $8.32 8.23 8.31 8.32 8.37
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .39 .40 .43 .07
- --------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.04)
- --------------------------------------------------------------------------------------------------
Total from investment operations .13 .48 .31 .39 .03
- --------------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .39 .39 .40 .08
- --------------------------------------------------------------------------------------------------
Net asset value, end of period $8.26 8.32 8.23 8.31 8.32
- --------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.61% 5.96 3.79 4.84 .34
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 2.01% 1.93 1.89 1.85 1.96
- --------------------------------------------------------------------------------------------------
Net investment income 4.43% 4.82 4.75 5.01 3.36
- --------------------------------------------------------------------------------------------------
</TABLE>
C- 1
FINANCIAL Highlights
<PAGE> 60
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS C
--------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST MAY 31
FEBRUARY 28, 31, TO
1998 ------------------ AUGUST 31,
(UNAUDITED) 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.33 8.24 8.32 8.33 8.37
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .39 .40 .43 .08
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.04)
- ---------------------------------------------------------------------------------------------
Total from investment operations .13 .48 .31 .39 .04
- ---------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .39 .39 .40 .08
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.27 8.33 8.24 8.32 8.33
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.63% 5.98 3.82 4.89 .47
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.98% 1.88 1.89 1.79 1.88
- ---------------------------------------------------------------------------------------------
Net investment income 4.46% 4.87 4.75 5.07 3.52
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 ---------------------------------------
(UNAUDITED) 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Net assets at end of year (in thousands) $73,945 81,967 94,477 129,757 202,815
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 226% 249 272 308 533
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Scudder Kemper 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.
Total return does not reflect the effect of any sales charges.
C-2
<PAGE> 61
SHORT-INTERMEDIATE FUND
<TABLE>
<CAPTION>
CLASS A
YEAR ENDED
SEPTEMBER TWO MONTHS YEAR ENDED
SIX MONTHS 30, ENDED JULY 31,
ENDED MARCH ----------- SEPTEMBER 30, -----------
31, 1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.80 7.89 8.08 8.09 8.11 8.63
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .51 .54 .09 .54 .48
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.01) (.07) (.20) (.01) (.03) (.44)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .22 .44 .34 .08 .51 .04
- ---------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .24 .53 .53 .09 .53 .45
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- .11
- ---------------------------------------------------------------------------------------------------------------
Total dividends .24 .53 .53 .09 .53 .56
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 7.80 7.89 8.08 8.09 8.11
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.93% 5.80 4.25 1.00 6.58 .41
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 1.14% 1.19 1.15 1.05 1.06 1.06
- ---------------------------------------------------------------------------------------------------------------
Net investment income 5.77% 6.61 6.65 6.56 6.65 5.85
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
YEAR ENDED
SEPTEMBER TWO MONTHS YEAR ENDED
SIX MONTHS 30, ENDED JULY 31,
ENDED MARCH ----------- SEPTEMBER 30, -----------
31, 1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $7.77 7.85 8.05 8.06 8.08 8.61
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .46 .46 .08 .47 .40
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.01) (.07) (.20) (.01) (.03) (.44)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .17 .39 .26 .07 .44 (.04)
- ---------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .21 .47 .46 .08 .46 .38
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- .11
- ---------------------------------------------------------------------------------------------------------------
Total dividends .21 .47 .46 .08 .46 .49
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.73 7.77 7.85 8.05 8.06 8.08
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.24% 5.11 3.28 .87 5.68 (.48)
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses 2.08% 2.02 1.97 1.91 1.87 1.93
- ---------------------------------------------------------------------------------------------------------------
Net investment income 4.83% 5.78 5.83 5.70 5.84 4.95
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
C- 3
FINANCIAL Highlights
<PAGE> 62
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
CLASS C
-----------------------------------------------------------------------
YEAR MAY 31
SIX MONTHS YEAR ENDED TWO MONTHS ENDED TO
ENDED SEPTEMBER 30, ENDED JULY JULY
MARCH 31, ------------------ SEPTEMBER 30, 31, 31,
1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.78 7.86 8.06 8.06 8.08 8.09
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .47 .47 .09 .47 .07
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.01) (.07) (.20) (.01) (.03) (.01)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .19 .40 .27 .08 .44 .06
- --------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .22 .48 .47 .08 .46 .07
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.75 7.78 7.86 8.06 8.06 8.08
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.42% 5.24 3.36 1.00 5.73 .77
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.83% 1.86 1.85 1.74 1.78 1.83
- --------------------------------------------------------------------------------------------------------------------
Net investment income 5.08% 5.94 5.95 5.87 5.93 5.54
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS YEAR ENDED TWO MONTHS
ENDED SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
MARCH 31, ------------------ SEPTEMBER 30, ---------------------
1998 1997 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $166,208 171,400 204,021 239,619 246,248 266,640
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 336% 164 180 173 597 916
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Data for
the period ended March 31, 1998 is unaudited.
C-4
<PAGE> 63
EXHIBIT D
ADJUSTABLE RATE FUND'S FUNDAMENTAL POLICIES
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.
(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
D-1
<PAGE> 64
Fund did not borrow money as permitted by investment restriction number 4 in the
latest fiscal year and it has no present intention of borrowing during the
current year. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
Adjustable Rate Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Invest more than 15% of its net assets in illiquid securities.
D-2
<PAGE> 65
KEMPER EQUITY FUNDS/GROWTH STYLE
Kemper Aggressive Growth Fund
Kemper Blue Chip Fund
Kemper Growth Fund
Kemper Quantitative Equity Fund
Kemper Small Capitalization Equity Fund
Kemper Technology Fund
Kemper Total Return Fund
Kemper Value Plus Growth Fund
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 1, 1998
-------------------------
KEMPER INCOME FUNDS
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Series
comprised of the following two series:
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Portfolios including the following two series:
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
-------------------------
KEMPER CASH RESERVES FUND
(A SERIES OF KEMPER PORTFOLIOS)
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
-------------------------
KEMPER GLOBAL AND INTERNATIONAL FUNDS
Kemper Asian Growth Fund
Kemper Europe Fund
Kemper Global Income Fund
Kemper International Fund
SUPPLEMENT TO PROSPECTUS
DATED MARCH 1, 1998
-------------------------
KEMPER TAX-FREE INCOME FUNDS
Kemper National Tax-Free Income Series
comprised of the following two series:
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper State Tax-Free Income Series
comprised of the following eight series:
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper Michigan Tax-Free Income Fund
Kemper New Jersey Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Pennsylvania Tax-Free Income Fund
Kemper Texas Tax-Free Income Fund
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 26, 1997
-------------------------
KEMPER ASSET ALLOCATION FUNDS
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 21, 1997
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper Value Series, Inc.
comprised of the following three series:
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
SUPPLEMENT TO PROSPECTUS
DATED APRIL 1, 1998
-------------------------
KEMPER TARGET EQUITY FUND
Kemper Retirement Fund Series VII
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 1, 1997
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper U.S. Growth and Income Fund
SUPPLEMENT TO PROSPECTUS
DATED JANUARY 30, 1998
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper-Dreman Financial Services Fund
SUPPLEMENT TO PROSPECTUS
DATED MARCH 9, 1998
-------------------------
KEMPER GLOBAL
AND INTERNATIONAL FUNDS
Kemper Global Blue Chip Fund
Kemper International Growth and Income Fund
Kemper Emerging Markets Income Fund
Kemper Emerging Markets Growth Fund
Kemper Latin America Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 31, 1997
AS REVISED JANUARY 14, 1998
-------------------------
KEMPER EQUITY FUNDS/GROWTH STYLE
Kemper Classic Growth Fund
SUPPLEMENT TO PROSPECTUS
DATED APRIL 16, 1998
-------------------------
KEMPER GLOBAL AND
INTERNATIONAL FUNDS
Kemper Global Discovery Fund
SUPPLEMENT TO PROSPECTUS
DATED APRIL 16, 1998
-------------------------
<PAGE> 66
The following disclosure supplements information in each applicable Fund's
prospectus.
PURCHASE OF SHARES
Effective June 30, 1998, the net asset value transfer privilege is eliminated.
The net asset value transfer privilege provides for the purchase of Class A
shares at net asset value to the extent the amount invested represents the net
proceeds from a redemption of shares of a mutual fund that Scudder Kemper
Investments, Inc. or an affiliate does not serve as investment manager 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.
REDEMPTION OR REPURCHASE OF SHARES -- CONTINGENT DEFERRED SALES CHARGE -- CLASS
C SHARES
The waiver of the contingent deferred sales charge for Class C shares has been
expanded to include the following exception.
Redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer
of record had waived the advance of the first year administrative services
and distribution fees applicable to such shares and has agreed to receive
such fees quarterly.
April 30, 1998
KMF-1S
KDI 804082
2
<PAGE> 67
<TABLE>
<S> <C>
KEMPER EQUITY FUNDS/GROWTH STYLE KEMPER TAX-FREE INCOME FUNDS
Kemper Quantitative Equity Fund Kemper Intermediate Municipal Bond Fund
Kemper Technology Fund (a series of Kemper National Tax-Free Income
Kemper Value Plus Growth Fund Series)
SUPPLEMENT TO PROSPECTUS Kemper Michigan Tax-Free Income Fund
DATED FEBRUARY 1, 1998 Kemper New Jersey Tax-Free Income Fund
------------------------- Kemper Pennsylvania Tax-Free Income Fund
(series of Kemper State Tax-Free Income Series)
KEMPER INCOME FUNDS SUPPLEMENT TO PROSPECTUS
Kemper Adjustable Rate U.S. Government Fund DATED NOVEMBER 26, 1997
Kemper Diversified Income Fund -------------------------
Kemper Short-Intermediate Government Fund KEMPER HORIZON FUND
(a series of Kemper Portfolios) Kemper Horizon 20+ Portfolio
SUPPLEMENT TO PROSPECTUS Kemper Horizon 10+ Portfolio
DATED DECEMBER 30, 1997 Kemper Horizon 5 Portfolio
------------------------- SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 21, 1997
KEMPER EUROPE FUND -------------------------
SUPPLEMENT TO PROSPECTUS
DATED MARCH 1, 1998
-------------------------
</TABLE>
INVESTMENT MANAGER AND UNDERWRITER
As reflected in the prospectus of each fund, Scudder Kemper Investments, Inc.
("Scudder Kemper") serves as investment manager for the Kemper Funds. The
following supplements information in the applicable fund prospectus:
Marc J. Slendebroek has been the lead portfolio manager of the Kemper Europe
Fund since March 1998. Mr. Slendebroek joined Zurich Investment Management
Limited, sub-advisor for that Fund, in September 1994 and is an Associate
Director. Prior to joining Zurich Investment Management Limited, Mr. Slendebroek
was a Manager of Dutch research at Kleinwort Benson Securities from 1992 to
1994. Mr. Slendebroek received a Masters Degree in Civil Law from the University
of Leiden, in the Netherlands.
William M. Knapp and Philip S. Fortuna have been co-lead portfolio managers for
the Kemper Horizon Fund (since January 1997 and March 1998, respectively),
Kemper Value Plus Growth Fund (since December 1996 and March 1998, respectively)
and Kemper Quantitative Equity Fund (since March 1998). Mr. Knapp joined Scudder
Kemper in 1992 and is a Senior Vice President. Prior to joining Scudder Kemper,
he served as an officer with an unaffiliated investment management firm from
September 1988. Mr. Knapp received a B.S. in Economics from Drake University and
an M.S. and Ph.D. in Industrial Organization and Finance from the University of
Wisconsin -- Madison. Mr. Fortuna joined Scudder Kemper in 1986 and is a
Managing Director. Mr. Fortuna received a B.S. in Economics from Carnegie Mellon
University and an M.B.A. from the University of Chicago.
Tracy McCormick Chester has been the lead portfolio manager of the Kemper
Technology Fund since March 1998. Ms. Chester joined Scudder Kemper in September
1994 and is a Senior Vice President. Prior to joining Scudder Kemper, from
August 1992 to September 1994, she was a Senior Vice President and portfolio
manager of an investment management company; and prior thereto, she managed
private accounts. Ms. Chester received a B.A. and an M.B.A. in Finance from
Michigan State University.
Richard L. Vandenberg has been the lead portfolio manager of the Kemper
Adjustable Rate U.S. Government Fund and the Kemper Short-Term Intermediate
Government Fund since March 1998. Prior thereto, he had been a co-lead portfolio
manager of the funds since March 1996. Mr. Vandenberg joined Scudder Kemper in
March 1996 and is a Senior Vice President. Prior to joining Scudder Kemper, 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.
<PAGE> 68
Joseph P. Beimford has been the lead portfolio manager of the Kemper Diversified
Income Fund since March 1998. Prior thereto, Mr. Beimford had been a co-lead
portfolio manager of the fund. Mr. Beimford joined Scudder Kemper in April 1976
and is currently a Senior Vice President of Scudder Kemper. He received a
B.S.I.M. in Business from Purdue University and an M.B.A. in Finance from the
University of Chicago. Mr. Beimford is a Chartered Financial Analyst.
M. Ashton Patton has been the lead portfolio manager of the Kemper Intermediate
Municipal Bond Fund since March 1998. Ms. Patton joined Scudder Kemper in 1990
and is a Senior Vice President. Ms. Patton received a B.A. from Duke University
and is a Chartered Financial Analyst.
Eleanor R. Brennan has been the lead portfolio manager of the Kemper Michigan
Tax-Free Income Fund and Kemper New Jersey Tax-Free Income Fund since March
1998. Ms. Brennan joined Scudder Kemper in March 1995 and is a Vice President.
Prior to joining Scudder Kemper, Ms. Brennan was an assistant portfolio manager
for an unaffiliated investment management firm from 1993 to 1995. She received a
B.A. in Economics from Ursinus College and an M.S. in Finance from Drexel
University. Ms. Brennan is a Chartered Financial Analyst.
Philip G. Condon has been the lead portfolio manager of the Kemper Pennsylvania
Tax-Free Income Fund since March 1998. Mr. Condon joined Scudder Kemper in 1983
and is a Managing Director. He received a B.A. and M.B.A., with a concentration
in Finance, from the University of Massachusetts, Amherst.
March 23, 1998 (LOGO)PRINTED ON RECYCLED PAPER
KMF-1R
KDI 803092
<PAGE> 69
KEMPER EQUITY FUNDS/GROWTH STYLE
Kemper Aggressive Growth Fund
Kemper Blue Chip Fund
Kemper Growth Fund
Kemper Quantitative Equity Fund
Kemper Small Capitalization Equity Fund
Kemper Technology Fund
Kemper Total Return Fund
Kemper Value Plus Growth Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 31, 1996
-------------------------
KEMPER GLOBAL INCOME FUND
KEMPER INTERNATIONAL FUND
SUPPLEMENT TO PROSPECTUS
DATED MARCH 1, 1997
-------------------------
KEMPER INCOME FUNDS
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Series
comprised of the following two series:
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Portfolios including the following series:
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
-------------------------
KEMPER CASH RESERVES FUND
(A SERIES OF KEMPER PORTFOLIOS)
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
-------------------------
KEMPER ASIAN GROWTH FUND
SUPPLEMENT TO PROSPECTUS
DATED APRIL 1, 1997
-------------------------
KEMPER TAX-FREE INCOME FUNDS
Kemper National Tax-Free Income Series
comprised of the following two series:
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper State Tax-Free Income Series
comprised of the following eight series:
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper Michigan Tax-Free Income Fund
Kemper New Jersey Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Pennsylvania Tax-Free Income Fund
Kemper Texas Tax-Free Income Fund
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 26, 1997
INVESTMENT MANAGER AND UNDERWRITER
Pursuant to the terms of an agreement, Zurich Insurance Company ("Zurich"), the
parent of the Funds' investment adviser, Zurich Kemper Investments, Inc. ("ZKI")
and Scudder, Stevens & Clark, Inc. ("Scudder") have formed a new global
investment organization by combining Scudder's business with that of ZKI, and
Scudder has changed its name to Scudder Kemper Investments, Inc. ("Scudder
Kemper"). As a result of the transaction, Zurich owns approximately 70% of
Scudder Kemper, with the balance owned by Scudder Kemper's officers and
employees. Scudder Kemper, 280 Park Avenue, 40th floor, New York, New York
10017, now manages in excess of $200 billion.
Because the transaction between Scudder and Zurich resulted in the assignment of
each Fund's investment management agreement between ZKI and each respective
Fund, each of those agreements was deemed to be automatically terminated upon
consummation of the transaction. In anticipation of the transaction, however,
new investment management agreements between each Fund and Scudder Kemper were
approved
<PAGE> 70
by each respective Fund's Board of Trustees. A special meeting of shareholders
(the "Special Meeting") of each Fund was held in December, 1997, at which time
the shareholders also approved the new investment management agreements. The new
investment management agreements (each an "Investment Management Agreement" and,
collectively, the "Investment Management Agreements") are all effective as of
December 31, 1997 and will be in effect for an initial term ending on the same
date as would the corresponding previous investment management agreement.
Each Fund's Investment Management Agreement is substantially similar to the
corresponding investment management agreement terminated by the transaction,
except that Scudder Kemper is the new investment adviser to each Fund, the
management fee (except with respect to Kemper Small Capitalization Equity Fund
and Kemper Aggressive Growth Fund) is calculated monthly at 1/12 of the
applicable annual rate based upon the average daily net assets for such month,
and, for each Fund except Kemper Municipal Bond Fund, Kemper U.S. Government
Securities Fund and Kemper California Tax-Free Income Fund, the expense
limitation has been deleted because there are no longer any state expense
limitations in effect. In addition, for Funds investing in foreign securities,
except for Kemper International Fund, Kemper Global Income Fund, and Kemper
Asian Growth Fund, each Fund's respective sub-advisory agreement with Zurich
Investment Management Limited ("ZIML") has been terminated and Scudder Kemper
has assumed the duties previously performed by ZIML under each such Fund's
respective sub-advisory agreement. For Kemper Value Plus Growth Fund, the Fund's
sub-advisory agreement with Zurich Kemper Value Advisors, Inc. ("ZKVA") has been
terminated and Scudder Kemper has assumed the duties previously performed by
ZKVA under the Fund's sub-advisory agreement.
In addition, under a separate agreement between each Fund and Scudder Fund
Accounting Corporation ("SFAC"), a subsidiary of Scudder Kemper, SFAC, rather
than each Fund's investment manager, will compute the net asset value for each
Fund. SFAC does not charge the Funds for this service; however, subject to Board
approval, at some time in the future, SFAC may seek payment for its services
under this agreement.
CAPITAL STRUCTURE
Pending shareholder approval, except for Kemper Technology Fund, Kemper U.S.
Government Securities Fund, Kemper High Yield Opportunity Fund, Kemper Municipal
Bond Fund, Kemper California Tax-Free Income Fund, Kemper Florida Tax-Free
Income Fund, Kemper Michigan Tax-Free Income Fund, Kemper New Jersey Tax-Free
Income Fund, Kemper New York Tax-Free Income Fund, Kemper Ohio Tax-Free Income
Fund, and Kemper Pennsylvania Tax-Free Income Fund, which have obtained
shareholder approval, rather than invest in securities directly, each of the
Funds may in the future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds for investment in another investment
company having the same investment objective and substantially the same
investment policies and restrictions as such Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and to reduce costs.
It is expected that any such investment company will be managed by Scudder
Kemper in substantially the same manner as the corresponding Fund. Shareholders
of each Fund will be given at least 30 days' prior notice of any such
investment, although they will not be entitled to vote on the action. Such
investment would be made only if the Trustees determine it to be in the best
interests of the respective Fund and its shareholders.
<PAGE> 71
SUMMARY OF EXPENSES
The "Example" in the prospectus for Class B Shares and Class C Shares of certain
of the Funds is amended in part as follows:
CLASS B SHARES
<TABLE>
<CAPTION>
EXAMPLE(1) FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following Aggressive Growth $64 $103 $145 $224
expenses on a $1,000 Blue Chip 61 95 132 201
investment, assuming Growth 61 94 130 189
(1) 5% annual return and Quantitative Equity 63 101 141 222
(2) redemption at the end of Small Capitalization Equity 62 97 135 196
each time period: Technology 59 89 121 170
Total Return 60 92 127 185
Value Plus Growth 65 106 150 237
Global Income 62 97 135 215
International 66 109 155 245
Asian Growth 67 113 162 259
Municipal Bond 56 79 104 139
Intermediate Municipal Bond 58 85 115 167
California Tax-Free Income 56 81 108 150
Florida Tax-Free Income 57 82 110 153
Michigan Tax-Free Income 58 85 115 167
New Jersey Tax-Free Income 58 85 115 167
New York Tax-Free Income 57 83 111 155
Ohio Tax-Free Income 52 84 112 160
Pennsylvania Tax-Free Income 58 84 114 166
Texas Tax-Free Income 58 84 114 163
You would pay the following Aggressive Growth $43 $ 73 $125 $224
expenses on the same Blue Chip 21 65 112 201
investment, assuming no Growth 21 64 110 189
redemption: Quantitative Equity 23 71 121 222
Small Capitalization Equity 22 67 115 196
Technology 19 59 101 170
Total Return 20 62 107 185
Value Plus Growth 25 76 130 237
Global Income 22 67 115 215
International 26 79 135 245
Asian Growth 27 83 142 259
Municipal Bond 16 49 84 139
Intermediate Municipal Bond 18 55 95 167
California Tax-Free Income 16 51 88 150
Florida Tax-Free Income 17 52 90 153
Michigan Tax-Free Income 18 55 95 168
New Jersey Tax-Free Income 18 55 95 168
New York Tax-Free Income 17 53 91 155
Ohio Tax-Free Income 17 54 92 160
Pennsylvania Tax-Free Income 18 54 94 166
Texas Tax-Free Income 18 54 94 163
</TABLE>
(1) Assumes conversion to Class A shares six years after purchase. The
contingent deferred sales charge was applied as follows: 1 year (4%), 3
years (3%), 5 years (2%) and 10 years (0%). See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Class B Shares" in the
prospectus for more information regarding the calculation of the contingent
deferred sales charge.
<PAGE> 72
CLASS C SHARES
<TABLE>
<CAPTION>
EXAMPLE(2) FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------- ---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
You would pay the following Aggressive Growth $33 $72 $123 $264
expenses on a $1,000 Blue Chip 31 64 110 238
investment, assuming (1) 5% Growth 30 61 105 227
annual return and Quantitative Equity 33 70 119 256
(2) redemption at the end of Small Capitalization Equity 32 67 115 248
each time period: Technology 28 57 99 214
Total Return 29 59 102 221
Value Plus Growth 34 73 126 269
Global Income 31 65 111 239
International 35 78 133 284
Asian Growth 37 82 140 297
Municipal Bond 26 48 83 182
Intermediate Municipal Bond 28 54 94 204
California Tax-Free Income 26 50 87 190
Florida Tax-Free Income 27 52 89 194
Michigan Tax-Free Income 28 54 94 204
New Jersey Tax-Free Income 28 54 94 204
New York Tax-Free Income 27 52 90 195
Ohio Tax-Free Income 27 53 91 199
Pennsylvania Tax-Free Income 27 54 93 202
Texas Tax-Free Income 27 54 93 202
You would pay the following Aggressive Growth $23 $72 $123 $264
expenses on the same Blue Chip 21 64 110 238
investment, assuming no Growth 20 61 105 227
redemption: Quantitative Equity 23 70 119 256
Small Capitalization Equity 22 67 115 248
Technology 18 57 99 214
Total Return 19 59 102 221
Value Plus Growth 24 73 126 269
Global Income 21 65 111 239
International 25 78 133 284
Asian Growth 27 82 140 297
Municipal Bond 16 48 83 182
Intermediate Municipal Bond 18 54 94 204
California Tax-Free Income 16 50 87 190
Florida Tax-Free Income 17 52 89 194
Michigan Tax-Free Income 18 54 94 204
New Jersey Tax-Free Income 18 54 94 204
New York Tax-Free Income 17 52 90 195
Ohio Tax-Free Income 17 53 91 199
Pennsylvania Tax-Free Income 17 54 93 202
Texas Tax-Free Income 17 54 93 202
</TABLE>
(2) The contingent deferred sales charge was applied as follows: 1 year (1%), 3
years (0%), 5 years (0%) and 10 years (0%). See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Shares" in the prospectus.
December 31, 1997
KMF-1Q (LOGO)PRINTED ON RECYCLED PAPER
<PAGE> 73
KEMPER EQUITY FUNDS/GROWTH STYLE
Kemper Aggressive Growth Fund
Kemper Blue Chip Fund
Kemper Growth Fund
Kemper Quantitative Equity Fund
Kemper Small Capitalization Equity Fund
Kemper Technology Fund
Kemper Total Return Fund
Kemper Value+Growth Fund
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 1, 1998
-------------------------
KEMPER INCOME FUNDS
Kemper Adjustable Rate
U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 30, 1997
-------------------------
KEMPER GLOBAL AND
INTERNATIONAL FUNDS
Kemper Asian Growth Fund
Kemper Europe Fund
Kemper Global Income Fund
Kemper International Fund
SUPPLEMENT TO PROSPECTUS
DATED MARCH 1, 1998
KEMPER VALUE SERIES, INC.
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
SUPPLEMENT TO PROSPECTUS
DATED APRIL 1, 1998
-------------------------
KEMPER ASSET ALLOCATION FUNDS
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 21, 1997
-------------------------
KEMPER TARGET EQUITY FUNDS
Kemper Retirement Fund Series VII
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 1, 1997
-------------------------
KEMPER TAX-FREE INCOME FUNDS
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper Michigan Tax-Free Income Fund
Kemper New Jersey Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Pennsylvania Tax-Free Income Fund
Kemper Texas Tax-Free Income Fund
SUPPLEMENT TO PROSPECTUS
DATED NOVEMBER 26, 1997
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
Kemper Small Cap Relative Value Fund
SUPPLEMENT TO PROSPECTUS
DATED MAY 6, 1998
-------------------------
<PAGE> 74
The following disclosure replaces the "Net Asset Value" section of each
Prospectus except the Kemper Equity Funds/Value Style Prospectus. The following
effective dates apply: June 1998 for Kemper Aggressive Growth Fund, Kemper Blue
Chip Fund, Kemper Target Equity Fund -- Kemper Retirement Fund Series VII and
Kemper Total Return Fund; and July 1998 for Kemper Asian Growth Fund. The
following disclosure will be effective prior to the close of the third calendar
quarter of 1998 for the remainder of the Funds.
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C
shares of the Fund will generally be lower than that of the Class A shares
of a Fund because of the higher expenses borne by the Class B and Class C
shares. The net asset value of shares of a Fund is computed as of the close
of regular trading (the "value time") on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner
described below. All other securities may be valued at fair value as
determined in good faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign
exchanges, such securities may trade on days when the Fund's net asset
value is not computed; and therefore, the net asset value of a Fund may be
significantly affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at
the most recent bid quotation. An equity security which is traded on The
Nasdaq Stock Market Inc. ("Nasdaq") is valued at its most recent sale
price. Lacking any sales, the security is valued at the most recent bid
quotation. The value of an equity security not quoted on Nasdaq, but traded
in another over-the-counter market, is its most recent sale price. Lacking
any sales, the security is valued at the Calculated Mean. Lacking a
Calculated Mean, the security is valued at the most recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost,
which the Board believes approximates market value. If it is not possible
to value a particular debt security pursuant to these valuation methods,
the
<PAGE> 75
value of such security is the most recent bid quotation supplied by a bona
fide marketmaker. If it is not possible to value a particular debt security
pursuant to the above methods, the investment manager of the particular
fund may calculate the price of that debt security, subject to limitations
established by the Board.
An exchange-traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the
Calculated Mean. Lacking any Calculated Mean, the options contract is
valued at the most recent bid quotation in the case of a purchased options
contract, or the most recent asked quotation in the case of a written
options contract. An options contract on securities, currencies and other
financial instruments traded over-the-counter is valued at the most recent
bid quotation in the case of a purchased options contract and at the most
recent asked quotation in the case of a written options contract. Futures
contracts are valued at the most recent settlement price. Foreign currency
exchange forward contracts are valued at the value of the underlying
currency at the prevailing exchange rate on the valuation date.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these
procedures does not represent the fair market value of the portfolio asset,
the value of the portfolio asset is taken to be an amount which, in the
opinion of the Valuation Committee, represents fair market value on the
basis of all available information. The value of other portfolio holdings
owned by a Fund is determined in a manner which, in the discretion of the
Valuation Committee, most fairly reflects market value of the property on
the valuation date.
Following the valuations of securities or other portfolios assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the
prevailing currency exchange rate on the valuation date.
The following text supplements information in the section entitled "Investment
Manager and Underwriter" on page 23 in the Prospectus dated March 1, 1998 for
Kemper Asian Growth Fund, Kemper Europe Fund, Kemper Global Income Fund and
Kemper International Fund.
INVESTMENT MANAGER AND UNDERWRITER
Zurich Investment Management Limited ("ZIML") has been serving as
sub-adviser for the Kemper Asian Growth Fund, Kemper Europe Fund, Kemper
Global Income Fund and Kemper International Fund pursuant to sub-advisory
agreements with Scudder Kemper Investments, Inc. ("Scudder
<PAGE> 76
Kemper"), the Funds' investment manager. ZIML, which was previously a
wholly owned subsidiary of Zurich Insurance Company, is now a wholly owned
subsidiary of Scudder Kemper and is now known as Scudder Investments (U.K.)
Limited (the "Sub-Adviser"). As a result of this ownership change, for
Kemper Europe Fund, Kemper Global Income Fund and Kemper International
Fund, new sub-advisory agreements, which were previously approved by
shareholders, have been entered into between Scudder Kemper and the
Sub-Adviser on the same terms as the previous agreements, which terminated
automatically. The sub-advisory agreement for Kemper Asian Growth Fund also
terminated automatically upon this ownership change but a new agreement has
not been implemented for that Fund, which will be managed solely by Scudder
Kemper.
The following text replaces information in the section entitled "Investment
Manager and Underwriter" on page 23 in the Prospectus dated March 1, 1998 for
Kemper Asian Growth Fund, Kemper Europe Fund, Kemper Global Income Fund and
Kemper International Fund.
Stephen P. Dexter and Marc. J. Slendebroek have been the co-lead portfolio
managers for the Kemper International Fund since June 1998. Mr. Dexter
joined Scudder Kemper in 1986 and is a Senior Vice President. He received a
B.A. in Economics and an M.B.A. in Finance from the University of
Wisconsin. Mr. Slendebroek joined the Sub-Adviser in September 1994 and is
an Associate Director. Prior to joining the Sub-Adviser, Mr. Slendebroek
was a Manager of Dutch research at Kleinwort Benson Securities from 1992 to
1994. He received a Masters Degree in Civil Law from the University of
Leiden, in the Netherlands.
Elizabeth J. Allan and Theresa Gusman have been the co-lead portfolio
managers for the Kemper Asian Growth Fund since June 1998. Ms. Allan joined
Scudder Kemper in 1987 and is a Senior Vice President. She received a B.A.
in East Asian Studies from Colby College, two M.A.s (the first from Indiana
University in East Asian Studies and the second from Princeton University
in Sociology) and an M.B.A. in Finance and International Business from New
York University. Ms. Gusman joined Scudder Kemper in 1995 and is a Vice
President. Prior to joining Scudder Kemper, she was an equity research
analyst since 1983. Ms. Gusman received a B.A. in Economics from the State
University of New York.
The following text replaces the section and heading entitled "Investment
Objectives, Policies and Risk Factors -- Depository Receipts" on page 20 in the
Prospectus dated May 6, 1998 for Kemper Contrarian Fund, Kemper-Dreman High
Return Equity Fund, Kemper Small Cap Value Fund, and Kemper Small Cap Relative
Value Fund:
FOREIGN COMPANIES
Each Fund may invest up to 20% of its assets in securities of foreign
companies through the acquisition of American Depository Receipts ("ADRs"),
as well as through the purchase of securities of foreign companies that are
publicly traded in the United States. ADRs are bought
<PAGE> 77
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 of 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 following text replaces the third paragraph in the section entitled
"Investment Objectives, Policies and Risk Factors -- Selection of Investments"
on page 11 in the Prospectus dated April 1, 1998 for Kemper Contrarian Fund,
Kemper-Dreman High Return Equity Fund, and Kemper Small Cap Value Fund:
SELECTION OF INVESTMENTS
Fundamental analysis is used on companies that initially look promising.
Earnings and cash flow analysis as well as a company's conventional
dividend payout ratio are important to this process. Typically, the Funds
will consist of approximately 25 to 50 stocks, diversified by both sector
and industry, although, as noted above, the High Return Equity Fund may,
from time to time, concentrate its assets in one or more market sectors.
Most investments will be in securities of domestic companies, but, the
Funds may also invest up to 20% of their assets in securities of foreign
companies through the acquisition of American Depository Receipts ("ADRs")
as well as through the purchase of securities of foreign companies that are
publicly traded in the United States. ADRs are receipts issued by a U.S.
bank or trust company evidencing ownership of underlying securities issued
by a foreign issuer. ADRs may be listed on a national securities exchange
or may be traded in the over-the-counter market. While it is anticipated
that under normal circumstances all Funds will be fully invested, in order
to conserve assets during temporary defensive periods when the investment
manager deems it appropriate, each Fund may invest up to 50% of its assets
in cash or defensive-type securities, such as high-grade debt securities,
securities of the U.S. Government or its agencies and high quality money
market instruments, including repurchase agreements. Investments in such
interest bearing securities will be for temporary defensive purposes only.
The following text replaces the third and fourth paragraphs in the section
entitled "Investment Objectives, Policies and Risk Factors -- Kemper
Value+Growth Fund" on page 21 in the Prospectus dated February 1, 1998 for
Kemper Value+Growth Fund:
VALUE+GROWTH FUND
The allocation between growth and value stocks in the Fund's portfolio will
be made by the investment manager's Quantitative Research Department with
the help of a proprietary model that evaluates macro-economic factors such
as the strength of the economy, interest rates and special factors
concerning growth and value stocks. Historically, the performance
<PAGE> 78
of growth and value stocks has tended to be counter-cyclical, i.e., when
one was in favor, the other was out of favor relative to the equity market
in general. Through the allocation process, the investment manager will
seek to weight the portfolio more heavily in the type of stocks that are
believed to present greater return opportunities at the time. The neutral
allocation between growth and value stocks would be 50%/50%. The allocation
to growth or value may be up to 75% at any time. Allocation decisions are
normally based upon long-term considerations and changes would normally be
expected to be gradual. There is no assurance that the allocation process
will improve investment results.
In managing both the growth and value portions of the portfolio, the
investment manager emphasizes stock selection and fundamental research in
seeking to enhance long-term performance potential. The investment manager
considers a number of qualitative and quantitative factors in considering
whether to invest in a growth or value stock including return on equity,
earnings growth, price to earnings, price to book value and price to cash
flow ratios, dividend yield, level of debt, good management and industry
leadership. Typically stocks of both types will have a market
capitalization in excess of $1 billion.
The following text replaces information in the section entitled "Investment
Manager and Underwriter" on page 30 in the Prospectus dated February 1, 1998 for
Kemper Value+Growth Fund and Kemper Quantitative Equity Fund; and on page 20 in
the Prospectus dated November 21, 1997 for Kemper Horizon 20+ Portfolio, Kemper
10+ Portfolio and Kemper Horizon 5 Portfolio.
INVESTMENT MANAGER AND UNDERWRITER
Philip S. Fortuna is the lead portfolio manager for the Kemper Horizon
Fund, Kemper Value+Growth Fund, and Kemper Quantitative Equity Fund. Mr.
Fortuna joined Scudder Kemper in 1986 and is a Managing Director. He served
as Director of Quantitative Services from 1987 to 1993 and Director of
Investment Operations from 1993 to 1995. From 1995 to 1997, he was involved
in global planning and new product development in addition to his portfolio
management responsibilities. Mr. Fortuna currently oversees all of Scudder
Kemper's quantitative activities.
August 17, 1998
KMF-1W
501551 (LOGO)PRINTED ON RECYCLED PAPER
<PAGE> 79
SUPPLEMENT TO CURRENTLY EFFECTIVE PROSPECTUS OF EACH OF THE LISTED FUNDS
Kemper Adjustable Rate U.S. Government Fund
Kemper Aggressive Growth Fund
Kemper Asian Growth Fund
Kemper Blue Chip Fund
Kemper California Tax-Free Income Fund
Kemper Cash Reserves Fund
Kemper Contrarian Fund
Kemper Diversified Income Fund
Kemper Emerging Markets Growth Fund
Kemper Emerging Markets Income Fund
Kemper Europe Fund
Kemper Florida Tax-Free Income Fund
Kemper Global Blue Chip Fund
Kemper Global Income Fund
Kemper Growth Fund
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
Kemper Horizon 10+ Portfolio
Kemper Horizon 20+ Portfolio
Kemper Horizon 5 Portfolio
Kemper Income and Capital Preservation Fund
Kemper Intermediate Municipal Bond Fund
Kemper International Fund
Kemper International Growth and Income Fund
Kemper Latin America Fund
Kemper Michigan Tax-Free Income Fund
Kemper Municipal Bond Fund
Kemper New Jersey Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Pennsylvania Tax-Free Income Fund
Kemper Quantitative Equity Fund
Kemper Retirement Fund-Series VII
Kemper Short-Intermediate Government Fund
Kemper Small Cap Relative Value Fund
Kemper Small Cap Value Fund
Kemper Small Capitalization Equity Fund
Kemper Technology Fund
Kemper Total Return Fund
Kemper Texas Tax-Free Income Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Growth and Income Fund
Kemper U.S. Mortgage Fund
Kemper Value + Growth Fund
Kemper-Dreman Financial Services Fund
Kemper-Dreman High Return Equity Fund
On December 22, 1997, Zurich Insurance Company ("Zurich") entered into an
agreement with B.A.T. Industries p.l.c. ("B.A.T") pursuant to which the
financial services businesses of B.A.T will be combined with Zurich's businesses
(including Zurich's 70% interest in Scudder Kemper Investments, Inc. ("Scudder
Kemper")) to form a new global insurance and financial services company known as
Zurich Financial Services. After the transaction is completed, by way of a dual
holding company structure, current Zurich shareholders will own approximately
57% of the new organization, with the balance owned by B.A.T's current
shareholders.
The transaction is expected to close in the third quarter of 1998. Upon
consummation of the transaction, each Fund's investment management agreement
with Scudder Kemper will be deemed to have been assigned and, therefore, will
terminate. Each Board has approved new investment management agreements with
Scudder Kemper, which are substantially identical to the current investment
management agreements, except for the dates of execution and termination. Each
new investment management agreement is to become effective upon the termination
of the current investment management agreement. Each Board will seek shareholder
approval of the new investment management agreements through a proxy
solicitation that is currently scheduled to conclude in mid-December.
September 1, 1998 (LOGO)Printed on recycled paper
KMF-1X
501742
2
<PAGE> 80
<TABLE>
<S> <C>
TABLE OF CONTENTS
- -----------------------------------------------
Summary 1
- -----------------------------------------------
Summary of Expenses 3
- -----------------------------------------------
Financial Highlights 5
- -----------------------------------------------
Investment Objectives, Policies and Risk
Factors 14
- -----------------------------------------------
Investment Manager and Underwriter 33
- -----------------------------------------------
Dividends and Taxes 37
- -----------------------------------------------
Net Asset Value 38
- -----------------------------------------------
Purchase of Shares 39
- -----------------------------------------------
Redemption or Repurchase of Shares 45
- -----------------------------------------------
Special Features 49
- -----------------------------------------------
Performance 52
- -----------------------------------------------
Capital Structure 54
- -----------------------------------------------
Appendix--Portfolio Composition 56
- -----------------------------------------------
</TABLE>
This combined prospectus of the Kemper Income Funds contains information about
each of the Funds that you should know before investing and should be retained
for future reference. A Statement of Additional Information dated December 30,
1997, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. It is available upon request without charge
from the Funds at the address or telephone number on this cover or the firm from
which this prospectus was obtained.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Kemper Logo
KEMPER
INCOME
FUNDS
PROSPECTUS December 30, 1997
KEMPER INCOME FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This prospectus describes a choice of eight income investment portfolios managed
by Zurich Kemper Investments, Inc.
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Kemper U.S. Mortgage Fund and Kemper Short-Intermediate Government Fund are each
a series of Kemper Portfolios. Kemper High Yield Fund and Kemper High Yield
Opportunity Fund are each a series of Kemper High Yield Series.
KEMPER DIVERSIFIED INCOME FUND MAY AND KEMPER HIGH YIELD FUND AND KEMPER HIGH
YIELD OPPORTUNITY FUND DO INVEST PRIMARILY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER
RISK OF LOSS OF PRINCIPAL AND INTEREST THAN INVESTMENTS IN HIGHER RATED
SECURITIES. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THESE FUNDS.
<PAGE> 81
KEMPER INCOME FUNDS
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES. The eight open-end, diversified, management investment
companies or portfolios thereof (the "Funds") covered in this combined
prospectus are as follows:
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (the "Adjustable Rate Fund") seeks
high current income consistent with low volatility of principal.
KEMPER DIVERSIFIED INCOME FUND (the "Diversified Fund") seeks a high current
return.
KEMPER U.S. GOVERNMENT SECURITIES FUND (the "Government Fund") seeks high
current income, liquidity and security of principal.
KEMPER HIGH YIELD FUND (the "High Yield Fund") seeks the highest level of
current income obtainable from a professionally managed, diversified portfolio
of fixed income securities which the Fund's investment manager considers
consistent with reasonable risk.
KEMPER HIGH YIELD OPPORTUNITY FUND (the "Opportunity Fund") seeks total return
through high current income and capital appreciation.
KEMPER INCOME AND CAPITAL PRESERVATION FUND (the "Income and Capital Fund")
seeks as high a level of current income as is consistent with prudent investment
management, preservation of capital and ready marketability of its portfolio.
KEMPER U.S. MORTGAGE FUND (the "Mortgage Fund") seeks maximum current return
from U.S. Government securities.
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (the "Short-Intermediate Government
Fund") seeks, with equal emphasis, high current income and preservation of
capital from a portfolio composed primarily of short and intermediate-term U.S.
Government securities.
Each Fund may engage in options and financial futures transactions. The
Diversified, High Yield, Income and Capital and Opportunity Funds each may
invest a portion of its assets in foreign securities and engage in related
foreign currency transactions. See "Investment Objectives, Policies and Risk
Factors."
RISK FACTORS. There is no assurance that the investment objective of any Fund
will be achieved and investment in each Fund includes risks that vary in kind
and degree depending upon the investment policies of that Fund. The returns and
net asset value of each Fund will fluctuate. Investors should note that
investments in high yield securities by certain Funds (principally the
Diversified, High Yield and Opportunity Funds) entail relatively greater risk of
loss of income and principal than investments in higher rated securities and
market prices of high yield securities may fluctuate more than market prices of
higher rated securities. Foreign investments by certain Funds involve risk and
opportunity considerations not typically associated with investing in U.S.
companies. The U.S. Dollar value of a foreign security tends to decrease when
the value of the U.S. Dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the U.S. Dollar
falls against such currency. Thus, the U.S. Dollar value of foreign securities
in a Fund's portfolio, and the Fund's net asset value, may change in response to
changes in currency exchange rates even though the value of the foreign
securities in local currency terms may not have changed. A Fund's investments in
foreign securities may be in developed countries or in countries considered by
the Fund's investment manager to be developing or "emerging" markets, which
involve exposure to economic structures that are generally less diverse and
mature than in the United States, and to political systems that may be less
stable. There are special risks associated with options, financial futures,
foreign currency and other derivative transactions and there is no assurance
that use of those investment techniques will be successful. The Opportunity Fund
may borrow money for leverage purposes, which can exaggerate the effect on its
net asset value of any increase or decrease in the market value of the Fund's
portfolio. The government guarantee of the U.S. Government securities in which
certain Funds invest (principally
1
<PAGE> 82
the Adjustable Rate, Government, Mortgage and Short-Intermediate Government
Funds) does not guarantee the market value of the shares of such Funds.
Normally, the value of investments in U.S. Government securities, as with most
debt securities, varies inversely with changes in interest rates. See
"Investment Objectives, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares............................ Offered at net asset value plus a maximum sales charge of
4.5% (3.5% for the Adjustable Rate and Short-Intermediate
Government Funds) of the offering price. Reduced sales
charges apply to purchases of $100,000 or more. Class A
shares purchased at net asset value under the Large Order
NAV Purchase Privilege may be subject to a 1% contingent
deferred sales charge if redeemed within one year of
purchase and a .50% contingent deferred sales charge if
redeemed during the second year of purchase.
Class B Shares............................ Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares............................ Offered at net asset value without an initial sales charge,
but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into
another class.
</TABLE>
Each class of shares represents interests in the same portfolio of investments
of a Fund. The minimum initial investment is $1,000 and each investment
thereafter must be at least $100. Shares are redeemable at net asset value,
which may be more or less than original cost, subject to any applicable
contingent deferred sales charge. See "Purchase of Shares" and "Redemption or
Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Zurich Kemper Investments, Inc. ("ZKI")
serves as investment manager for each Fund. ZKI is paid an investment management
fee by each Fund based upon the average daily net assets of that Fund at an
effective annual rate that differs for each Fund. Zurich Investment Management
Limited ("ZIML"), an affiliate of ZKI, is the sub-adviser for each of the
Diversified, High Yield, Income and Capital and Opportunity Funds and is paid by
ZKI a fee of .30% of the portion of the average daily net assets of that Fund
allocated by ZKI to ZIML for management. ZIML is not expected to continue as
sub-adviser after the closing of the acquisition of Scudder, Stevens & Clark,
Inc. ("Scudder") by Zurich Insurance Company ("Zurich"). For further details see
"Investment Manager and Underwriter." Kemper Distributors, Inc. ("KDI"), a
wholly owned subsidiary of ZKI, is principal underwriter and administrator for
each Fund. For Class B shares and Class C shares, KDI receives a Rule 12b-1
distribution fee of .75 of 1% of average daily net assets. KDI also receives the
amount of any contingent deferred sales charges paid on the redemption of
shares. Administrative services are provided to shareholders under
administrative services agreements with KDI. Each Fund pays an administrative
services fee at the annual rate of up to .25 of 1% of average daily net assets
of each class of the Fund, which KDI pays to various broker-dealer firms and
other service or administrative firms. See "Investment Manager and Underwriter."
DIVIDENDS. Each Fund normally distributes monthly dividends of net investment
income and distributes any net realized capital gains at least annually. Income
and capital gain dividends of a Fund are automatically reinvested in additional
shares of that Fund, without a sales charge, unless the shareholder makes a
different election. See "Dividends and Taxes."
GENERAL. In the opinion of the staff of the Securities and Exchange Commission,
the use of this combined prospectus may make each Fund liable for any
misstatement or omission in this prospectus regardless of the particular Fund to
which it pertains.
2
<PAGE> 83
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL CLASS A CLASS B CLASS C
FUNDS)(1) ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price).................. 3.5*/4.5%(2) None None
Maximum Sales Charge on Reinvested Dividends........... None None None
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
Deferred Sales Charge (as a percentage of redemption
proceeds)............................................ None(3) 4% during the first 1% during
year, 3% during the the first
second and third years, year
2% during the fourth and
fifth years and 1% in
the sixth year
</TABLE>
* 3.5% APPLIES TO THE ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
ONLY.
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details. The table does not include the $9.00 quarterly small
account fee. See "Redemption or Repurchase of Shares."
(2) Reduced sales charges apply to purchases of $100,000 or more. See "Purchase
of Shares -- Initial Sales Charge Alternative -- Class A Shares."
(3) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% the first year and .50% the second year. See "Purchase of
Shares -- Initial Sales Charge Alternative -- Class A Shares."
CLASS A SHARES
<TABLE>
<CAPTION>
INCOME SHORT-
ANNUAL FUND ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees.................... None None None None None None None None
Other Expenses(6)............. .70% .47% .37% .35% .44% .46% 1.20% .64%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses...... 1.25% 1.03% .78% .88% .97% .96% 1.85% 1.19%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
INCOME SHORT-
ANNUAL FUND ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees(4)................. .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses(6)............. .63% .67% .57% .48% .62% .58% 1.33% .72%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses...... 1.93% 1.98% 1.73% 1.76% 1.90% 1.83% 2.73% 2.02%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
3
<PAGE> 84
CLASS C SHARES
<TABLE>
<CAPTION>
INCOME SHORT-
ANNUAL FUND ADJUSTABLE HIGH AND INTERMEDIATE
OPERATING EXPENSES RATE DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE OPPORTUNITY GOVERNMENT
(as a percentage of average net FUND FUND FUND FUND FUND FUND FUND FUND
assets) ---------- ----------- ---------- ----- ------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees............... .55% .56% .41% .53% .53% .50% .65% .55%
12b-1 Fees(5)................. .75% .75% .75% .75% .75% .75% .75% .75%
Other Expenses(6)............. .58% .54% .52% .43% .58% .46% 1.30% .56%
---- ---- ---- ---- ---- ---- ---- ----
Total Operating Expenses...... 1.88% 1.85% 1.68% 1.71% 1.86% 1.71% 2.70% 1.86%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
(6) "Other Expenses" have been estimated for the Opportunity Fund for the
current fiscal year. These expenses include estimated interest expense of
.60% of average net assets. Interest expense represents interest paid by the
Opportunity Fund on borrowings for the purpose of making additional
portfolio investments. Excluding interest expense, "Total Operating
Expenses" would be for Class A, 1.25%, for Class B, 2.13%, and for Class C,
2.10%.
CLASS A SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE
You would pay the following Adjustable Rate $47 $ 73 $101 $181
expenses on a $1,000 Diversified $55 $ 76 $ 99 $165
investment, assuming (1) 5% Government $53 $ 69 $ 86 $137
annual return and (2) High Yield $54 $ 72 $ 92 $149
redemption at the end of each Income and Capital $54 $ 75 $ 96 $159
time period: Mortgage $54 $ 74 $ 96 $158
Opportunity(7) $63 $101 $ -- $ --
Short-Intermediate Government $47 $ 71 $ 98 $174
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(8)
You would pay the following Adjustable Rate $60 $ 91 $124 $192
expenses on a $1,000 Diversified $60 $ 92 $127 $183
investment, assuming (1) 5% Government $58 $ 84 $114 $156
annual return and (2) High Yield $58 $ 85 $115 $163
redemption at the end of each Income and Capital $59 $ 90 $123 $176
time period: Mortgage $59 $ 88 $119 $171
Opportunity(7) $68 $115 $ -- $ --
Short-Intermediate Government $61 $ 93 $129 $194
You would pay the following Adjustable Rate $20 $ 61 $104 $192
expenses on the same Diversified $20 $ 62 $107 $183
investment, assuming no Government $18 $ 54 $ 94 $156
redemption: High Yield $18 $ 55 $ 95 $163
Income and Capital $19 $ 60 $103 $176
Mortgage $19 $ 58 $ 99 $171
Opportunity(7) $28 $ 85 $ -- $ --
Short-Intermediate Government $21 $ 63 $109 $194
</TABLE>
- ---------------
(7) For the Opportunity Fund, excluding interest expense discussed in footnote
(6) above, expenses shown in the Example would be for Class A, $57 and $83,
for Class B with redemption, $62 and $97, for Class B without redemption,
$22 and $67, for Class C with redemption, $31 and $66, and for Class C
without redemption, $21 and $66, respectively.
(8) Assumes conversion to Class A shares six years after purchase. The
contingent deferred sales charge was applied as follows: 1 year (4%), 3
years (3%), 5 years (2%) and 10 years (0%). See "Redemption or Repurchase of
Shares -- Contingent Deferred Sales Charge -- Class B Shares" for more
information regarding the calculation of the contingent deferred sales
charge.
4
<PAGE> 85
CLASS C SHARES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
---- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
EXAMPLE(9)
You would pay the following Adjustable Rate $29 $59 $102 $220
expenses on a $1,000 Diversified $29 $58 $100 $217
investment, assuming (1) 5% Government $27 $53 $ 91 $199
annual return and (2) High Yield $27 $54 $ 93 $202
redemption at the end Income and Capital $29 $58 $101 $218
of each time period: Mortgage $27 $54 $ 93 $202
Opportunity(7) $37 $84 $ -- $ --
Short-Intermediate Government $29 $58 $101 $218
You would pay the following Adjustable Rate $19 $59 $102 $220
expenses on the same Diversified $19 $58 $100 $217
investment, assuming no Government $17 $53 $ 91 $199
redemption: High Yield $17 $54 $ 93 $202
Income and Capital $19 $58 $101 $218
Mortgage $17 $54 $ 93 $202
Opportunity(7) $27 $84 $ -- $ --
Short-Intermediate Government $19 $58 $101 $218
</TABLE>
- ---------------
(9) The contingent deferred sales charge was applied as follows: 1 year (1%), 3
years (0%), 5 years (0%) and 10 years (0%). See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information. The
Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The tables below show financial information for each Fund, except the
Opportunity Fund, expressed in terms of one share outstanding throughout the
period. The information in the table for each Fund is covered by the report of
the Fund's independent auditors. The report for each Fund is contained in its
Registration Statement and is available from that Fund. The financial statements
contained in each Fund's 1997 Annual Report to Shareholders (except the
Opportunity Fund) are incorporated herein by reference and may be obtained by
writing or calling that Fund.
5
<PAGE> 86
ADJUSTABLE RATE FUND
<TABLE>
<CAPTION>
SEPTEMBER 1,
JULY 1 TO YEAR ENDED 1987 TO
YEAR ENDED AUGUST 31, AUGUST 31, JUNE 30, JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1991 1990 1989 1988
CLASS A SHARES --------------------------------------------- ---------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79 9.00
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .45 .46 .48 .34 .47 .63 .13 .79 .81 .87 .52
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .09 (.09) (.04) (.29) .02 .22 .17 .02 (.41) (.08) (.14)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .54 .37 .44 .05 .49 .85 .30 .81 .40 .79 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .45 .45 .47 .40 .44 .59 .14 .81 .78 .85 .49
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- -- -- -- -- .07 .07 .10
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .45 .45 .47 .40 .44 .59 .14 .81 .85 .92 .59
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.31 8.22 8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.75% 4.55 5.52 .59 5.87 10.56 3.62 10.33 4.85 9.64 4.29
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)(A):
Expenses 1.25% 1.15 1.10 .93 .21 .28 1.09 1.07 1.37 1.41 1.51
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.50% 5.49 5.76 3.96 5.44 7.02 9.45 9.62 9.60 10.10 8.63
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
AUGUST 31, MAY 31 TO AUGUST 31, MAY 31 TO
1997 1996 1995 AUGUST 31, 1994 1997 1996 1995 AUGUST 31, 1994
CLASS B & C SHARES --------------------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.23 8.31 8.32 8.37 8.24 8.32 8.33 8.37
- -------------------------------------------------------------------------------------- ---------------------------------------
Income from investment operations:
Net investment income .39 .40 .43 .07 .39 .40 .43 .08
- -------------------------------------------------------------------------------------- ---------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.04) .09 (.09) (.04) (.04)
- -------------------------------------------------------------------------------------- ---------------------------------------
Total from investment operations .48 .31 .39 .03 .48 .31 .39 .04
- -------------------------------------------------------------------------------------- ---------------------------------------
Less distribution from net investment income .39 .39 .40 .08 .39 .39 .40 .08
- -------------------------------------------------------------------------------------- ---------------------------------------
Net asset value, end of period $8.32 8.23 8.31 8.32 8.33 8.24 8.32 8.33
- -------------------------------------------------------------------------------------- ---------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.96% 3.79 4.84 .34 5.98 3.82 4.89 .47
- -------------------------------------------------------------------------------------- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.93% 1.89 1.85 1.96 1.88 1.89 1.79 1.88
- -------------------------------------------------------------------------------------- ---------------------------------------
Net investment income 4.82% 4.75 5.01 3.36 4.87 4.75 5.07 3.52
- -------------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
JULY 1 TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30,
1997 1996 1995 1994 1993 1992 1991 1991 1990 1989
ALL CLASSES ---------------------------------------------------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $ 81,967 94,477 129,757 202,815 212,694 174,967 76,749 75,012 75,913 75,704
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 249% 272 308 533 138 309 228 259 278 265
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SEPTEMBER 1,
1987 TO
JUNE 30,
1988
ALL CLASSES ------------
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 59,054
- --------------------------------------
Portfolio turnover rate
(annualized) 201
- --------------------------------------
</TABLE>
(a) ZKI agreed to waive its management fee and to absorb certain other operating
expenses of the Adjustable Rate Fund through December 31, 1992. Thereafter,
these expenses were gradually reinstated through January 31, 1994. Without this
agreement, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets for Class A Shares would have been .99%
and 3.90%, respectively, for fiscal 1994, .95% and 4.70%, respectively, for
fiscal 1993, and .90% and 6.40%, respectively, for fiscal 1992.
6
<PAGE> 87
DIVERSIFIED FUND
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS
TO ENDED ENDED
YEAR ENDED OCTOBER 31, OCT. 31, NOV. 30, NOV. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------------------------------------------------- --------- --------- ---------
CLASS A SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .46 .55 .52 .59 .63 .60 .71 .39
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments and
foreign currency .01 .12 .16 (.45) .58 .14 1.36 (1.34) .10
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .47 .58 .71 .07 1.17 .77 1.96 (.63) .49
- ----------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .50 .57 .50 .53 .59 .59 .63 .71 .40
- ----------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Paid in surplus -- -- -- -- -- -- -- -- .67
- ----------------------------------------------------------------------------------------------------------------------------
Total dividends .50 .57 .50 .53 .59 .59 .63 .71 1.07
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.96 5.99 5.98 5.77 6.23 5.65 5.47 4.14 5.48
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.13% 10.27 12.90 1.02 21.60 14.59 50.58 (12.79) 8.59
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.03% 1.03 1.09 1.12 1.10 1.19 1.21 1.15 .96
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 7.68% 7.72 9.43 8.81 9.74 11.02 13.41 14.32 6.76
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR
ENDED
OCT. 31,
1988
---------
CLASS A SHARES
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period 6.10
- --------------------------------------------
Income from investment
operations:
Net investment income .13
- --------------------------------------------
Net realized and unrealized
gain (loss) on investments and
foreign currency .72
- --------------------------------------------
Total from investment operations .85
- --------------------------------------------
Less dividends:
Distribution from net
investment income .13
- --------------------------------------------
Distribution from net realized
gain .02
- --------------------------------------------
Paid in surplus .74
- --------------------------------------------
Total dividends .89
- --------------------------------------------
Net asset value, end of period 6.06
- --------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 15.30
- --------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses .97
- --------------------------------------------
Net investment income 3.08
- --------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
------------------------ ---------------- ----------------------- ----------------
CLASS B & C SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $5.99 5.98 5.77 5.94 6.01 6.00 5.79 5.95
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .40 .41 .49 .19 .42 .41 .50 .20
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments and
foreign currency .01 .12 .16 (.17) .01 .12 .16 (.17)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .41 .53 .65 .02 .43 .53 .66 .03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment
income .44 .52 .44 .19 .45 .52 .45 .19
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $5.96 5.99 5.98 5.77 5.99 6.01 6.00 5.79
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.13% 9.23 11.87 .35 7.37 9.33 11.95 .55
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.98% 1.96 2.04 1.97 1.85 1.86 1.86 1.96
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.73% 6.79 8.48 8.01 6.86 6.89 8.68 8.02
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEC. 1, THIRTEEN
1990 YEAR MONTHS
TO ENDED ENDED
YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989
--------------------------------------------------------------- --------- --------- ---------
ALL CLASSES
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period
(in thousands) $861,543 778,752 754,222 738,014 328,512 244,620 227,625 179,154 284,497
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 347% 310 286 179 80 57 20 45 102
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR
ENDED
OCT. 31,
1988
---------
ALL CLASSES
<S> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period
(in thousands) 371,758
- --------------------------------
Portfolio turnover
rate (annualized) 16
- --------------------------------
</TABLE>
7
<PAGE> 88
GOVERNMENT FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
CLASS A SHARES --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of year $8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .63 .66 .67 .69 .78 .84 .85 .88 .93
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .06 (.17) .56 (.97) (.01) (.02) .61 (.38) .09 (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .70 .46 1.22 (.30) .68 .76 1.45 .47 .97 .85
- ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .63 .64 .65 .64 .69 .78 .84 .85 .90 .96
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.81 8.74 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.41% 5.36 15.24 (3.37) 7.60 8.44 17.41 5.53 11.51 9.73
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .78% .77 .72 .75 .65 .64 .63 .53 .49 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.34% 7.17 7.68 7.58 7.36 8.31 9.24 9.62 9.93 10.20
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED OCT. 31, MAY 31 TO YEAR ENDED OCT. 31, MAY 31 TO
1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
CLASS B & C SHARES ----------------------- ---------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
$8.73 8.91 8.34 8.67 8.75 8.93 8.35 8.67
Net asset value, beginning of period
- ---------------------------------------------------------------------------------- -------------------------------------------
Income from investment operations:
Net investment income .56 .54 .58 .28 .56 .55 .60 .29
- ---------------------------------------------------------------------------------- -------------------------------------------
Net realized and unrealized gain
(loss) .06 (.17) .56 (.38) .06 (.17) .56 (.38)
- ---------------------------------------------------------------------------------- -------------------------------------------
Total from investment operations .62 .37 1.14 (.10) .62 .38 1.16 (.09)
- ---------------------------------------------------------------------------------- -------------------------------------------
Less distribution from net investment
income .55 .55 .57 .23 .55 .56 .58 .23
- ---------------------------------------------------------------------------------- -------------------------------------------
Net asset value, end of period $8.80 8.73 8.91 8.34 8.82 8.75 8.93 8.35
- ---------------------------------------------------------------------------------- -------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 7.40% 4.36 14.18 (1.15) 7.42 4.40 14.33 (1.01)
- ---------------------------------------------------------------------------------- -------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.73% 1.73 1.69 1.71 1.68 1.70 1.64 1.68
- ---------------------------------------------------------------------------------- -------------------------------------------
Net investment income 6.39% 6.21 6.71 7.09 6.44 6.24 6.76 7.12
- ---------------------------------------------------------------------------------- -------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991
ALL CLASSES ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) $3,642,027 4,163,157 4,738,415 4,941,451 6,686,735 6,683,092 5,544,095
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 261% 391 362 1,000 550 569 695
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
1990 1989 1988
ALL CLASSES ----------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year
(in thousands) 4,565,689 4,540,382 4,403,110
- -------------------------------------------------------------
Portfolio turnover rate 497 289 203
- -------------------------------------------------------------
</TABLE>
8
<PAGE> 89
HIGH YIELD FUND
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
CLASS A SHARES --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .76 .76 .83 .73 .81 .85 .92 1.07 1.09 1.10
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.35) .23 .54 1.15 (2.13) (.58) .09
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.07 .99 1.03 .38 1.04 1.39 2.07 (1.06) .51 1.19
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .80 .77 .76 .76 .78 .83 .99 1.06 1.12 1.11
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- -- -- -- -- .36
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .80 .77 .76 .76 .78 .83 .99 1.06 1.12 1.47
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.50 8.23 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 13.69% 13.00 14.10 4.64 13.92 19.96 36.82 (13.83) 5.91 14.22
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses .88% .88 .90 .86 .80 .82 .85 .73 .67 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 9.18% 9.45 10.74 9.22 10.22 11.00 14.02 14.46 12.40 12.59
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED MAY 31 TO YEAR ENDED MAY 31 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
CLASS B & C SHARES 1997 1996 1995 1994 1997 1996 1995 1994
--------------------- ------------- --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $8.22 8.00 7.73 7.96 8.24 8.02 7.75 7.96
- ----------------------------------------------------------------------------------- -------------------------------------------
Income from investment operations:
Net investment income .69 .69 .76 .23 .70 .69 .77 .25
- ----------------------------------------------------------------------------------- -------------------------------------------
Net realized and unrealized gain (loss) .31 .23 .20 (.23) .31 .23 .20 (.23)
- ----------------------------------------------------------------------------------- -------------------------------------------
Total from investment operations 1.00 .92 .96 -- 1.01 .92 .97 .02
- ----------------------------------------------------------------------------------- -------------------------------------------
Less distribution from net investment income .73 .70 .69 .23 .73 .70 .70 .23
- ----------------------------------------------------------------------------------- -------------------------------------------
Net asset value, end of period $8.49 8.22 8.00 7.73 8.52 8.24 8.02 7.75
- ----------------------------------------------------------------------------------- -------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 12.72% 12.02 13.09 -- 12.88 12.06 13.13 .27
- ----------------------------------------------------------------------------------- -------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.76% 1.77 1.77 1.80 1.71 1.71 1.71 1.74
- ----------------------------------------------------------------------------------- -------------------------------------------
Net investment income 8.30% 8.56 9.87 8.70 8.35 8.62 9.93 8.75
- ----------------------------------------------------------------------------------- -------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991
ALL CLASSES ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) $4,939,302 4,096,939 3,527,954 3,152,029 1,957,524 1,953,509 1,673,161
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover
rate (annualized) 91% 102 99 93 101 69 31
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1990 1989 1988
ALL CLASSES --------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
year (in thousands) 1,183,943 1,552,762 978,310
- -------------------------------------------------------
Portfolio turnover
rate (annualized) 37 45 76
- -------------------------------------------------------
</TABLE>
9
<PAGE> 90
INCOME AND CAPITAL FUND
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
CLASS A SHARES ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .57 .58 .61 .61 .63 .67 .74 .80 .84 .89
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .08 (.15) .72 (1.03) .62 .11 .53 (.52) (.26) .12
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .65 .43 1.33 (.42) 1.25 .78 1.27 .28 .58 1.01
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .57 .59 .62 .59 .62 .66 .75 .80 .89 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- .05 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .57 .59 .62 .64 .62 .66 .75 .80 .89 .92
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 8.54 8.46 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN: 8.00% 5.17 17.47 (4.86) 15.48 9.83 17.26 3.60 7.13 12.67
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses .97% .96 .90 .94 .82 .82 .82 .73 .67 .69
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.75% 6.90 7.31 7.34 7.26 8.01 9.21 10.05 10.02 10.53
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B CLASS C
YEAR ENDED YEAR ENDED
OCTOBER 31, MAY 31 TO OCTOBER 31, MAY 31 TO
CLASS B & C SHARES 1997 1996 1995 OCTOBER 31, 1994 1997 1996 1995 OCTOBER 31, 1994
----------------------- ---------------- ----------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.43 8.59 7.90 8.16 8.45 8.61 7.90 8.16
- ----------------------------------------------------------------------------------- ------------------------------------------
Income from investment operations:
Net investment income .49 .50 .51 .23 .49 .50 .53 .23
- ----------------------------------------------------------------------------------- ------------------------------------------
Net realized and unrealized gain
(loss) .08 (.15) .72 (.26) .08 (.15) .72 (.26)
- ----------------------------------------------------------------------------------- ------------------------------------------
Total from investment operations .57 .35 1.23 (.03) .57 .35 1.25 (.03)
- ----------------------------------------------------------------------------------- ------------------------------------------
Less distribution from net investment
income .49 .51 .54 .23 .49 .51 .54 .23
- ----------------------------------------------------------------------------------- ------------------------------------------
Net asset value, end of period $ 8.51 8.43 8.59 7.90 8.53 8.45 8.61 7.90
- ----------------------------------------------------------------------------------- ------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 6.99% 4.20 16.12 (.45) 7.03 4.23 16.45 (.44)
- ----------------------------------------------------------------------------------- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.90% 1.93 1.81 1.92 1.86 1.90 1.78 1.89
- ----------------------------------------------------------------------------------- ------------------------------------------
Net investment income 5.82% 5.93 6.40 6.72 5.86 5.96 6.43 6.75
- ----------------------------------------------------------------------------------- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
ALL CLASSES --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of year (in
thousands) $613,470 572,998 649,427 510,432 569,145 482,009 432,490 394,131 404,995 322,229
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 164% 74 182 163 190 178 115 189 64 34
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 91
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JANUARY 10 TO
CLASS A SHARES 1997 1996 1995 1995 1994 1993 JULY 31, 1992
---------------- ------------- --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.91 7.13 7.06 6.96 7.56 7.78 7.81
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .52 .49 .08 .53 .51 .62 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .10 (.19) .08 .09 (.59) (.21) (.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .62 .30 .16 .62 (.08) .41 .35
- ---------------------------------------------------------------------------------------------------------------------------------
Less distribution from net investment
income .52 .52 .09 .52 .52 .63 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.01 6.91 7.13 7.06 6.96 7.56 7.78
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 9.26% 4.28 2.23 9.48 (1.21) 5.52 4.76
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses .96% .97 .94 .89 .99 .97 .94
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 7.23% 6.98 6.87 7.77 7.00 8.22 8.73
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
CLASS B SHARES 1997 1996 1995 1995 1994 1993 1992 1991 1990 1989 1988
---------------- ------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .45 .44 .07 .47 .45 .57 .65 .64 .66 .72 .72
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .10 (.19) .08 .09 (.59) (.21) .49 .01 (.36) .07 (.33)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .55 .25 .15 .56 (.14) .36 1.14 .65 .30 .79 .39
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .46 .46 .08 .47 .46 .57 .62 .65 .66 .76 .74
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- -- -- -- -- -- -- .08
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .46 .46 .08 .47 .46 .57 .62 .65 .66 .76 .82
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.91 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.17% 3.54 2.09 8.44 (2.00) 4.85 16.36 9.37 4.26 11.12 5.06
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 1.83% 1.80 1.79 1.75 1.79 1.75 1.86 2.03 1.99 1.98 1.98
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.36% 6.15 6.02 6.91 6.27 7.44 8.70 8.86 9.00 9.62 9.28
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 92
MORTGAGE FUND
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, JULY 31, MAY 31 TO
CLASS C SHARES 1997 1996 1995 1995 JULY 31, 1994
----------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $6.90 7.12 7.05 6.95 6.99
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .43 .07 .48 .07
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .10 (.19) .08 .09 (.04)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .56 .24 .15 .57 .03
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividend from net investment income .46 .46 .08 .47 .07
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.00 6.90 7.12 7.05 6.95
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 8.45% 3.47 2.10 8.65 .47
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.71% 1.72 1.69 1.71 1.55
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.48% 6.23 6.12 6.95 6.46
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUG. 1, 1995
SEPT. 30, TO SEPT. 30, YEAR ENDED JULY 31,
ALL CLASSES 1997 1996 1995 1995 1994 1993 1992 1991
----------------------- ------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) $2,497,825 2,960,135 3,493,052 3,528,329 4,158,066 5,639,097 5,602,682 4,879,832
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 235% 391 249 573 963 551 376 498
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED JULY 31,
ALL CLASSES 1990 1989 1988
-----------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of
period (in thousands) 5,178,159 6,193,674 6,332,021
- ---------------------------------------------------------------
Portfolio turnover rate
(annualized) 206 152 178
- ---------------------------------------------------------------
</TABLE>
12
<PAGE> 93
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
AUGUST 1 JANUARY 10
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
1997 1996 1995 1995 1994 1993 1992
CLASS A SHARES ---------------- ------------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.89 8.08 8.09 8.11 8.63 8.65 8.59
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .54 .09 .54 .48 .53 .29
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.07) (.20) (.01) (.03) (.44) (.03) .11
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .34 .08 .51 .04 .50 .40
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends from:
Distribution from net investment income .53 .53 .09 .53 .45 .52 .34
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .53 .53 .09 .53 .56 .52 .34
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.80 7.89 8.08 8.09 8.11 8.63 8.65
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.80% 4.25 1.00 6.58 .41 6.01 4.87
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.19% 1.15 1.05 1.06 1.06 1.04 .95
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 6.61% 6.65 6.56 6.65 5.85 6.06 7.48
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1 FEBRUARY 1
YEAR ENDED TO TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31,
1997 1996 1995 1995 1994 1993 1992 1991 1990 1989
CLASS B SHARES ---------------- ------------- --------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period $7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .08 .47 .40 .45 .58 .69 .72 .36
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) (.07) (.20) (.01) (.03) (.44) (.02) .36 (.14) (.27) .14
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .39 .26 .07 .44 (.04) .43 .94 .55 .45 .50
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .47 .46 .08 .46 .38 .46 .57 .70 .72 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- -- .11 -- -- -- .01 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends .47 .46 .08 .46 .49 .46 .57 .70 .73 .30
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.77 7.85 8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.11% 3.28 .87 5.68 (.48) 5.13 11.76 6.85 5.52 5.99
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED):
Expenses 2.02% 1.97 1.91 1.87 1.93 1.87 1.89 2.07 2.10 2.24
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.78% 5.83 5.70 5.84 4.95 5.23 6.84 8.19 8.60 8.50
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 94
SHORT-INTERMEDIATE GOVERNMENT FUND
<TABLE>
<CAPTION>
MAY 31
AUGUST 1 TO YEAR ENDED TO
YEAR ENDED SEPTEMBER 30, JULY 31, JULY 31,
SEPTEMBER 30, 1995 1995 1994
1997 1996 ------------- ---------- --------
CLASS C SHARES ----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $7.86 8.06 8.06 8.08 8.09
- ------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .47 .09 .47 .07
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.07) (.20) (.01) (.03) (.01)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 .27 .08 .44 .06
- ------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income .48 .47 .08 .46 .07
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 7.86 8.06 8.06 8.08
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED): 5.24% 3.36 1.00 5.73 .77
- ------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED):
Expenses 1.86% 1.85 1.74 1.78 1.83
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 5.94% 5.95 5.87 5.93 5.54
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 1 TO
SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED JULY 31,
1997 1996 1995 1995 1994 1993 1992 1991 1990
ALL CLASSES --------------------- ------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:
Net assets at end of period (in
thousands) $171,400 204,021 239,619 246,248 266,640 283,249 191,716 104,279 51,741
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (annualized) 164% 180 173 597 916 339 120 180 89
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES FOR ALL FUNDS:
Total return does not reflect the effect of any sales charges. The Adjustable
Rate, Diversified, Government and Income and Capital Funds are separate
Massachusetts business trusts. The Mortgage and Short-Intermediate Government
Funds are separate portfolios of Kemper Portfolios, a Massachusetts business
trust, and the High Yield and Opportunity Funds are separate portfolios of
Kemper High Yield Series, a Massachusetts business trust. See "Capital
Structure."
The Opportunity Fund (not shown above) commenced operations on October 1, 1997.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following information sets forth each Fund's investment objective and
policies. Each Fund's returns and net asset value will fluctuate and there is no
assurance that any Fund will achieve its objective.
ADJUSTABLE RATE FUND. The Adjustable Rate Fund seeks high current income
consistent with low volatility of principal. Under normal market conditions, the
Fund will, as a fundamental policy, invest at least 65% of its total assets in
adjustable rate securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). See "Government
Fund" below concerning U.S. Government Securities and the risks related to those
securities, including the fact that the government guarantee of such securities
in the Fund's portfolio does not guarantee the net asset value of the Fund's
shares. The Fund is designed for the investor who seeks a higher yield than a
stable price money market fund or an insured bank certificate of deposit and
less fluctuation in net asset value than a longer-term bond fund; unlike money
market funds, however, the Fund does not seek to maintain a stable net asset
value and, unlike an insured bank certificate of deposit, the Fund's shares are
not insured. There is no assurance that the Fund will achieve its objective.
14
<PAGE> 95
Adjustable rate securities bear interest at rates that adjust at periodic
intervals in response to changes in market levels of interest rates generally.
As the interest rates are reset periodically, yields on such securities will
gradually align themselves to reflect changes in market interest rates. The
adjustable interest rate feature of the securities in which the Fund invests
generally will act as a buffer to reduce sharp changes in the Fund's net asset
value in response to normal interest rate fluctuations. As the interest rates on
the Fund's investments are reset periodically, yields of portfolio securities
will gradually align themselves to reflect changes in market rates and should
cause the net asset value of the Fund's shares to fluctuate less dramatically
than it would if the Fund invested in long-term, fixed rate securities.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic adjustments in the interest rate resulting in
both higher current yields and lower price fluctuations. During periods of
declining interest rates, of course, the coupon rates may readjust downward,
resulting in lower yields to the Fund. Further, because of this feature, the
value of adjustable rate mortgages is unlikely to rise during periods of
declining interest rates to the same extent as fixed rate instruments. As with
other mortgage-backed securities, interest rate declines may result in
accelerated prepayment of mortgages, and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates. However, during periods of
rising interest rates, changes in the coupon rate lag behind changes in the
market rate, possibly resulting in a lower net asset value until the coupon
resets to market rates. Thus, investors could suffer some principal loss if they
sold their shares of the Fund before the interest rates on portfolio investments
are adjusted to reflect current market rates. During periods of extreme
fluctuations in interest rates, the Fund's net asset value will fluctuate as
well.
The Fund may invest without limit in Mortgage-Backed Securities, as described
under "Mortgage Fund" below. Mortgage-Backed Securities can have either a fixed
rate of interest or an adjustable rate. Adjustable rate mortgage securities in
which the Fund generally invests would have the same characteristics as
described above with respect to adjustable rate securities. In addition, since
most mortgage securities in the Fund's portfolio will generally have annual
reset caps of 100 to 200 basis points (1-2%), fluctuation in interest rates
above these levels could cause such mortgage securities to "cap out" and to
behave more like long-term, fixed rate debt securities.
To help protect the value of the Fund's portfolio primarily from interest rate
fluctuations, the Fund may engage in interest rate swaps and other swap-related
products such as interest rate "caps" and "floors." The Fund will enter into
these transactions normally to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing. There is no assurance that
these transactions will be successful. The Fund will not sell interest rate caps
or floors that it does not own. See "Additional Investment Information--Interest
Rate Swaps and Swap-Related Products" below.
The Fund may also invest up to 35% of its total assets in securities other than
adjustable rate U.S. Government Securities including, without limitation,
privately issued Mortgage-Backed Securities, commercial paper and other debt
obligations of corporations and other business organizations, certificates of
deposit, bankers' acceptances and time deposits and other debt securities such
as convertible securities and preferred stocks. These securities will, at the
time of purchase, be rated within the two highest grades (Aaa or Aa) assigned by
Moody's Investors Service, Inc. ("Moody's"), or (AAA or AA) by Standard & Poor's
Corporation ("S&P"), or will be non-rated but of comparable quality in the
opinion of the investment manager.
The Fund also may invest in obligations collateralized by a portfolio or pool of
mortgages, Mortgage-Backed Securities, U.S. Government Securities or other
assets and may engage in options and financial futures transactions, securities
lending, delayed delivery transactions and other portfolio strategies. See
"Additional Investment Information" below.
Additional information concerning the Adjustable Rate Fund appears in the
"Interest Rate Swaps, Caps and Floors" and "Additional Information--Adjustable
Rate Securities" sections under "Investment Policies and Techniques" in the
Statement of Additional Information.
DIVERSIFIED FUND. The Diversified Fund seeks high current return. The Fund
pursues its objective by investing primarily in fixed income securities and
dividend-paying common stocks and by writing options. Current return includes
interest income, common stock dividends and any net short-term gains.
15
<PAGE> 96
Investment in fixed income securities will include corporate debt obligations,
U.S. and Canadian Government securities, obligations of U.S. and Canadian
banking institutions, convertible securities, preferred stocks, and cash and
cash equivalents, including repurchase agreements. Investment in equity
securities will primarily be in dividend-paying common stocks. The percentage of
assets invested in fixed income and equity securities will vary from time to
time depending upon the judgment of the investment manager as to general market
and economic conditions, trends in yields and interest rates and changes in
fiscal or monetary policies. The Fund may invest up to 50% of its total assets
in foreign securities that are traded principally in securities markets outside
the United States. Foreign securities present certain risks in addition to those
presented by domestic securities, including risks associated with currency
fluctuations, possible imposition of foreign governmental regulations or taxes
adversely affecting portfolio securities and generally different degrees of
liquidity, market volatility and availability of information. See "Special Risk
Factors--Foreign Securities" below.
The Fund may invest without limit in high yield, fixed income securities,
commonly referred to as "junk bonds," that are in the lower rating categories
and those that are non-rated. The high yield, fixed income securities (debt and
preferred stock issues, including convertibles and assignments or participations
in loans) in which the Fund may invest normally offer a current yield or yield
to maturity that is significantly higher than the yield available from
securities rated in the four highest categories assigned by S&P or Moody's. The
characteristics of the securities in the Fund's portfolio, such as the maturity
and the type of issuer, will affect yields and yield differentials, which vary
over time. The actual yield realized by the investor is subject, among other
things, to the Fund's expenses and the investor's transaction costs.
The Fund may also purchase options on securities and index options, purchase and
sell financial futures contracts and options on financial futures contracts,
engage in foreign currency transactions, engage in delayed delivery transactions
and lend its portfolio securities. See "Special Risk Factors--Foreign
Securities" and "Additional Investment Information" below. Under normal market
conditions, the Fund will invest at least 65% of its total assets in income
producing investments. In periods of unusual market conditions, the Fund may,
for defensive purposes, temporarily retain all or any part of its assets in cash
or cash equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund will fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on any published ratings. The
Fund will invest in a particular fixed income security if in the investment
manager's view, the increased yield offered, regardless of published ratings, is
sufficient to compensate for a reasonable element of assumed risk. Since
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of the Fund's goals may depend more upon the
abilities of the investment manager than would otherwise be the case.
Investments in lower rated or non-rated securities, while generally providing
greater income and opportunity for gain than investments in higher rated
securities, entail greater risk of loss of income and principal. See "Special
Risk Factors--High Yield (High Risk) Bonds" below and "Appendix--Ratings of
Investments" in the Statement of Additional Information.
Since interest rates vary with changes in economic, market, political and other
conditions, there can be no assurance that historic interest rates are
indicative of rates that may prevail in the future. The values of fixed income
securities in the Fund's portfolio will fluctuate depending upon market factors
and inversely with current interest rate levels. The market value of equity
securities in the Fund's portfolio will also fluctuate with market and other
conditions.
GOVERNMENT FUND. The Government Fund seeks high current income, liquidity and
security of principal by investing in obligations issued or guaranteed by the
U.S. Government or its agencies, and by obtaining rights to acquire such
securities. The Fund's yield and net asset value will fluctuate and there can be
no assurance that the Fund will attain its objective.
The Fund intends to invest some or all of its assets in Government National
Mortgage Association ("GNMA") Certificates of the modified pass-through type.
These GNMA Certificates are debt securities issued by a mortgage
16
<PAGE> 97
banker or other mortgagee and represent an interest in one or a pool of
mortgages insured by the Federal Housing Administration or guaranteed by the
Veterans Administration. GNMA guarantees the timely payment of monthly
installments of principal and interest on modified pass-through Certificates at
the time such payments are due, whether or not such amounts are collected by the
issuer of these Certificates on the underlying mortgages.
The National Housing Act provides that the full faith and credit of the United
States is pledged to the timely payment of principal and interest by GNMA of
amounts due on these GNMA Certificates, and an assistant attorney general of the
United States has rendered an opinion that this guarantee by GNMA is a general
obligation of the United States backed by its full faith and credit.
Mortgages included in single family residential mortgage pools backing an issue
of GNMA Certificates have a maximum maturity of 30 years. Scheduled payments of
principal and interest are made to the registered holders of GNMA Certificates
(such as the Fund) each month. Unscheduled prepayments of mortgages included in
these pools occur as a result of the prepayment or refinancing of such mortgages
by homeowners or as a result of the foreclosure of such mortgages. Such
prepayments are passed through to the registered holders of GNMA Certificates
with the regular monthly payments of principal and interest, which has the
effect of reducing future payments on such Certificates. That portion of monthly
payments received by the Fund which represents interest and discount will be
included in the Fund's net investment income. See "Dividends and Taxes."
Principal payments on a GNMA Certificate will be reinvested by the Fund.
The balance of the Fund's assets, other than those invested in GNMA Certificates
and options and financial futures contracts as discussed below, will be invested
in obligations issued or guaranteed by the United States or by its agencies.
There are two broad categories of U.S. Government-related debt instruments: (a)
direct obligations of the U.S. Treasury, and (b) securities issued or guaranteed
by U.S. Government agencies. Examples of direct obligations of the U.S. Treasury
are Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury. These instruments are backed by the "full faith and credit" of the
United States. They differ primarily in interest rates, the length of maturities
and the dates of issuance. Some obligations issued or guaranteed by agencies of
the U.S. Government are backed by the full faith and credit of the United States
(such as Maritime Administration Title XI Ship Financing Bonds and Agency for
International Development Housing Guarantee Program Bonds) and others are backed
only by the rights of the issuer to borrow from the U.S. Treasury (such as
Federal Home Loan Bank Bonds and Federal National Mortgage Association Bonds).
With respect to securities supported only by the credit of the issuing agency or
by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies and such
securities may involve risk of loss of principal and interest. U.S. Government
Securities may include "zero coupon" securities that have been stripped by the
U.S. Government of their unmatured interest coupons (see "Investment Policies
and Techniques--Zero Coupon Government Securities" in the Statement of
Additional Information for a discussion of their features and risks) and
collateralized obligations issued or guaranteed by a U.S. Government agency or
instrumentality (see "Collateralized Obligations" below).
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the U.S. Government Securities in the Fund's portfolio,
however, does not guarantee the net asset value of the shares of the Fund. There
are market risks inherent in all investments in securities and the value of an
investment in the Fund will fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. For example,
as interest rates rise the value of the Fund's investments will tend to decline,
and as interest rates fall the value of the Fund's investments will tend to
increase. In addition, the potential for appreciation in the event of a decline
in interest rates may be limited or negated by increased principal prepayments
in respect to certain Mortgage-Backed Securities, such as GNMA Certificates.
Prepayments of high interest rate Mortgage-Backed Securities during times of
declining interest rates will tend to lower the return of the Fund and may even
result in losses to the Fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the Fund's
average portfolio maturity. As a result, the Fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market
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conditions. With respect to U.S. Government Securities supported only by the
credit of the issuing agency or by an additional line of credit with the U.S.
Treasury, there is no guarantee that the U.S. Government will provide support to
such agencies and such securities may involve risk of loss of principal and
interest. The Fund will not invest in Mortgage-Backed Securities issued by
private issuers.
The Fund may also write (sell) and purchase options on securities, index
options, financial futures contracts and options on financial futures contracts
in connection with attempts to hedge its portfolio investments and not for
speculation. See "Additional Investment Information" below.
HIGH YIELD FUND. The primary objective of the High Yield Fund is to achieve the
highest level of current income obtainable from a professionally managed,
diversified portfolio of fixed income securities which the investment adviser
considers consistent with reasonable risk. As a secondary objective, the Fund
will seek capital gain where consistent with its primary objective.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objectives, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
As a secondary objective, the Fund will seek capital gain where consistent with
its primary objective. However, the Fund intends to hold portfolio securities to
maturity unless yields on alternative investments, based on current market
prices, are more attractive than those on securities held in the Fund's
portfolio or unless the investment manager determines defensive strategies
should be implemented.
The Fund anticipates that under normal circumstances 90 to 100% of its assets
will be invested in fixed income securities (debt and preferred stock issues,
including convertibles). The Fund may invest in common stocks, rights or other
equity securities when consistent with the Fund's objectives, but will generally
hold such equity investments only as a result of purchases of unit offerings of
fixed income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed income securities.
The Fund may invest all or a portion of its assets in money market instruments
such as obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the three highest grades by Moody's or S&P;
commercial paper rated within the two highest grades by either of such rating
services; bank certificates of deposit or bankers' acceptances of domestic or
Canadian chartered banks having total assets in excess of $1 billion; and any of
the foregoing investments subject to short-term repurchase agreements (an
instrument under which the purchaser acquires ownership of the underlying
obligation and the seller agrees, at the time of sale, to repurchase the
obligation at a mutually agreed upon time and price). The Fund may also purchase
and sell options on securities, index options, financial futures contracts and
options on financial futures contracts in connection with attempts to hedge its
portfolio investments and not for speculation; and it may purchase
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foreign securities and engage in foreign currency transactions. See "Special
Risk Factors--Foreign Securities" and "Additional Investment Information" below.
INCOME AND CAPITAL FUND. The Income and Capital Fund seeks as high a level of
current income as is consistent with prudent investment management, preservation
of capital and ready marketability of its portfolio by investing primarily in a
diversified portfolio of investment grade debt securities. Specifically, at
least 90% of the Fund's assets will be invested in the following categories: (a)
corporate debt securities which are rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P; (b) obligations of, or guaranteed by, the United States,
its agencies or instrumentalities; (c) obligations (payable in U.S. Dollars) of,
or guaranteed by, the government of Canada or any instrumentality or political
subdivision thereof; (d) commercial paper rated Prime-1 or Prime-2 by Moody's or
A-1 or A-2 by S&P; (e) bank certificates of deposit or bankers' acceptances
issued by domestic or Canadian chartered banks having total deposits in excess
of $1 billion; (f) options on securities, index options, financial futures
contracts and options on financial futures contracts as described under
"Additional Investment Information" in connection with attempts to hedge its
portfolio investments and not for speculation; and (g) cash and cash
equivalents.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. Normally, the value of the
Fund's investments varies inversely with changes in interest rates. There can be
no assurance that the objective of the Fund will be achieved. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
The Fund may invest up to 10% of its total assets in fixed income securities
that are rated below BBB by S&P and Baa by Moody's or are non-rated. For a
discussion of lower rated and non-rated securities, commonly referred to as
"junk bonds," and related risks, see "Special Risk Factors--High Yield (High
Risk) Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information. The Fund may also invest in foreign securities and
engage in foreign currency transactions. See "Special Risk Factors--Foreign
Securities" below.
MORTGAGE FUND. The Mortgage Fund seeks maximum current return from a portfolio
of U.S. Government Securities. Additionally, the Fund may engage in options and
financial futures transactions which relate to U.S. Government Securities and
may purchase or sell securities on a when-issued or delayed delivery basis. See
"Additional Investment Information" below for a discussion of such transactions
applicable to the Fund.
As a non-fundamental policy, at least 65% of the Fund's total assets normally
will be invested in "Mortgage-Backed Securities." Mortgage-Backed Securities are
securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property. There are
currently three basic types of Mortgage-Backed Securities: (a) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"),
the Federal National Mortgage Association ("Fannie Mae" or "FNMA") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"); (b) those
issued by private issuers that represent an interest in or are collateralized by
Mortgage-Backed Securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (c) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement. The dominant issuers or guarantors of
Mortgage-Backed Securities today are GNMA, FNMA and FHLMC. GNMA creates mortgage
securities from pools of government guaranteed or insured (Federal Housing
Authority or Veterans Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA and FHLMC issue
Mortgage-Backed Securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks, credit
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unions and mortgage bankers. Mortgage-Backed Securities issued by GNMA, FNMA and
FHLMC are considered U.S. Government Securities. The Fund will not invest in
Mortgage-Backed Securities issued by private issuers.
U.S. Government Securities of the type in which the Fund may invest have
historically involved little risk of loss of principal if held to maturity. The
government guarantee of the securities in the Fund, however, does not guarantee
the net asset value of the shares of the Fund. There are market risks inherent
in all investments in securities and the value of an investment in the Fund will
fluctuate over time. Normally, the value of the Fund's investments varies
inversely with changes in interest rates. For example, as interest rates rise,
the value of the Fund's investments will tend to decline and, as interest rates
fall, the value of the Fund's investments will tend to increase. In addition,
the potential for appreciation in the event of a decline in interest rates may
be limited or negated by increased principal prepayments in respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayment of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of the Fund and may even result in losses to
the Fund if some securities were acquired at a premium. Moreover, during periods
of rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of the Fund's average portfolio maturity. As a
result, the Fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions.
OPPORTUNITY FUND. The Opportunity Fund seeks total return through high current
income and capital appreciation. The Fund will invest primarily in fixed income
securities and under normal market conditions, the Fund will, invest at least
65% of its total assets in high yield, fixed income securities. The Fund
anticipates that under normal conditions approximately 80 to 90% of its total
assets will be held in high yield, fixed income securities.
The high yield, fixed income securities (debt and preferred stock issues,
including convertibles and assignments or participations in loans) in which the
Fund intends to invest are commonly referred to as "junk bonds" and normally
offer a current yield or yield to maturity that is significantly higher than the
yield available from securities rated in the four highest categories assigned by
S&P or Moody's. The characteristics of the securities in the Fund's portfolio,
such as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by the investor
is subject, among other things, to the Fund's expenses and the investor's
transaction costs.
There are market and investment risks with any security and the value of an
investment in the Fund may fluctuate over time. In seeking to achieve its
investment objective, the Fund will invest in fixed income securities based on
the investment manager's analysis without relying on published ratings. The Fund
will invest in a particular security if in the view of the investment manager
the increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Since investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case. Investment in high yield
securities, while providing greater income and opportunity for gain than
investment in higher rated securities, entails relatively greater risk of loss
of income and principal. See "Special Risk Factors--High Yield (High Risk)
Bonds" below and "Appendix--Ratings of Investments" in the Statement of
Additional Information.
The Fund may invest up to a maximum of 20% of its total assets in common stocks,
rights or other equity securities; generally of companies that issue high yield,
fixed income securities. The Fund anticipates that under normal circumstances
approximately 10% of its total assets will be in equity securities.
The Fund may borrow money for leverage purposes, which can exaggerate the effect
on its net asset value for any increase or decrease in the market value of the
Fund's portfolio. Money borrowed for leveraging will be limited to 20% of the
total assets of the Fund, including the amount borrowed. The Fund anticipates
that under normal conditions, the Fund would keep the leverage portion under 10%
of its total assets. These borrowings are subject to interest costs which may or
may not be recovered by the return received on the securities purchased. Under
certain circumstances, the interest costs may exceed the return received on the
securities purchased.
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To help protect the value of the Fund's portfolio primarily from interest rate
fluctuations, the Fund may engage in interest rate swaps and other swap-related
products such as interest rate "caps" and "floors." The Fund will enter into
these transactions normally to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the
price of securities the Fund anticipates purchasing. There is no assurance that
these transactions will be successful. The Fund will not sell interest rate caps
or floors that it does not own. See "Additional Investment Information--Interest
Rate Swaps and Swap-Related Products" below.
When a defensive position is deemed advisable, all or a significant portion of
the Fund's assets may be held temporarily in cash or defensive type securities,
such as high-grade debt securities, securities of the U.S. Government or its
agencies and high quality money market instruments, including repurchase
agreements. The Fund may also: (i) purchase foreign securities and engage in
foreign currency transactions and (ii) purchase and sell options on securities,
index options, financial futures contracts and options on financial futures
contracts. See "Special Risk Factors--Foreign Securities" and "Additional
Investment Information" below.
SHORT-INTERMEDIATE GOVERNMENT FUND. The Short-Intermediate Government Fund
seeks, with equal emphasis, high current income and preservation of capital from
a portfolio composed primarily of short and intermediate-term U.S. Government
Securities. Under normal market conditions, the Fund will, as a fundamental
policy, invest at least 65% of its total assets in U.S. Government Securities
and repurchase agreements of U.S. Government Securities. See "Government Fund"
above for a discussion of U.S. Government Securities and the risks related to
those securities, including the fact that the government guarantee of U.S.
Government Securities in the Fund does not guarantee the net asset value of the
shares of the Fund.
Under normal market conditions, the Fund will maintain a Dollar-weighted average
portfolio maturity of more than two years but less than five years. The maturity
of a security held by the Fund will generally be considered to be the time
remaining until repayment of the principal amount of such security, except that
the maturity of a security may be considered to be a shorter period in the case
of (a) contractual rights to dispose of a security, because such rights limit
the period during which the Fund bears a market risk with respect to the
security, and (b) Mortgage-Backed Securities, because of possible prepayment of
principal on the mortgages underlying such securities. Short and
intermediate-term securities generally are more stable and less susceptible to
principal decline than longer term securities. While short and intermediate-term
securities in most cases offer lower yields than securities with longer
maturities, the Fund will seek to enhance income through limited investment in
fixed income securities other than U.S. Government Securities. The investment
manager believes that investment in short and intermediate-term securities
allows the Fund to seek both high current income and preservation of capital.
There is, however, no assurance that the Fund's objective will be achieved. The
return and net asset value of the Fund will fluctuate over time.
Up to 35% of the total assets of the Fund may be invested in fixed income
securities other than U.S. Government Securities. Such other fixed income
securities include: (a) corporate debt securities that are rated at the time of
purchase within the four highest grades by either Moody's (Aaa, Aa, A, or Baa)
or S&P (AAA, AA, A, or BBB); (b) commercial paper that is rated at the time of
purchase within the two highest grades by either Moody's (Prime-1 or Prime-2) or
S&P (A-1 or A-2); (c) bank certificates of deposit (including term deposits) or
bankers' acceptances issued by domestic banks (including their foreign branches)
and Canadian chartered banks having total assets in excess of $1 billion; and
(d) repurchase agreements with respect to any of the foregoing. Corporate debt
securities rated within the four highest grades by Moody's or S&P are generally
considered to be "investment grade." Like higher rated securities, securities
rated in the BBB or Baa categories are considered to have adequate capacity to
pay principal and interest, although they may have fewer protective provisions
than higher rated securities and thus may be adversely affected by severe
economic circumstances and are considered to have speculative characteristics.
During temporary defensive periods when the investment manager deems it
appropriate, the Fund may invest all or a portion of its assets in cash or
short-term high quality money market instruments, including short-term U.S.
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Government Securities and repurchase agreements with respect to such securities.
The yields on these securities tend to be lower than the yields on other
securities to be purchased by the Fund.
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. The Fund may invest in collateralized obligations which, consistent with
the limitations reflected above, may be privately issued or may be issued or
guaranteed by U.S. Government agencies or instrumentalities. The Fund also may
engage in options or financial futures transactions in connection with attempts
to hedge its portfolio investments and not for speculation. See "Additional
Investment Information" below.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the
Diversified Fund may, and the High Yield and Opportunity Funds do, invest a
substantial portion of their assets in fixed income securities offering high
current income. Subject to its specific investment objective and policies as
described above, the Income and Capital Fund may invest up to 10% of its assets
in such securities. Such high yield (high risk), fixed income securities
ordinarily will be in the lower rating categories (securities rated below the
fourth category) of recognized rating agencies or will be non-rated. Lower-rated
and non-rated securities, which are commonly referred to as "junk bonds," have
widely varying characteristics and quality. These lower rated and non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories. Accordingly, an investment in the
Diversified, High Yield or Opportunity Funds may not constitute a complete
investment program and may not be appropriate for all investors.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also are more sensitive to economic conditions than are
higher rated securities. Adverse publicity and investor perceptions regarding
lower rated bonds, whether or not based on fundamental analysis, may depress the
prices for such securities. These and other factors adversely affecting the
market value of high yield securities will adversely affect each Fund's net
asset value.
The investment philosophy of the Diversified, High Yield and Opportunity Funds
with respect to high yield (high risk) bonds is based upon the premise that over
the long term a broadly diversified portfolio of high yield fixed income
securities should, even taking into account possible losses, provide a higher
net return than that achievable on a portfolio of higher rated securities. The
Funds seek to achieve the highest yields possible while reducing relative risk
through (a) broad diversification, (b) credit analysis by the investment manager
of the issuers in which the Funds invest, (c) purchase of high yield securities
at discounts from par or stated value when practicable and (d) monitoring and
seeking to anticipate changes and trends in the economy and financial markets
that might affect the prices of portfolio securities. The investment manager's
judgment as to the "reasonableness" of the risk involved in any particular
investment will be a function of its experience in managing fixed income
investments and its evaluation of general economic and financial conditions, a
specific issuer's business and management, cash flow, earnings coverage of
interest and dividends, ability to operate under adverse economic conditions,
and fair market value of assets, and of such other considerations as the
investment manager may deem appropriate. The investment manager, while seeking
maximum current yield, will monitor current corporate developments with respect
to portfolio securities and potential investments and to broad trends in the
economy. In some circumstances, defensive strategies may be implemented to
preserve or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but are
not limited to, investments in discount securities or investments in money
market instruments as well as futures and options strategies.
High yield (high risk) securities frequently are issued by corporations in the
growth stage of their development. They may also be issued in connection with a
corporate reorganization or a corporate takeover. Companies that issue such high
yielding securities often are highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater than is the case
with higher rated securities. For example, during an economic downturn or
recession,
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highly leveraged issuers of high yield securities may experience financial
stress. During such periods, such issuers may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss from
default by the issuer is significantly greater for the holders of high yield
securities because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. Although some risk is inherent in
all securities ownership, holders of fixed income securities have a claim on the
assets of the issuer prior to the holders of common stock. Therefore, an
investment in fixed income securities generally entails less risk than an
investment in common stock of the same issuer.
A Fund may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the Funds anticipate that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and a Fund's ability to dispose of particular issues and may
also make it more difficult for a Fund to obtain accurate market quotations for
purposes of valuing the Fund's assets. Market quotations generally are available
on many high yield issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently having similar maturities
and credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry
additional risk in that, unlike bonds that pay interest throughout the period to
maturity, a Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, a Fund may
obtain no return at all on its investment.
Current federal income tax law requires the holder of a zero coupon security or
of certain pay-in-kind bonds (bonds which pay interest through the issuance of
additional bonds) to accrue income with respect to these securities prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability for federal income and excise taxes, a
Fund will be required to distribute income accrued with respect to these
securities and may be required to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
Additional information concerning high yield (high risk) securities appears
under "Appendix--Portfolio Composition of High Yield Bonds" below and
"Appendix--Ratings of Investments" in the Statement of Additional Information.
SPECIAL RISK FACTORS--FOREIGN SECURITIES. The Diversified, High Yield, Income
and Capital and Opportunity Funds have the discretion to invest a portion of
their assets in foreign securities that are traded principally in securities
markets outside the United States. These Funds currently limit investment in
foreign securities not publicly traded in the United States to 50% of total
assets in the case of the Diversified Fund and 25% of total assets in the case
of the High Yield, Income and Capital and Opportunity Funds. These Funds may
also invest without limit in U.S. Dollar denominated American Depository
Receipts ("ADRs"), which are bought and sold in the United States and are not
subject to the preceding limitation. In connection with their foreign securities
investments, these Funds may, to a limited extent, engage in foreign currency
exchange, options and futures transactions as a hedge and not for speculation.
See "Additional Investment Information--Options and Financial Futures
Transactions and Foreign Currency Transactions." The Short-Intermediate
Government Fund may, subject to its quality standards, invest in U.S.
Dollar-denominated securities of foreign issuers.
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Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
EMERGING MARKETS. A Fund's investments in foreign securities may be in developed
countries or in countries considered by the Fund's investment manager to be
developing or "emerging" markets, which involve exposure to economic structures
that are generally less diverse and mature than in the United States, and to
political systems that may be less stable. A developing or emerging market
country can be considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia, New
Zealand, Hong Kong, Singapore and most Western European countries. Currently,
investing in many emerging markets may not be desirable or feasible because of
the lack of adequate custody arrangements for a Fund's assets, overly burdensome
repatriation and similar restrictions, the lack of organized and liquid
securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, a Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The investment manager
believes that these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when
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settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Such settlement
problems may cause emerging market securities to be illiquid. The inability of a
Fund to make intended securities purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security caused by settlement problems could result either in
losses to a Fund due to subsequent declines in value of the portfolio security
or, if a Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Certain emerging markets may lack clearing
facilities equivalent to those in developed countries. Accordingly, settlements
can pose additional risks in such markets and ultimately can expose a Fund to
the risk of losses resulting from a Fund's inability to recover from a
counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund
will invest in foreign fixed income securities based on the investment manager's
analysis without relying on published ratings. Since such investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of a Fund's goals may depend more upon the abilities of the
investment manager than would otherwise be the case.
The value of the foreign fixed income securities held by a Fund, and thus the
net asset value of the Fund's shares, generally will fluctuate with (a) changes
in the perceived creditworthiness of the issuers of those securities, (b)
movements in interest rates, and (c) changes in the relative values of the
currencies in which a Fund's investments in fixed income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Fund's investments
in foreign fixed income securities, and the extent to which a Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the foreign
fixed income obligations in which a Fund will invest will have long maturities.
A longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to allow debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Fund may be unable to
collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Fund. A significant
portion of the sovereign debt in which a Fund may invest is issued as
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part of debt restructuring and such debt is to be considered speculative. There
is a history of defaults with respect to commercial bank loans by public and
private entities issuing Brady Bonds. All or a portion of the interest payments
and/or principal repayment with respect to Brady Bonds may be uncollateralized.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Fund's investments in the
securities of privatized enterprises include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet
conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as a Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization or management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprises's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Fund may invest
enjoy the protection of and receive preferential treatment from the respective
sovereigns that own or control them. After making an initial equity offering
these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. The Funds may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs") which are receipts
evidencing an arrangement with a European bank similar to that for ADRs and are
designed for use in the European and other foreign securities markets. EDRs and
GDRs are not necessarily denominated in the currency of the underlying security.
ADDITIONAL INVESTMENT INFORMATION. A Fund will not normally engage in the
trading of securities for the purpose of realizing short-term profits, but will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and its investment objective. Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such securities for inclusion in its portfolio in anticipation of a
decline in interest rates. Frequency of portfolio turnover will not be a
limiting factor should the investment
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manager deem it desirable to purchase or sell securities. The portfolio turnover
rates for the Funds (except the Opportunity Fund) are listed under "Financial
Highlights." It is anticipated that, under normal circumstances, the portfolio
turnover rate for the Opportunity Fund will not exceed 300%. High portfolio
turnover (over 100%) involves correspondingly greater brokerage commissions or
other transaction costs. Higher portfolio turnover may result in the realization
of greater net short-term capital gains. See "Dividends and Taxes" in the
Statement of Additional Information.
A Fund (other than the Adjustable Rate and Short-Intermediate Government Funds)
may take full advantage of the entire range of maturities of fixed income
securities and may adjust the average maturity of its portfolio from time to
time, depending upon its assessment of relative yields on securities of
different maturities and its expectations of future changes in interest rates.
Thus, the average maturity of a Fund's portfolio may be relatively short (under
5 years, for example) at some times and relatively long (over 10 years, for
example) at other times. Generally, since shorter term debt securities tend to
be more stable than longer term debt securities, the portfolio's average
maturity will be shorter when interest rates are expected to rise and longer
when interest rates are expected to fall. The effective Dollar-weighted average
portfolio maturity of the Adjustable Rate Fund generally will range from less
than one year to five years. The effective Dollar-weighted average portfolio
maturity of the Short-Intermediate Government Fund generally will be more than
two years but less than five years.
The Adjustable Rate, Mortgage and Short-Intermediate Government Funds each may
not borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of a Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. A Fund will not
borrow for leverage purposes. The Adjustable Rate Fund may pledge up to 15% of
its total assets to secure any such borrowings.
The Diversified, Government, High Yield and Income and Capital Funds may each
borrow money only for temporary or emergency purposes and not for leverage
purposes, and then only in an amount up to 5% of its assets, in order to meet
redemption requests without immediately selling any portfolio securities or
other assets. These Funds, except for the Government Fund, may not pledge their
assets in an amount exceeding the amount of the borrowings secured by such
pledge. The Government Fund may pledge up to 7 1/2% of its assets to secure any
such borrowings.
The maximum amount that the Opportunity Fund may borrow is one-third of the
value of its assets (including the amount borrowed). As a temporary measure for
extraordinary or emergency purposes, the Opportunity Fund may borrow money up to
one-third of the value of its total assets (including the amount borrowed) in
order to meet redemption requests without immediately selling any portfolio
securities. The Opportunity Fund may also borrow money up to 20% of the value of
its total assets (including the amount borrowed) for leverage purposes. See
"Investment Objectives, Policies and Risk Factors--Opportunity Fund" above.
A Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets, valued at the time of the transaction, would be invested in
such securities, except that the Mortgage Fund may not purchase illiquid
securities if more than 10% of its total assets would be invested in such
securities. See "Investment Policies and Techniques--Over-the-Counter Options"
in the Statement of Additional Information for a description of the extent to
which over-the-counter traded options are in effect considered as illiquid for
purposes of a Fund's limit on illiquid securities. Each Fund may invest in
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933. This rule permits otherwise restricted securities to be sold to certain
institutional buyers, such as the Funds. Such securities may be illiquid and
subject to a Fund's limitation on illiquid securities. A "Rule 144A" security
may be treated as liquid, however, if so determined pursuant to procedures
adopted by the Board of Trustees. Investing in Rule 144A securities could have
the effect of increasing the level of illiquidity in a Fund to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A securities.
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Each Fund has adopted certain fundamental investment restrictions which are
presented in the Statement of Additional Information and that, together with the
investment objective and policies of a Fund (for the Adjustable Rate and
Opportunity Funds, however, only those policies specifically designated in this
prospectus as fundamental), cannot be changed without approval by holders of a
majority of its outstanding voting shares. As defined in the Investment Company
Act of 1940 ("1940 Act"), this means the lesser of the vote of (a) 67% of the
shares of a Fund present at a meeting where more than 50% of the outstanding
shares are present in person or by proxy; or (b) more than 50% of the
outstanding shares of a Fund. Policies of the Adjustable Rate and Opportunity
Funds that are neither designated as fundamental nor incorporated into any of
the fundamental investment restrictions referred to above may be changed by the
Board of Trustees of the Fund without shareholder approval.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. As stated above, the Adjustable
Rate and Opportunity Funds may engage in interest rate swaps and other
swap-related products. Swap agreements can take many different forms and are
known by a variety of names. The Adjustable Rate and Opportunity Funds are not
limited to any particular form of swap agreement if the investment manager
determines it is consistent with a fund's investment objective and policies.
Interest rate swaps are the exchange by the Fund with another party of their
respective commitments to pay or receive interest with respect to a notional
(agreed upon) principal amount, for example, an exchange of floating rate
payments for fixed rate payments. Interest rate swaps are generally entered into
to permit the party seeking a floating or fixed rate obligation, as the case may
be, the opportunity to acquire such obligation at a lower rate than is directly
available in the credit market. The success of such a transaction depends in
large part on the availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
Additional information concerning interest rate swaps and swap-related products
is contained in the Statement of Additional Information under "Investment
Policies and Techniques--Interest Rate Swaps and Swap-Related Products."
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. A Fund may deal in options on
securities and securities indexes, which options may be listed for trading on a
national securities exchange or traded over-the-counter. In connection with
their foreign securities investments, the Diversified, High Yield, Income and
Capital and Opportunity Funds may also purchase and sell foreign currency
options.
The Diversified and Mortgage Funds may write (sell) covered call options on up
to 100% of net assets and may write (sell) secured put options on up to 50% of
net assets. The Adjustable Rate, Government, High Yield, Income and Capital and
Opportunity Funds each may write (sell) covered call and secured put options on
up to 25% of its net assets. Each such Fund may purchase put and call options
provided that no more than 5% of its net assets may be invested in premiums on
such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security or
other asset at the exercise price during or at the end of the option period. The
writer of a covered call owns securities or other assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible securities or other assets to the extent that it is
obligated as a writer. If a call written by a Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying security or other asset over the exercise price plus the premium
received. In writing puts, there is a risk that a Fund may be required to take
delivery of the underlying security or other asset at a disadvantageous price.
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Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Fund may experience material losses. However, in writing options the premium
is paid in advance by the dealer. OTC options are available for a greater
variety of securities and other assets, and a wider range of expiration dates
and exercise prices, than for exchange traded options.
A Fund may engage in financial futures transactions. Financial futures contracts
are commodity contracts that obligate the long or short holder to take or make
delivery of a specified quantity of a financial instrument, such as a security,
or the cash value of a securities index during a specified future period at a
specified price. A Fund will "cover" futures contracts sold by the Fund and
maintain in a segregated account certain liquid assets in connection with
futures contracts purchased by the Fund as described under "Investment Policies
and Techniques" in the Statement of Additional Information. In connection with
their foreign securities investments, the Diversified, High Yield, Income and
Capital and Opportunity Funds may also engage in foreign currency financial
futures transactions. A Fund will not enter into any futures contracts or
options on futures contracts if the aggregate of the contract value of the
outstanding futures contracts of the Fund and futures contracts subject to
outstanding options written by the Fund and, for each of the Adjustable Rate and
Opportunity Funds, the aggregate notional (agreed upon) principal amount of
interest rate swaps, would exceed 50% of the total assets of the Fund.
The Funds may engage in financial futures transactions and may use index options
as an attempt to hedge against market risks. For example, if a Fund owned
long-term bonds and interest rates were expected to rise, it could sell
financial futures contracts. If interest rates did increase, the value of the
bonds in the Fund would decline, but this decline would be offset in whole or in
part by an increase in the value of the Fund's futures contracts. If, on the
other hand, long-term interest rates were expected to decline, the Fund could
hold short-term debt securities and benefit from the income earned by holding
such securities, while at the same time the Fund could purchase futures
contracts on long-term bonds or the cash value of a securities index. Thus, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them. The futures contracts and short-term debt
securities could then be liquidated and the cash proceeds used to buy long-term
bonds.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. For example, if
participants in the futures market elect to close out their contracts rather
than meet margin requirements, distortions in the normal relationship between
the underlying assets and futures market could result. Price distortions also
could result if investors in futures contracts decide to make or take delivery
of underlying securities or other assets rather than engage in closing
transactions because of the resultant reduction in the liquidity of the futures
market. In addition, because, from the point of view of speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities or other assets and movements in
the prices of futures contracts, a correct forecast of market trends by the
investment manager still may not result in a successful hedging transaction. If
any of these events should occur, a Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets. The costs
incurred in connection with futures transactions could reduce a Fund's return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a Fund
may expire worthless, in which case a Fund would lose the premium paid therefor.
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A Fund may engage in futures transactions only on commodities exchanges or
boards of trade. A Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Fund owns or intends to purchase.
FOREIGN CURRENCY TRANSACTIONS. The Diversified, High Yield, Income and Capital
and Opportunity Funds may each invest a limited portion of its assets in
securities denominated in foreign currencies. These Funds may engage in foreign
currency transactions in connection with their investments in foreign securities
but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Fund measured in U.S.
Dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains that might result from a positive
change in such currency relationships. A Fund may also hedge its foreign
currency exchange rate risk by engaging in foreign currency financial futures
and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Diversified, High Yield, Income and Capital
and Opportunity Funds do not intend to enter into forward contracts for the
purchase of a foreign currency if they would have more than 15% of the value of
their total assets committed to such contracts. The Funds segregate cash or
liquid securities to the extent required by applicable regulation in connection
with forward foreign currency exchange contracts entered into for the purchase
of a foreign currency. A Fund generally does not enter into a forward contract
with a term longer than one year.
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DERIVATIVES. In addition to options and financial futures transactions,
consistent with its objective, each Fund may invest in a broad array of
financial instruments and securities in which the value of the instrument or
security is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate or a foreign currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). The types of
derivatives used by each Fund and the techniques employed by the investment
manager may change over time as new derivatives and strategies are developed or
regulatory changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures or other derivatives contracts and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivatives intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; and (e) the possible non-performance of
the counter-party to the derivative contract.
DELAYED DELIVERY TRANSACTIONS. Any of the Funds may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Fund to purchase or sell
securities with payment and delivery to take place in the future (not to exceed
120 days from trade date for the Government Fund) in order to secure what is
considered to be an advantageous price or yield to the Fund at the time of
entering into the transaction. The value of fixed yield securities to be
delivered in the future will fluctuate as interest rates vary. Because a Fund is
required to set aside cash or other liquid securities to satisfy its commitments
to purchase when-issued or delayed delivery securities, flexibility to manage
the Fund's investments may be limited if commitments to purchase when-issued or
delayed delivery securities were to exceed 25% of the value of its assets.
To the extent a Fund engages in when-issued or delayed delivery transactions, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. A Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but the Fund would not pay for such
securities or start earning interest on them until they are delivered. However,
when the Fund purchases securities on a when-issued or delayed delivery basis,
it immediately assumes the risks of ownership, including the risk of price
fluctuation. Failure to deliver a security purchased on a when-issued or delayed
delivery basis may result in a loss or missed opportunity to make an alternative
investment. Depending on market conditions, the Fund's when-issued and delayed
delivery purchase commitments could cause its net asset value per share to be
more volatile, because such securities may increase the amount by which its
total assets, including the value of when-issued and delayed delivery securities
it holds, exceed its net assets.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, under
which it acquires ownership of a security and the broker-dealer or bank agrees
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Fund's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal
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Reserve Book-Entry System. Repurchase agreements will be limited to transactions
with financial institutions believed by the investment manager to present
minimal credit risk. The investment manager will monitor on an on-going basis
the creditworthiness of the broker-dealers and banks with which the Funds may
engage in repurchase agreements. Repurchase agreements maturing in more than
seven days will be considered as illiquid for purposes of the Funds' limitations
on illiquid securities.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds (other than the Government Fund) may lend securities
(principally to broker-dealers) without limit where such loans are callable at
any time and are continuously secured by segregated collateral (cash or other
liquid securities) equal to no less than the market value, determined daily, of
the securities loaned. The Funds will receive amounts equal to dividends or
interest on the securities loaned. The Funds will also earn income for having
made the loan. Any cash collateral pursuant to these loans will be invested in
short-term money market instruments. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of the securities fail financially. However, the loans would be
made only to firms deemed by the investment manager to be of good standing, and
when the investment manager believes the potential earnings to justify the
attendant risk. Management will limit such lending to not more than one-third of
the value of a Fund's total assets.
COLLATERALIZED OBLIGATIONS. Subject to its investment objective and policies, a
Fund may purchase collateralized obligations, including interest only ("IO") and
principal only ("PO") securities. A collateralized obligation is a debt security
issued by a corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that is collateralized by a portfolio or pool of mortgages,
Mortgage-Backed Securities, U.S. Government Securities or other assets. The
issuer's obligation to make interest and principal payments is secured by the
underlying pool or portfolio of securities. Collateralized obligations issued or
guaranteed by a U.S. Government agency or instrumentality, such as the Federal
Home Loan Mortgage Corporation, are considered U.S. Government Securities for
purposes of this prospectus. Privately-issued collateralized obligations
collateralized by a portfolio of U.S. Government Securities are not direct
obligations of the U.S. Government or any of its agencies or instrumentalities
and are not considered U.S. Government Securities for purposes of this
prospectus. A variety of types of collateralized obligations are available
currently and others may become available in the future.
Since the collateralized obligations may be issued in classes with varying
maturities and interest rates, the investor may obtain greater predictability of
maturity than with direct investments in mortgage-backed securities. Classes
with shorter maturities may have lower volatility and lower yield while those
with longer maturities may have higher volatility and higher yield. This
provides the investor with greater control over the characteristics of the
investment in a changing interest rate environment. With respect to interest
only and principal only securities, an investor has the option to select from a
pool of underlying collateral the portion of the cash flows that most closely
corresponds to the investor's forecast of interest rate movements. These
instruments tend to be highly sensitive to prepayment rates on the underlying
collateral and thus place a premium on accurate prepayment projections by the
investor.
A Fund may invest in collateralized obligations whose yield floats inversely
against a specified index rate. These "inverse floaters" are more volatile than
conventional fixed or floating rate collateralized obligations and the yield
thereon, as well as the value thereof, will fluctuate in inverse proportion to
changes in the index upon which interest rate adjustments are based. As a
result, the yield on an inverse floater will generally increase when market
yields (as reflected by the index) decrease and decrease when market yields
increase. The extent of the volatility of inverse floaters depends on the extent
of anticipated changes in market rates of interest. Generally, inverse floaters
provide for interest rate adjustments based upon a multiple of the specified
interest index, which further increases their volatility. The degree of
additional volatility will be directly proportional to the size of the multiple
used in determining interest rate adjustments.
Additional information concerning collateralized obligations is contained in the
Statement of Additional Information under "Investment Policies and
Techniques--Collateralized Obligations."
32
<PAGE> 113
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the investment manager of each Fund and
provides each Fund with continuous professional investment supervision. ZKI is
one of the largest investment managers in the country and has been engaged in
the management of investment funds for more than forty-nine years. ZKI and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, affiliated insurance companies and other corporate, pension,
profit-sharing and individual accounts representing approximately $89 billion
under management (including approximately $16 billion in U.S. Government
securities). ZKI acts as investment manager for 32 open-end and seven closed-end
investment companies, with 86 separate investment portfolios, representing more
than 2.5 million shareholder accounts. ZKI is an indirect subsidiary of Zurich
Insurance Company, a leading internationally recognized provider of insurance
and financial services in property/casualty and life insurance, reinsurance and
structured financial solutions as well as asset management.
Zurich Insurance Company ("Zurich") has entered into a definitive agreement with
Scudder, Stevens & Clark, Inc. ("Scudder") pursuant to which Zurich will acquire
approximately 70% of Scudder. Upon completion of the transaction, Scudder will
change its name to Scudder Kemper Investments, Inc. ("SKI"), and ZKI will be
combined with SKI. Because the transaction would constitute an assignment of the
Funds' investment management agreements with ZKI under the Investment Company
Act of 1940, ZKI sought approval of new agreements. The Funds' boards and
shareholders have approved new agreements with SKI. If any remaining
contingencies are timely met, the transaction is expected to close December 31,
1997. Zurich will own 69.5% of SKI and senior employees of SKI will hold the
remaining 30.5%. SKI will be headquartered in New York City and the chief
executive officer of SKI will be Edmond D. Villani, Scudder's president and
chief executive officer.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by ZKI.
The investment management agreements provide that ZKI shall act as each Fund's
investment adviser, manage its investments and provide it with various services
and facilities. Zurich Investment Management Limited ("ZIML"), 1 Fleet Place,
London, U.K. EC4M 7RQ, an affiliate of ZKI, is the sub-adviser for the
Diversified, High Yield, Income and Capital and Opportunity Funds. ZIML is an
indirect subsidiary of Zurich Insurance Company and has served as sub-adviser
for mutual funds since December, 1996 and investment adviser for certain
institutional accounts since August, 1988. Under the terms of the Sub-Advisory
Agreement between ZIML and ZKI, ZIML renders investment advisory and management
services with regard to such portion of the Fund's portfolio as may be allocated
to ZIML by ZKI from time to time for management of foreign securities, including
foreign currency transactions and related investments. ZKI pays ZIML for its
services a sub-advisory fee, payable monthly at the annual rate of .30% of the
portion of the average daily net assets of the Fund allocated by ZKI to ZIML for
management. ZIML is not expected to continue as sub-adviser after the closing of
the acquisition of Scudder by Zurich.
Richard L. Vandenberg (since March, 1996) has been a portfolio manager of the
Government Fund, the Mortgage Fund and portfolio co-manager with Elizabeth A.
Byrnes of the Short-Intermediate Government Fund. Mr. Vandenberg (since March,
1996) and Elizabeth A. Byrnes (since 1994) are portfolio co-managers of the
Adjustable Rate Fund. Mr. Vandenberg joined ZKI in March, 1996 and is a Senior
Vice President of ZKI and a Vice President of the Government, Mortgage,
Adjustable Rate and Short-Intermediate Government Funds. Immediately prior to
joining ZKI, he was a senior vice president and portfolio manager of an
investment management firm. He received a B.B.A. and M.B.A., both in Finance,
Investments and Banking, from the University of Wisconsin, Madison, Wisconsin.
Ms. Byrnes joined ZKI in 1982 and is a First Vice President of ZKI and a Vice
President of the Adjustable Rate Fund. She received a B.A. from Miami
University, Oxford, Ohio.
Michael A. McNamara (since 1990) and Harry E. Resis, Jr. (since 1992) are the
portfolio co-managers of the High Yield Fund. Daniel J. Doyle (since 1997), Mr.
McNamara (since 1997) and Mr. Resis (since 1997) are the portfolio co-managers
of the Opportunity Fund. Mr. Doyle joined ZKI in February 1986 and is First Vice
33
<PAGE> 114
President of ZKI and a Vice President of the Opportunity Fund. He received a
B.S. in Finance from Northern Illinois University, Dekalb, Illinois, and an
M.B.A. in Finance from the University of Chicago, Chicago, Illinois. Mr. Doyle
is a Chartered Financial Analyst. Mr. McNamara joined ZKI in February 1972 and
is a Senior Vice President of ZKI and a Vice President of the High Yield and
Opportunity Funds. He received a B.S. in Business Administration from the
University of Missouri, St. Louis, Missouri, and an M.B.A. in Finance from
Loyola University, Chicago, Illinois. Mr. Resis joined ZKI in June, 1988 and is
currently a Senior Vice President of ZKI and a Vice President of the High Yield
and Opportunity Funds. He received a B.A. in Finance from Michigan State
University, East Lansing, Michigan.
Robert Cessine is the portfolio manager (since 1994) and a Vice President of the
Income and Capital Fund. Mr. Cessine joined ZKI in 1993 and is a Senior Vice
President of ZKI and director of investment grade corporate and sovereign bond
research. Before joining ZKI in 1993, Mr. Cessine was a senior corporate bond
analyst and chairman of the bond selection committee of an investment management
company. He received a B.S. in Economics from the University of Wisconsin,
Madison, Wisconsin, an M.S. in Agricultural and Resource Economics from the
University of Maryland, Baltimore/College Park, Maryland and an M.S. in Finance
from the University of Wisconsin, Madison, Wisconsin. Mr. Cessine is a Chartered
Financial Analyst.
Diversified Income Fund is managed by a team of portfolio managers who are
specialists in the basic sectors in which it invests. Messrs J. Patrick
Beimford, Jr., Robert S. Cessine, Michael A. McNamara, Harry E. Resis, Jr.,
Jonathan W. Trutter and Richard L. Vandenberg are the members of the team. Mr.
Beimford joined ZKI in April 1976 and is currently an Executive Vice President
of ZKI and a Vice President of the Diversified Fund. He received a B.S.I.M. in
Business from Purdue University, West Lafayette, Indiana, and an M.B.A. in
Finance from the University of Chicago, Chicago, Illinois. Mr. Beimford is a
Chartered Financial Analyst. Mr. Trutter has an A.B. with dual majors in East
Asian Languages and International Relations from the University of Southern
California, Los Angeles California and an M.B.A. from Kellogg Graduate School of
Management at Northwestern University, Chicago, Illinois. He is also a Certified
Public Accountant. See above for information on the background of Messrs.
Cessine, McNamara, Resis and Vandenberg.
The Funds pay ZKI investment management fees, payable monthly, at the annual
rates shown below.
<TABLE>
<CAPTION>
ADJUSTABLE RATE, INCOME DIVERSIFIED
AND CAPITAL, MORTGAGE AND
AVERAGE DAILY NET ASSETS AND SHORT-INTERMEDIATE GOV'T HIGH YIELD GOVERNMENT OPPORTUNITY
- ------------------------ ---------------------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
$0 - $250 million.......................... .55% .58% .45% .65%
$250 million - $1 billion.................. .52 .55 .43 .62
$1 billion - $2.5 billion.................. .50 .53 .41 .60
$2.5 billion - $5 billion.................. .48 .51 .40 .58
$5 billion - $7.5 billion.................. .45 .48 .38 .55
$7.5 billion - $10 billion................. .43 .46 .36 .53
$10 billion - $12.5 billion................ .41 .44 .34 .51
Over $12.5 billion......................... .40 .42 .32 .49
</TABLE>
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, a wholly owned
subsidiary of ZKI, is the principal underwriter and distributor of each Fund's
shares and acts as agent of each Fund in the sale of its shares. KDI bears all
its expenses of providing services pursuant to the distribution agreement,
including the payment of any commissions. KDI provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. KDI bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and each Fund bears the expense of
registering its shares with the Securities and Exchange Commission. KDI may
enter into related selling group agreements with various broker-dealers,
34
<PAGE> 115
including affiliates of KDI, that provide distribution services to investors.
KDI also may provide some of the distribution services.
CLASS A SHARES. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class B shares. This fee is
accrued daily as an expense of Class B shares. KDI also receives any contingent
deferred sales charges. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class B Shares." KDI currently compensates firms for
sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from each Fund, payable monthly, at the annual rate of .75% of average
daily net assets of each Fund attributable to Class C shares. This fee is
accrued daily as an expense of Class C shares. KDI currently advances to firms
the first year distribution fee at a rate of .75% of the purchase price of Class
C shares. For periods after the first year, KDI currently pays firms for sales
of Class C shares a distribution fee, payable quarterly, at an annual rate of
.75% of net assets attributable to Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or a Fund. KDI also receives
any contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class C Shares."
RULE 12B-1 PLAN. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. As of December 1997, each Fund's Rule 12b-1 Plan has
been separated from its distribution agreement. The table below shows amounts
paid in connection with each Fund's Rule 12b-1 Plan during its 1997 fiscal year
(except the Opportunity Fund, which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
DISTRIBUTION FEES CONTINGENT DEFERRED
DISTRIBUTION EXPENSES PAID BY FUND SALES CHARGES PAID
INCURRED BY UNDERWRITER TO UNDERWRITER TO UNDERWRITER
-------------------------- ---------------------- ----------------------
FUND CLASS B CLASS C CLASS B CLASS C CLASS B CLASS C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate................. $ 676,000 96,000 51,000 9,000 31,000 0
Diversified..................... $ 5,084,000 348,000 2,148,000 83,000 419,000 5,000
Government...................... $ 1,540,000 171,000 528,000 62,000 234,000 1,000
High Yield...................... $26,641,000 2,833,000 8,925,000 657,000 1,473,000 58,000
Income and Capital.............. $ 1,363,000 185,000 600,000 53,000 211,000 2,000
Mortgage........................ $ 1,121,000 60,000 6,685,000 16,000 1,362,000 1,000
Short-Intermediate Government... $ 558,000 155,000 1,071,000 34,000 327,000 3,000
</TABLE>
If a Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of a Fund to make payments to KDI pursuant to the Plan will cease
and the Fund will not be required to make any payments past the termination
date. Thus, there is no legal obligation for the Fund to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under the Plan may or
may not be sufficient to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of each Fund pursuant to administrative services
agreements ("administrative agreements"). KDI may enter into related
arrangements with various broker-dealer firms and other service or
administrative firms ("firms"), that provide
35
<PAGE> 116
services and facilities for their customers or clients who are investors of the
Funds. Such administrative services and assistance may include, but are not
limited to, establishing and maintaining accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding each
Fund and its special features and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. KDI bears all its expenses of providing services pursuant to the
administrative agreement, including the payment of any service fees. For
services under the administrative agreements, each Fund pays KDI a fee, payable
monthly, at an annual rate of up to .25% of average daily net assets of Class A,
B and C shares of such Fund. With respect to Class A shares, KDI then pays each
firm a service fee at an annual rate of (a) up to .15% of net assets (.25% for
the Mortgage and Short-Intermediate Government Funds) of those accounts that it
maintains and services for each Fund attributable to shares acquired prior to
October 1, 1993, and (b) up to .25% of net assets of those accounts that it
maintains and services for each Fund attributable to Class A shares acquired on
or after October 1, 1993. With respect to Class B shares and Class C shares, KDI
pays each firm a service fee, normally payable quarterly, at an annual rate of
up to .25% of net assets of those accounts in the Fund that it maintains and
services attributable to Class B shares and Class C shares, respectively. Firms
to which service fees may be paid include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based on assets in the accounts in the month following the month of purchase and
the fee continues until terminated by KDI or a Fund. The fees are calculated
monthly and normally paid quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first year
service fee at a rate of up to .25% of the purchase price of such shares. For
periods after the first year, KDI currently intends to pay firms a service fee
at a rate of up to .25% (calculated monthly and normally paid quarterly) of the
net assets attributable to Class B and Class C shares maintained and serviced by
the firm and the fee continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for each Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from each
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of each Fund while this procedure is
in effect will depend upon the proportion of Fund assets that is in accounts for
which a firm provides administrative services as well as, with respect to Class
A shares (except for the Mortgage and Short-Intermediate Government Funds), the
date when shares representing such assets were purchased. In addition, KDI may,
from time to time, from its own resources, pay certain firms additional amounts
for ongoing administrative services and assistance provided to their customers
and clients who are shareholders of the Funds.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. For Funds that invest in foreign
securities, The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York
11245, as custodian, has custody of all securities and cash of each Fund held
outside the United States. IFTC also is the Funds' transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company ("KSvC"), an affiliate of ZKI, serves as "Shareholder Service
Agent" of the Funds and as such, performs all of IFTC's duties as transfer agent
and dividend-paying agent. For a description of shareholder service agent fees
payable to the Shareholder Service Agent, see "Investment Manager and
Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. ZKI and ZIML place all orders for purchases and sales of
a Fund's securities. Subject to seeking best execution of orders, ZKI and ZIML
may consider sales of shares of a Fund and other funds managed by ZKI or its
affiliates as a factor in selecting broker-dealers. See "Portfolio Transactions"
in the Statement of Additional Information.
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<PAGE> 117
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally declares and distributes monthly dividends of net
investment income and distributes any net realized capital gains at least
annually.
Dividends paid by a Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income dividends and capital gain dividends, if any, of a Fund will be credited
to shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value, except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Funds reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions in the aggregate amount of $10
or less are automatically reinvested in shares of the same Fund unless the
shareholder requests that such policy not be applied to the shareholder's
account.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, will not be liable for federal income taxes to the extent its
earnings are distributed. Dividends derived from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gain regardless of how long the shares have been held and whether
received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 18 months and at a maximum rate of 28% on
gains realized by a Fund from securities held more than 12 months but not more
than 18 months. Dividends declared in October, November or December to
shareholders of record as of a date in one of those months and paid during the
following January are treated as paid on December 31 of the calendar year
declared. A portion of the dividends paid by the Diversified, High Yield or
Opportunity Funds may qualify for the dividends received deduction available to
corporate shareholders. However, it is anticipated that only a small portion, if
any, of the dividends paid by such Funds will so qualify. No portion of the
dividends paid by the Adjustable Rate, Government, Income and Capital, Mortgage
or Short-Intermediate Government Funds will qualify for the dividends received
deduction.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
Fund dividends that are derived from interest on direct (but not guaranteed)
obligations of the U.S. Government and certain of its agencies and
instrumentalities may be exempt from state and local taxes in certain states. In
other states, arguments can be made that such distributions should be exempt
from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the
U.S. Supreme Court's interpretation of that provision in AMERICAN
37
<PAGE> 118
BANK AND TRUST CO. v. DALLAS COUNTY, 463 U.S. 855 (1983). Shareholders should
consult their tax advisers regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes.
Each Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
("IRAs") or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes,
including information regarding any foreign taxes and credits, will be provided
after the end of the calendar year. Shareholders are encouraged to retain copies
of their account confirmation statements or year-end statements for tax
reporting purposes, including information regarding any foreign taxes and
credits. However, those who have incomplete records may obtain historical
account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
For each Fund, the net asset value per share is determined separately for each
class by dividing the value of the Fund's net assets attributable to that class
by the number of shares of that class outstanding. The per share net asset value
of the Class B and Class C shares of a Fund will generally be lower than that of
the Class A shares of the Fund because of the higher expenses borne by the Class
B and Class C shares. Fixed income securities are valued by using market
quotations, or independent pricing services that use prices provided by market
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Portfolio securities
that are primarily traded on a domestic securities exchange or securities listed
on the NASDAQ National Market are valued at the last sale price on the exchange
or market where primarily traded or listed or, if there is no recent sale price
available, at the last current bid quotation. Portfolio securities that are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges where
primarily traded. A security that is listed or traded on more than one exchange
is valued at the quotation on the exchange determined to be the primary market
for such security by the Board of Trustees or its delegates. Securities not so
traded or listed are valued at the last current bid quotation if market
quotations are available. Equity options are valued at the last sale price
unless the bid price is higher or the ask price is lower, in which event such
bid or asked price is used. Exchange traded fixed income options, financial
futures and options thereon are valued at the settlement price established each
day by the board of trade or exchange on which they are traded. Over-the-counter
traded options, swap agreements and swap-related products are valued based upon
current prices provided by market makers. Financial futures and options thereon
are valued at the settlement price established each day by the board of trade or
exchange on which they are traded. Other securities and assets are valued at
fair value as determined in good faith by the Board of Trustees. Because of the
need to obtain prices as of the close of trading on various exchanges throughout
the world, the calculation of net asset value of a Fund investing in foreign
securities does not necessarily take place contemporaneously with the
determination of the prices of the Fund's foreign securities, which may be made
prior to the determination of net asset value. For purposes of determining the
net asset value of a Fund investing
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<PAGE> 119
in foreign securities, all assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of such currencies against U.S. Dollars as last
quoted by a recognized dealer. If an event were to occur, after the value of a
security was so established but before the net asset value per share was
determined, which was likely to materially change the net asset value, then that
security would be valued using fair value determinations by the Board of
Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------------- ------------------------ ----------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
4.5% of the public offering price reduced for certain purchases
(3.5% for the Adjustable Rate and
Short-Intermediate Government
Funds)
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
The minimum initial investment for each Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion. In order to begin accruing income dividends as soon as
possible, purchasers may wire payment to United Missouri Bank of Kansas City,
N.A., 10th and Grand Avenue, Kansas City, Missouri 64106.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
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<PAGE> 120
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers of the Adjustable Rate and Short-Intermediate
Government Funds choosing the initial sales charge alternative is the net asset
value plus a sales charge, as set forth below.
ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
As a Allowed to
As a Percentage of Dealers as a
Percentage of Net Asset Percentage of
Amount of Purchase Offering Price Value* Offering Price
- ------------------ -------------- ------------- --------------
<S> <C> <C> <C>
Less than $100,000......................................... 3.50% 3.63% 3.00%
$100,000 but less than $250,000............................ 3.00 3.09 2.50
$250,000 but less than $500,000............................ 2.50 2.56 2.25
$500,000 but less than $1 million.......................... 2.00 2.04 1.75
$1 million and over........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
The public offering price of Class A shares for purchasers of the Diversified,
Government, High Yield, Income and Capital, Mortgage and Opportunity Funds
choosing the initial sales charge alternative is the net asset value plus a
sales charge, as set forth below.
DIVERSIFIED, GOVERNMENT, HIGH YIELD, INCOME AND CAPITAL, MORTGAGE AND
OPPORTUNITY FUNDS
<TABLE>
<CAPTION>
Sales Charge
-------------------------------------------------------------
As a Allowed to
As a Percentage of Dealers as a
Percentage of Net Asset Percentage of
Amount of Purchase Offering Price Value* Offering Price
- ------------------ -------------- ------------- --------------
<S> <C> <C> <C>
Less than $100,000......................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000............................ 3.50 3.63 3.00
$250,000 but less than $500,000............................ 2.60 2.67 2.25
$500,000 but less than $1 million.......................... 2.00 2.04 1.75
$1 million and over........................................ .00** .00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Fund may be purchased at net asset value to the extent that
the amount invested represents the net proceeds from a redemption of shares of a
mutual fund for which ZKI or an affiliate does not serve as investment manager
("non-Kemper Fund") provided that: (a) the investor has previously paid either
an initial sales charge in connection with the purchase of the non-Kemper Fund
shares redeemed or a contingent deferred
40
<PAGE> 121
sales charge in connection with the redemption of the non-Kemper Fund shares,
and (b) the purchase of Fund shares is made within 90 days after the date of
such redemption. To make such a purchase at net asset value, the investor or the
investor's dealer must, at the time of purchase, submit a request that the
purchase be processed at net asset value pursuant to this privilege. KDI may in
its discretion compensate firms for sales of Class A shares under this privilege
at a commission rate of .50% of the amount of Class A shares purchased. The
redemption of the shares of the non-Kemper fund is, for federal income tax
purposes, a sale upon which a gain or loss may be realized.
Class A shares of a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features;" or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, .50% on the next $45 million and .25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through KSvC. For purposes of determining the appropriate commission percentage
to be applied to a particular sale, KDI will consider the cumulative amount
invested by the purchaser in a Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of a Fund at net asset value under the Large Order NAV Purchase Privilege is not
available if another net asset value purchase privilege also applies.
Effective on February 1, 1996, Class A shares of a Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as HOWARD AND AUDREY TABANKIN, ET AL. V. KEMPER
SHORT-TERM GLOBAL INCOME FUND, ET AL., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
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<PAGE> 122
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a Fund, its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Funds,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Fund, Inc. ("KVF") on September 8, 1995, and have
continuously owned shares of KVF (or a Kemper Fund acquired by exchange of KVF
shares) since that date, for themselves or members of their families, and (d)
any trust or pension, profit-sharing or other benefit plan for only such
persons. Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of the Funds for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund Class A shares may purchase
Fund shares at net asset value hereunder. Class A shares may be sold at net
asset value in any amount to unit investment trusts sponsored by Ranson &
Associates, Inc. In addition, unitholders of unit investment trusts sponsored by
Ranson & Associates, Inc. or its predecessors may purchase a Fund's Class A
shares at net asset value through reinvestment programs described in the
prospectuses of such trusts that have such programs. Class A shares of a Fund
may be sold at net asset value through certain investment advisers registered
under the Investment Advisers Act of 1940 and other financial services firms
that adhere to certain standards established by KDI, including a requirement
that such shares be sold for the benefit of their clients participating in an
investment advisory program under which such clients pay a fee to the investment
adviser or other firm for portfolio management and other services. Such shares
are sold for investment purposes and on the condition that they will not be
resold except through redemption or repurchase by the Funds. The Funds may also
issue Class A shares at net asset value in connection with the acquisition of
the assets of or merger or consolidation with another investment company, or to
shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of a Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of .50% of the
amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon
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<PAGE> 123
redemption of Class B shares. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares originally representing
Initial Shares of a KIP Portfolio will automatically convert to Class A shares
of the applicable Fund six years after issuance of the Initial Shares for shares
issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for KDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's Fund
account will be converted to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Fund is the next determined net asset value. No initial sales charge is imposed.
Since Class C shares are sold without an initial sales charge, the full amount
of the investor's purchase payment will be invested in Class C shares for his or
her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of .75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of .75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a Fund or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5 million including purchases pursuant to the "Combined Purchases," "Letter
of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be
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<PAGE> 124
appropriate. KDI does not believe that termination of a relationship with a bank
would result in any material adverse consequences to a Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of a Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
KSvC, (iii) the registered representative placing the trade is a member of
ProStar, a group of persons designated by KSvC in acknowledgement of their
dedication to the employee benefit plan area and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Funds. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Funds or other funds underwritten by KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
See "Purchase and Redemption of Shares" in the Statement of Additional
Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Funds through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, each
Fund may temporarily suspend the offering of any class of its shares to new
investors. During the period of such suspension, persons who are already
shareholders of such class of the Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this
prospectus.
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<PAGE> 125
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that Fund next determined following receipt by the Shareholder Service Agent
of a properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request
accompanied by any outstanding share certificates in proper form for transfer.
When a Fund is asked to redeem shares for which it may not have yet received
good payment (i.e., purchases by check, EXPRESS-Transfer or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Fund of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred sales charge (see "Contingent Deferred
Sales Charge--Class B Shares" below), and the redemption of Class C shares
within the first year following purchase may be subject to a contingent deferred
sales charge (see "Contingent Deferred Sales Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts, effective January 1998,
the Funds may assess a quarterly fee of $9 on an account with a balance below
$1,000 for the quarter. The fee will not apply to accounts enrolled in an
automatic investment program, Individual Retirement Accounts or employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS,
including loss resulting from fraudulent or unauthorized transactions, as long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor
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<PAGE> 126
or guardian is named in the account registration. Other institutional account
holders and guardian account holders of custodial accounts for gifts and
transfers to minors may exercise this special privilege of redeeming shares by
telephone request or written request without signature guarantee subject to the
same conditions as individual account holders and subject to the limitations on
liability described under "General" above, provided that this privilege has been
pre-authorized by the institutional account holder or guardian account holder by
written instruction to the Shareholder Service Agent with signatures guaranteed.
Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed
under this privilege of redeeming shares by telephone request until such shares
have been owned for at least 10 days. This privilege of redeeming shares by
telephone request or by written request without a signature guarantee may not be
used to redeem shares held in certificated form and may not be used if the
shareholder's account has had an address change within 30 days of the redemption
request. During periods when it is difficult to contact the Shareholder Service
Agent by telephone, it may be difficult to use the telephone redemption
privilege, although investors can still redeem by mail. The Funds reserve the
right to terminate or modify this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Fund can be redeemed and proceeds sent by federal wire
transfer to a single previously designated account. Requests received by the
Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption request of $250,000 or more may be delayed by the Fund for up to
seven days if ZKI deems it appropriate under then current market conditions.
Once authorization is on file, the Shareholder Service Agent will honor requests
by telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder Service Agent with signatures guaranteed as described above or
contact the firm through which shares of the Fund were purchased. Shares
purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be
redeemed by wire transfer until such shares have been owned for at least 10
days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
redemption privilege. The Funds reserve the right to terminate or modify this
privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and .50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
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deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
YEAR OF CONTINGENT
REDEMPTION DEFERRED
AFTER SALES
PURCHASE CHARGE
- ---------- ----------
<S> <C>
First................................................................. 4%
Second................................................................ 3%
Third................................................................. 3%
Fourth................................................................ 2%
Fifth................................................................. 2%
Sixth................................................................. 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR OF ---------------------------------------------------------------------------------------
REDEMPTION SHARES PURCHASED ON OR AFTER
AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
---------- ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
First................... 4% 3% 5%
Second.................. 3% 3% 4%
Third................... 3% 2% 3%
Fourth.................. 2% 2% 2%
Fifth................... 2% 1% 2%
Sixth................... 1% 1% 1%
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below) and (d) for redemptions made
pursuant to any IRA systematic withdrawal based on the shareholder's life
expectancy including, but not limited to, substantially equal periodic payments
described in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2;
and (e) for redemptions to satisfy required minimum distributions after age
70 1/2 from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Kemper IRA accounts). The contingent deferred
sales charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to
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<PAGE> 128
10% of the total value of plan assets invested in a Fund), (c) redemptions in
connection with distributions qualifying under the hardship provisions of the
Internal Revenue Code and (d) redemptions representing returns of excess
contributions to such plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months
later the value of the shares has grown by $1,000 through reinvested dividends
and by an additional $1,000 in appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1997 will be eligible for the second year's charge if redeemed on or
after December 1, 1998. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund
or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment in Class A shares, Class B
shares or Class C shares, as the case may be, of a Fund or of other Kemper
Mutual Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost and purchase
date for purposes of the contingent deferred sales charge. Also, a holder of
Class B shares who has redeemed shares may reinvest up to the full amount
redeemed, less any applicable contingent deferred sales charge that may have
been imposed upon the redemption of such shares, at net asset value in Class A
shares of a Fund or of the other Kemper Mutual Funds listed under "Special
Features--Class A Shares--Combined Purchases." Purchases through
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<PAGE> 129
the reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of a Funds'
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
SPECIAL FEATURES
CLASS A SHARES -- COMBINED PURCHASES. Each Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth
Fund ("Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"),
which are not considered "Kemper Mutual Funds" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund, and
(c) the value of any other plan investments, such as guaranteed investment
contracts and employer stock, maintained on such subaccount record keeping
system.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.
CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
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<PAGE> 130
CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Investors Municipal
Cash Fund and Investors Cash Trust are available on exchange but only through a
financial services firm having a services agreement with KDI.
Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege
may be exchanged for Class A shares of another Kemper Mutual Fund or a Money
Market Fund under the exchange privilege described above without paying any
contingent deferred sales charge at the time of exchange. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed in accordance with the foregoing requirements provided that the
shares redeemed will retain their original cost and purchase date for purposes
of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features --Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without any contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of a Fund and Class C shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For determining whether there is a contingent deferred
sales charge that may be imposed upon the redemption of the Class C shares
received by exchange, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). For purposes of
determining whether the 15 Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, direction, or
advice, including without limitation, accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to KSvC, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the
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<PAGE> 131
shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-621-1048,
subject to the limitations on liability under "Redemption or Repurchase of
Shares -- General." Any share certificates must be deposited prior to any
exchange of such shares. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the telephone
exchange privilege. The exchange privilege is not a right and may be suspended,
terminated or modified at any time. Except as otherwise permitted by applicable
regulations, 60 days' prior written notice of any termination or material change
will be provided. Exchanges may only be made for funds that are available for
sale in the shareholder's state of residence. Currently, Tax-Exempt California
Money Market Fund is available for sale only in California and the portfolios of
Investors Municipal Cash Fund are available for sale only in certain states.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
Kemper Fund. Exchanges are subject to the terms and conditions described above
under "Exchange Privilege" except that the $1,000 minimum investment requirement
for the Kemper Fund acquired on exchange is not applicable. This privilege may
not be used for the exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from ANY PERSON to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares -- General." Once enrolled
in EXPRESS-Transfer, a shareholder can initiate a transaction by calling
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (minimum $50 maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Funds may terminate or modify
this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) A Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
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<PAGE> 132
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Fund will not knowingly permit additional investments of less
than $2,000 if the investor is at the same time making systematic withdrawals.
KDI will waive the contingent deferred sales charge on redemptions of Class A
shares purchased under the Large Order NAV Purchase Privilege, Class B shares
and Class C shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Funds.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
- - Individual Retirement Accounts ("IRAs") with IFTC as custodian. This includes
Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE"), IRA
accounts and Simplified Employee Pension Plan ("SEP") IRA accounts and
prototype documents.
- - 403(b)(7) Custodial Accounts also with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax advisers before establishing a retirement plan.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield" and "average annual total return" and "total return."
Performance information will be computed separately for Class A, Class B and
Class C shares. Each of these figures is based upon historical results and is
not representative of the future performance of any class of a Fund. A Fund with
fees or expenses being waived or absorbed by ZKI may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
A Fund's yield is a measure of the net investment income per share earned over a
specific one month or 30-day period expressed as a percentage of the maximum
offering price of the Fund's shares at the end of the period. Yield is an
annualized figure, which means that it is assumed that a Fund generates the same
level of net
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investment income over a one year period. Net investment income is assumed to be
compounded semiannually when it is annualized.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a Fund
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. ("Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
A Fund may depict the historical performance of the securities in which the Fund
may invest over periods reflecting a variety of market or economic conditions
either alone or in comparison with alternative investments, performance indexes
of those investments or economic indicators. A Fund may also describe its
portfolio holdings and depict its size or relative size compared to other mutual
funds, the number and make-up of its shareholder base and other descriptive
factors concerning the Fund.
The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the Constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the Fund. Distribution rate is simply a measure of the
level of dividends distributed for a specified period. It differs from yield,
which is a measure of the income actually earned by the Fund's investments, and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and unrealized appreciation or depreciation of, such
investments during the period. Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly long-term gains (which may be non-recurring) and
may not
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include the effect of amortization of bond premiums. As reflected under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information," option writing can limit the potential for capital appreciation.
Class A shares of each Fund are sold at net asset value plus a maximum sales
charge of 4.5% of the offering price (3.5% for the Adjustable Rate and
Short-Intermediate Government Funds). While the maximum sales charge is normally
reflected in a Fund's Class A performance figures, certain total return
calculations may not include such charge and those results would be reduced if
it were included. Class B shares and Class C shares are sold at net asset value.
Redemptions of Class B shares within the first six years after purchase may be
subject to a contingent deferred sales charge that ranges from 4% during the
first year to 0% after six years. Redemption of Class C shares within the first
year after purchase may be subject to a 1% contingent deferred sales charge.
Average annual total return figures do, and total return figures may, include
the effect of the contingent deferred sales charge for the Class B shares and
Class C shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included.
Each Fund's returns and net asset value will fluctuate and shares of a Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning each Fund's performance appears in the Statement of
Additional Information. Additional information about each Fund's performance
also appears in its Annual Report to Shareholders, which is available without
charge from the applicable Fund.
CAPITAL STRUCTURE
The Adjustable Rate, Diversified, Government, Income and Capital Funds, and High
Yield Series are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Adjustable Rate Fund was
organized as a business trust under the laws of Massachusetts on May 28, 1987.
Prior to January 1, 1992, the Fund was known as "Kemper Enhanced Government
Income Fund." The Diversified Fund was organized as a business trust under the
laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Option Income Fund, Inc., a Maryland corporation organized in 1977. Prior to
February 1, 1989, the Fund was known as "Kemper Option Income Fund." The
Government Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
U.S. Government Securities Fund, Inc., a Maryland corporation (formerly known as
Kemper Fund For Government Guaranteed Securities, Inc.) organized in 1980 as
successor to a Pennsylvania business trust organized in 1977. The High Yield and
Opportunity Funds are separate series, or "Portfolios," of Kemper High Yield
Series. The High Yield Series was organized as a business trust under the laws
of Massachusetts on October 24, 1985 with a single portfolio. Effective January
31, 1986, that Trust, pursuant to a reorganization succeeded to the assets and
liabilities of Kemper High Yield Fund, Inc., a Maryland corporation organized in
1977. Prior to October 1, 1997, the Trust was known as Kemper High Yield Fund.
The Income and Capital Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Income and Capital Preservation Fund, Inc., a Maryland corporation organized in
1972. The Mortgage and Short-Intermediate Government Funds are separate series,
or "Portfolios", of Kemper Portfolios ("KP"), an open-end management investment
company organized as a business trust under the laws of Massachusetts on August
9, 1985. Effective November 20, 1987, KP pursuant to a reorganization succeeded
to the assets and liabilities of Investment Portfolios, Inc., a Maryland
corporation organized on March 26, 1982. After such reorganization, KP was known
as Investment Portfolios until February 1, 1991, and thereafter until May 28,
1994, as Kemper Investment Portfolios, when the name of KP became "Kemper
Portfolios." Until December 1, 1989, the Mortgage Fund was known as the
"Government Plus Portfolio" and prior to May 28, 1994, the Mortgage
54
<PAGE> 135
Fund was known as the "Government Portfolio." Prior to May 28, 1994, the
Short-Intermediate Government Fund was known as the Short-Intermediate
Government Portfolio.
Each Trust may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of each
Trust may authorize the issuance of additional classes and additional Portfolios
if deemed desirable, each with its own investment objective, policies and
restrictions. Since the Trusts may offer multiple Portfolios, each is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio and are subject to any preferences, rights or privileges of any
classes of shares of the Portfolio. Currently, each Portfolio offers four
classes of shares. These are Class A, Class B and Class C shares, as well as
Class I shares, which have different expenses, that may affect performance, and
are available for purchase exclusively by the following investors: (a)
tax-exempt retirement plans of ZKI and its affiliates; and (b) the following
investment advisory clients of ZKI and its investment advisory affiliates that
invest at least $1 million in a Portfolio: (1) unaffiliated benefit plans, such
as qualified retirement plans (other than individual retirement accounts and
self-directed retirement plans); (2) unaffiliated banks and insurance companies
purchasing for their own accounts; and (3) endowment funds of unaffiliated
non-profit organizations. Shares of each Portfolio have equal noncumulative
voting rights except that Class B and Class C shares have separate and exclusive
voting rights with respect to each Portfolio's Rule 12b-1 Plan. Shares of each
class also have equal rights with respect to dividends, assets and liquidation
subject to any preferences (such as resulting from different Rule 12b-1
distribution fees), rights or privileges of any classes of shares of a
Portfolio. Shares of each Portfolio are fully paid and nonassessable when
issued, are transferable without restriction and have no preemptive or
conversion rights. The Trusts are not required to hold annual shareholder
meetings and do not intend to do so. However, they will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment management agreement. Subject to
the Agreement and Declaration of Trust of each Trust, shareholders may remove
trustees. If shares of more than one Portfolio for any Trust are outstanding,
shareholders will vote by Portfolio and not in the aggregate or by class except
when voting in the aggregate is required under the 1940 Act, such as for the
election of trustees, or when voting by class is appropriate.
55
<PAGE> 136
APPENDIX--PORTFOLIO COMPOSITION OF HIGH YIELD BONDS
The table below reflects the composition by quality rating of the portfolios of
the Diversified, High Yield and Opportunity Funds. Percentages for each Fund
reflect the net asset weighted average of the percentage for each category on
the last day of each month in the twelve month period ended October 31, 1997
(the one-month period for the Opportunity Fund). The table reflects the
percentage of total net assets represented by fixed income securities rated by
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), by unrated fixed income securities and by other assets. The percentage
shown reflects the higher of the Moody's or S&P rating. U.S. Government
securities, whether or not rated, are reflected as Aaa and AAA (highest
quality). Cash equivalents include money market instruments, repurchase
agreements, net payables and receivables, treasuries with a maturity of less
than one year and cash. Other assets include options, financial futures
contracts and equity securities. As noted under "Investment Objectives, Policies
and Risk Factors" the Diversified, High Yield and Opportunity Funds invest in
high yielding, fixed income securities without relying upon published ratings.
The allocations in the table are not necessarily representative of the
composition of the portfolios at other times. Portfolio composition will change
over time.
END OF THE MONTH COMPOSITION OF PORTFOLIO BY QUALITY AS AN AVERAGE PERCENTAGE OF
NET ASSETS (NOVEMBER 1, 1996-OCTOBER 31, 1997)
<TABLE>
<CAPTION>
MOODY'S/S&P RATING DIVERSIFIED HIGH YIELD OPPORTUNITY GENERAL DEFINITION OF
CATEGORY FUND FUND FUND BOND QUALITY
------------------ ----------- ---------- ----------- ---------------------
<S> <C> <C> <C> <C>
Cash Equivalents........................ (1)% 5% 12%
Aaa/AAA................................. 50 2 0 Highest quality
Aa/AA................................... 0 0 0 High quality
A/A..................................... 3 0 0 Upper medium grade
Baa/BBB................................. 4 1 0 Medium grade
Ba/BB................................... 11 16 8 Some speculative elements
B/B..................................... 27 68 75 Speculative
Caa/CCC................................. 1 3 0 More speculative
Ca/CC, C/C.............................. 0 0 0 Very speculative
D....................................... 0 0 0 In default
Not Rated............................... 3 4 4
Other Assets............................ 0 1 1
--- --- ---
Net Assets.............................. 100% 100% 100%
</TABLE>
The description of each bond quality category set forth in the table above is
intended to be a general guide and not a definitive statement as to how Moody's
and S&P define such rating category. A more complete description of the rating
categories is set forth under "Appendix--Ratings of Investments" in the
Statement of Additional Information. The ratings of Moody's and S&P represent
their opinions as to the quality of the securities that they undertake to rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality.
56
<PAGE> 137
PROSPECTUS
KEMPER INCOME FUNDS
DECEMBER 30, 1997
--------------
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
KEMPER DIVERSIFIED INCOME FUND
KEMPER U.S. GOVERNMENT
SECURITIES FUND
KEMPER HIGH YIELD FUND
KEMPER HIGH YIELD
OPPORTUNITY FUND
KEMPER INCOME AND CAPITAL
PRESERVATION FUND
KEMPER U.S. MORTGAGE FUND
KEMPER SHORT-INTERMEDIATE
GOVERNMENT FUND
--------------
KEMPER
[KEMPER LOGO]
[KEMPER LOGO] Investment Manager
Zurich Kemper Investments, Inc.
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
KFIF-1 (12/97) [RECYCLED PAPER LOGO]
KDI712237
<PAGE> 138
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
DATED: , 1998
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides information about the Kemper
Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund" or a "Fund"),
an open-end management investment company organized as a Massachusetts business
trust (a "Trust"), in addition to information contained in the Prospectus/Proxy
Statement of the Adjustable Rate Fund, dated , 1998, which
also serves as the proxy statement of the Kemper Short-Intermediate Government
Fund (the "Short-Intermediate Fund" or a "Fund"), a series of the Kemper
Portfolios, an open-end investment company organized as a Massachusetts business
trust (also a "Trust"), in connection with the issuance of Class A, B and C
shares of the Adjustable Rate Fund to shareholders of the Short-Intermediate
Fund. This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus/Proxy Statement, into which it has been
incorporated by reference and which may be obtained by contacting the Funds
located at 222 South Riverside Plaza, Chicago, Illinois 60606 (telephone No.
(800) 621-1048 or (800) 414-7447).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the Short-Intermediate Fund...... S-1
Additional Information About the Adjustable Rate Fund....... S-2
Additional Information About the Short-Intermediate Fund.... S-2
Financial Statements........................................ S-2
Agreement and Plan of Reorganization........................ Exhibit A
Statement of Additional Information for the Adjustable Rate
Fund and the Short-Intermediate Fund...................... Exhibit B
Financial Statements for the Adjustable Rate Fund........... Exhibit C
Financial Statements for the Short-Intermediate Fund........ Exhibit D
Pro Forma Financial Statements.............................. Exhibit E
</TABLE>
The Funds will provide, without charge, upon the written or oral request of any
person to whom this Statement of Additional Information is delivered, a copy of
any and all documents that have been incorporated by reference in the
registration statement of which this Statement of Additional Information is a
part.
PROPOSED REORGANIZATION OF THE SHORT-INTERMEDIATE FUND
The shareholders of the Short-Intermediate Fund are being asked to approve an
Agreement and Plan of Reorganization by and between the Adjustable Rate Fund and
the Short-Intermediate Fund (the "Agreement") pursuant to which the
Short-Intermediate Fund would (i) transfer all of its assets to the Adjustable
Rate Fund in exchange for Class A, B and C shares of beneficial interest of the
Adjustable Rate Fund and the Adjustable Rate Fund's assumption of the
liabilities of the Short-Intermediate Fund, (ii) distribute such shares of the
Adjustable Rate Fund to the holders of shares of the Short-Intermediate Fund and
(iii) be liquidated, dissolved and terminated as a series of the Kemper
Portfolios in accordance with the Trust's Declaration of Trust. A copy of the
Agreement is attached hereto as Exhibit A.
S-1
<PAGE> 139
ADDITIONAL INFORMATION ABOUT THE ADJUSTABLE RATE FUND
Incorporated herein by reference in its entirety is the Statement of Additional
Information of the Adjustable Rate Fund, dated December 30, 1997, attached as
Exhibit B to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE SHORT-INTERMEDIATE FUND
Incorporated herein by reference in its entirety is the Statement of Additional
Information of the Short-Intermediate Fund, dated December 30, 1997, attached as
Exhibit B to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their entireties are (i) for the Adjustable
Rate Fund, [the unaudited financial statements for the six months ended February
28, 1998 and the audited financial statements for the fiscal year ended August
31, 1997, attached as Exhibit C hereto; (ii) for the Short-Intermediate Fund,
the unaudited financial statements for the six months ended March 31, 1998 and
the audited financial statements for the fiscal year ended September 30, 1997,
attached as Exhibit D hereto; and (iii) the proforma financial statements as of
August 31, 1998 attached as Exhibit E hereto.
S-2
<PAGE> 140
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
September 18, 1998, by and between the Kemper Adjustable Rate U.S. Government
Fund (the "Acquiring Fund") an open-end management investment company organized
as a business trust formed under the laws of the Commonwealth of Massachusetts,
and the Kemper Short-Intermediate Government Fund (the "Acquired Fund") series
of Kemper Portfolios, an open-end management investment company organized as a
business trust formed under the laws of the Commonwealth of Massachusetts (the
"Acquired Fund Trust").
WITNESSETH:
WHEREAS, the Board of Trustees of the Acquiring Fund and the Acquired Fund
Trust, on behalf of the Acquired Fund, have determined that entering into this
Agreement for the Acquiring Fund to acquire the assets and liabilities of the
Acquired Fund is in the best interests of the shareholders of each respective
fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
a. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the Acquired Fund will convey, transfer
and deliver to the Acquiring Fund at the closing, provided for in Section 2
hereof, all of the existing assets of the Acquired Fund (including accrued
interest to the Closing Date), free and clear of all liens, encumbrances
and claims whatsoever (the assets so transferred collectively being
referred to as the "Assets").
b. CONSIDERATION. In consideration thereof, the Acquiring Fund agrees that
on the Closing Date, defined in Section 2 hereof, the Acquiring Fund will
(i) deliver to the Acquired Fund, full and fractional Class A, Class B,
Class C shares of beneficial interest of the Acquiring Fund having net
asset values per share in an amount equal to the aggregate dollar value of
the Assets net of any liabilities of the Acquired Fund described in Section
3E hereof (the "Liabilities") determined pursuant to Section 3A of this
Agreement (collectively, the "Acquiring Fund Shares") and (ii) assume all
of the Acquired Fund's Liabilities. The calculation of full and fractional
Class A, Class B and Class C shares of beneficial interest of the Acquiring
Fund to be exchanged shall be carried out to no less than two (2) decimal
places. On the Closing Date, the Acquiring Fund shall deliver to the
Acquired Fund the Acquiring Fund Shares in the amount determined pursuant
to this Section 1B and the Acquired Fund thereafter shall, in order to
effect the distribution of such shares to the Acquired Fund's shareholders
in liquidation of the Acquired Fund and in exchange for the shareholders'
shares of the Acquired Fund, instruct the Acquiring Fund to register the
pro rata interest in the Acquiring Fund Shares (in full and fractional
shares) of each of the holders of record of shares of the Acquired Fund in
accordance with their holdings of other Class A, Class B or Class C shares
and shall provide as part of such instruction a complete and updated list
of such holders (including addresses and taxpayer identification numbers),
and the Acquiring Fund agrees promptly to comply with said instruction. The
Acquiring Fund shall have no obligation to inquire as to the validity,
propriety or correctness of such instruction, but shall assume that such
instruction is valid, proper and correct. All Acquiring Fund Shares
delivered to the Acquired Fund in exchange for such Assets shall be
delivered at net asset value without sales load, commission or other
similar fee being imposed.
A-1
<PAGE> 141
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall be [ ] or such later date as
the parties may mutually agree (the "Closing Date").
3. PROCEDURE FOR REORGANIZATION.
a. VALUATION. The value of the Assets and Liabilities of the Acquired Fund
to be transferred and assumed, respectively, by the Acquiring Fund shall be
computed as of the Closing Date, in the manner set forth in the most recent
Prospectus and Statement of Additional Information of the Acquiring Fund
(collectively, the "Acquiring Fund Prospectus"), copies of which have been
delivered to the Acquired Fund.
b. DELIVERY OF FUND ASSETS. The Assets shall be delivered to [INVESTORS
FIDUCIARY TRUST COMPANY, 801 PENNSYLVANIA AVENUE, KANSAS CITY, MISSOURI
64105], as custodian for the Acquiring Fund (the "Custodian") for the
benefit of the Acquiring Fund, duly endorsed in proper form for transfer in
such condition as to constitute a good delivery thereof, free and clear of
all liens, encumbrances and claims whatsoever, in accordance with the
custom of brokers, and shall be accompanied by all necessary state stock
transfer stamps.
c. FAILURE TO DELIVER SECURITIES. If the Acquired Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the
Acquired Fund's securities for the reason that any of such securities
purchased by the Acquired Fund have not yet been delivered to it by the
Acquired Fund's broker or brokers, then, in lieu of such delivery, the
Acquired Fund shall deliver to the Custodian, with respect to said
securities, executed copies of an agreement of assignment and due bills
executed on behalf of said broker or brokers, together with such other
documents as may be required by the Acquiring Fund or Custodian, including
brokers' confirmation slips.
d. SHAREHOLDER ACCOUNTS. The Acquiring Fund, in order to assist the
Acquired Fund in the distribution of the Acquiring Fund Shares to the
Acquired Fund shareholders after delivery of the Acquiring Fund Shares to
the Acquired Fund, will establish pursuant to the request of the Acquired
Fund an open account with the Acquiring Fund for each shareholder of the
Acquired Fund and, upon request by the Acquired Fund, shall transfer to
such account the exact number of full and fractional Class A, Class B and
Class C shares of the Acquiring Fund then held by the Acquired Fund
specified in the instruction provided pursuant to Section 2 hereof. The
Acquiring Fund is not required to issue certificates representing Acquiring
Fund Shares. Upon liquidation or dissolution of the Acquired Fund,
certificates representing shares of beneficial interest stock of the
Acquired Fund shall become null and void.
e. LIABILITIES. The Liabilities shall include all of Acquired Fund's
liabilities, debts, obligations, and duties of whatever kind or nature,
whether absolute, accrued, contingent, or otherwise, whether or not arising
in the ordinary course of business, whether or not determinable at the
Closing Date, and whether or not specifically referred to in this
Agreement.
f. EXPENSES. The expenses associated with the transactions contemplated
herein will be borne by Scudder Kemper Investments, Inc., investment
manager for the Funds.
g. LIQUIDATION AND DISSOLUTION. As soon as practicable after the Closing
Date but in no event later than one year after the Closing Date, the Board
of Trustees of the Acquired Fund Trust and the Acquired Fund shall take all
necessary and proper action to completely liquidate and terminate the
Acquired Fund as a series in accordance with Massachusetts law and the
Acquiring Fund Trust's Declaration of Trust. Immediately after the Closing
Date, the stock transfer books relating to the Acquired Fund shall be
closed and no transfer of shares shall thereafter be made on such books.
A-2
<PAGE> 142
4. ACQUIRED FUND'S REPRESENTATIONS AND WARRANTIES.
The Acquired Fund hereby represents and warrants to the Acquiring Fund, which
representations and warranties are true and correct on the date hereof, and
agrees with the Acquiring Fund that:
a. ORGANIZATION. The Acquired Fund Trust is a business trust duly formed,
existing and in good standing under the laws of the Commonwealth of
Massachusetts and is duly authorized to transact business in the
Commonwealth of Massachusetts. The Acquired Fund is a separate series of
the Acquired Fund Trust duly designated in accordance with the applicable
provisions of the Acquired Fund Trust's Declaration of Trust. The Acquired
Fund Trust and Acquired Fund are qualified to do business in all
jurisdictions in which they are required to be so qualified, except
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the Acquired Fund Trust or Acquired Fund. The Acquired
Fund has all material federal, state and local authorizations necessary to
own all of the properties and assets and to carry on its business as now
being conducted, except authorizations which the failure to so obtain would
not have a material adverse effect on the Acquired Fund.
b. REGISTRATION. The Acquired Fund Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end management
company and such registration has not been revoked or rescinded. The
Acquired Fund is a diversified series of the Acquired Fund Trust. The
Acquired Fund Trust and the Acquired Fund are in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder. All of
the outstanding shares of beneficial interest of the Acquired Fund have
been duly authorized and are validly issued, fully paid and nonassessable
and not subject to pre-emptive or dissenters' rights.
c. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations
and changes in net assets of the Acquired Fund audited as of and for the
fiscal year ended September 30, 1997, true and complete copies of which
have been heretofore furnished to the Acquiring Fund, fairly represent the
financial condition and the results of operations of the Acquired Fund as
of and for their respective dates and periods in conformity with generally
accepted accounting principles applied on a consistent basis during the
periods involved.
d. FINANCIAL STATEMENTS. The Acquired Fund shall furnish to the Acquiring
Fund [(i) an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and
changes in net assets of the Acquired Fund for the period ended March 31,
1998; and (ii)] within five (5) business days after the Closing Date, an
unaudited statement of assets and liabilities as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results
of the Acquired Fund's operations as of, and for the period ending on, the
dates of such statements in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved and
the results of its operations and changes in financial position for the
periods then ended; and such financial statements shall be certified by the
Treasurer of the Acquired Fund as complying with the requirements hereof.
e. CONTINGENT LIABILITIES. There are no contingent Liabilities of the
Acquired Fund not disclosed in the financial statements delivered pursuant
to Sections 4C and 4D which would materially affect the Acquired Fund's
financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the Acquired
Fund which would, if adversely determined, materially affect the Acquired
Fund's financial condition. All Liabilities were incurred by the Acquired
Fund in the ordinary course of its business.
f. MATERIAL AGREEMENTS. The Acquired Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in
the Acquired Fund's Prospectus and Statement of Additional Information,
there are
A-3
<PAGE> 143
no material agreements outstanding relating to the Acquired Fund to which
the Acquired Fund is a party.
g. TAX RETURNS. At the date hereof, all federal and other material tax
returns and reports of the Acquired Fund required by law to have been filed
by such dates shall have been filed, and all federal and other taxes shown
thereon shall have been paid so far as due, or provision shall have been
made for the payment thereof, and to the best of the Acquired Fund's
knowledge no such return is currently under audit and no assessment has
been asserted with respect to any such return.
h. CORPORATE AUTHORITY. The Acquired Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein.
The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein have been duly
authorized by the Acquired Fund's Board of Trustees, and except for
obtaining approval of the holders of the shares of the Acquired Fund, no
other corporate acts or proceedings by the Acquired Fund are necessary to
authorize this Agreement and the transactions contemplated herein. This
Agreement has been duly executed and delivered by the Acquired Fund and
constitutes the legal, valid and binding obligation of Acquired Fund
enforceable in accordance with its terms.
i. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Acquired Fund does not and will not
(i) violate any provision of the Acquired Fund Trust's Declaration of Trust
or the Designation of Series of the Acquired Fund, (ii) violate any
statute, law, judgment, writ, decree, order, regulation or rule of any
court or governmental authority applicable to the Acquired Fund, (iii)
result in a violation or breach of, or constitute a default under any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument or obligation to which the Acquired Fund is subject, or
(iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the Acquired Fund. No consent,
approval, authorization, order or filing with or notice to any court or
governmental authority or agency is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement and no
consent of or notice to any third party or entity is required for the
consummation by the Acquired Fund of the transactions contemplated by this
Agreement.
j. TITLE. The Acquired Fund has good and marketable title to the Assets,
free and clear of all liens, mortgages, pledges, encumbrances, charges,
claims and equities whatsoever other than a lien for taxes not yet due and
payable, and full right, power and authority to sell assign, transfer and
deliver such Assets; upon delivery of such Assets, the Acquiring Fund will
receive good and marketable title to such Assets, free and dear of all
liens, mortgage encumbrances, charges, claims and equities other than a
lien for taxes not yet due and payable.
k. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of
the Registration Statement, as amended or as supplemented if it shall have
been amended or supplemented, conforms and will conform as it relates to
the Acquired Fund, in all material respects, to the applicable requirements
of the applicable federal and state securities laws and the rules and
regulations of the SEC thereunder, and do not and will not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
except that no representations or warranties in this Section 4K apply to
statements or omissions made in reliance upon and in conformity with
written information concerning the Acquiring Fund furnished to the Acquired
Fund by the Acquiring Fund.
l. TAX QUALIFICATION. The Acquired Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each
of its taxable years; and has satisfied the distribution requirements
imposed by Section 852 of the Code for each of its taxable years.
m. FAIR MARKET VALUE. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Acquiring
Fund and those to which the Assets are subject.
A-4
<PAGE> 144
5. THE ACQUIRING FUND'S REPRESENTATIONS AND WARRANTIES.
The Acquiring Fund hereby represents and warrants to the Acquired Fund, which
representations and warranties are true and correct on the date hereof, and
agrees with the Acquired Fund that:
a. ORGANIZATION. The Acquiring Fund is a business trust duly formed,
existing and in good standing under the laws of the Commonwealth of
Massachusetts and is duly authorized to transact business in the
Commonwealth of Massachusetts. The Acquiring Fund is qualified to do
business in all jurisdictions in which it is required to be so qualified,
except jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Acquiring Fund. The Acquiring Fund has all
material federal, state and local authorizations necessary to own all of
the properties and assets and to carry on its business and the business
thereof as now being conducted, except authorizations which the failure to
so obtain would not have a material adverse effect on the Acquiring Fund.
b. REGISTRATION. The Acquiring Fund is registered under the 1940 Act as an
open-end management company and such registration has not been revoked or
rescinded. The Acquiring Fund is a diversified fund. The Acquiring Fund is
in compliance in all material respects with the 1940 Act and the rules and
regulations thereunder. All of the outstanding shares of beneficial
interest of the Acquiring Fund have been duly authorized and are validly
issued, fully paid and non-assessable and not subject to pre-emptive
dissenters rights.
c. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations
and changes in net assets of the Acquiring Fund audited as of and for the
fiscal year ended August 31, 1997, true and complete copies of which have
been heretofore furnished to the Acquired Fund fairly represent the
financial condition and the results of operations of the Acquiring Fund as
of and for their respective dates and periods in conformity with generally
accepted accounting principles applied on a consistent basis during the
periods involved.
d. FINANCIAL STATEMENTS. The Acquiring Fund shall furnish to the Acquired
Fund [(i) an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and
changes in net assets of the Acquiring Fund for the period ended February
28, 1998 and (ii)] within five (5) business days after the Closing Date, an
unaudited statement of assets and liabilities as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results
of its operations as of, and for the period ending on, the dates of such
statements in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved and the results
of its operations and changes in financial position for the periods then
ended; and such financial statements shall be certified by the Treasurer of
the Acquiring Fund as complying with the requirements hereof.
e. CONTINGENT LIABILITIES. There are no contingent liabilities of the
Acquiring Fund not disclosed in the financial statements delivered pursuant
to Sections 5C and 5D which would materially affect the Acquiring Fund's
financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the Acquiring
Fund which would, if adversely determined, materially affect the Acquiring
Fund's financial condition.
f. MATERIAL AGREEMENTS. The Acquiring Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in
the Acquiring Fund Prospectus and Statement of Additional Information there
are no material agreements outstanding relating to the Acquiring Fund to
which the Acquiring Fund is a party.
g. TAX RETURNS. At the date hereof, all federal and other material tax
returns and reports of the Acquiring Fund required by law to have been
filed by such dates shall have been filed, and all federal and other taxes
shall have been paid so far as due, or provision shall have been made for
the payment thereof, and to the best of the Acquiring Fund's knowledge no
such return is currently under audit and no assessment has been asserted
with respect to any such return.
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h. CORPORATE AUTHORITY. The Acquiring Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein.
The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein have been duly
authorized by the Acquiring Fund's Board of Trustees, no other corporate
acts or proceedings by the Acquiring Fund are necessary to authorize this
Agreement and the transactions contemplated herein. This Agreement has been
duly executed and delivered by the Acquiring Fund and constitutes a valid
and binding obligation of the Acquiring Fund enforceable in accordance with
its terms.
i. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Acquiring Fund does not and will not
(i) violate any provision of the Acquiring Fund's Declaration of Trust,
(ii) violate any statute, law, judgment, writ, decree, order, regulation or
rule of any court or governmental authority applicable to the Acquiring
Fund, (iii) result in a violation or breach of, or constitute a default
under, any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument or obligation to which the Acquiring Fund is
subject or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the Acquiring Fund. No consent,
approval, authorization, order or filing with or notice to any court or
governmental authority or agency is required for the consummation by the
Acquiring Fund of the transactions contemplated by this Agreement and no
consent of or notice to any third party or entity is required for the
consummation by the Acquiring Fund of the transactions contemplated by this
Agreement.
j. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Acquiring
Fund which would materially affect its financial condition.
k. SHARES OF THE ACQUIRING FUND: AUTHORIZATION. The Acquiring Fund Shares
to be issued pursuant to Section 1 hereof have been duly authorized and,
when issued in accordance with this Agreement, will be validly issued and
fully paid and non-assessable by the Acquiring Fund and conform in all
material respects to the description thereof contained in the Acquiring
Fund's Prospectus furnished to the Acquired Fund.
l. SHARES OF THE ACQUIRING FUND: REGISTRATION. The Acquiring Fund Shares to
be issued pursuant to Section 1 hereof will be duly registered under the
Securities Act and all applicable state securities laws.
m. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of
the Registration Statement, and at all times subsequent thereto up to and
including the Closing Date, as amended or as supplemented if they shall
have been amended or supplemented, conforms and will conform as it relates
to the Acquiring Fund, in all material respects, to the applicable
requirements of the applicable federal securities laws and the rules and
regulations of the SEC thereunder, and do not and will not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
except that no representations or warranties in this Section 5M apply to
statements or omissions made in reliance upon and in conformity with
written information concerning the Acquired Fund furnished to the Acquiring
Fund by the Acquired Fund.
n. TAX QUALIFICATION. The Acquiring Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each
of its taxable years; and has satisfied the distribution requirements
imposed by Section 852 of the Code for each of its taxable years.
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6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Acquired Fund and Acquiring Fund (except as expressly
contemplated or permitted by this Agreement) agree as follows:
a. OTHER ACTIONS. The Acquired Fund and Acquiring Fund shall operate only
in the ordinary course of business consistent with prior practice. No party
shall take any action that would, or reasonably would be expected to,
result in any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect.
b. GOVERNMENT FILINGS; CONSENTS. The Acquired Fund and Acquiring Fund shall
file all reports required to be filed by the Acquired Fund and Acquiring
Fund with the SEC between the date of this Agreement and the Closing Date
and shall deliver to the other party copies of all such reports promptly
after the same are filed. Except where prohibited by applicable statutes
and regulations, each party shall promptly provide the other (or its
counsel) with copies of all other filings made by such party with any
state, local or federal government agency or entity in connection with this
Agreement or the transactions contemplated hereby. Each of the Acquired
Fund and the Acquiring Fund shall use all reasonable efforts to obtain all
consents, approvals, and authorizations required in connection with the
consummation of the transactions contemplated by this Agreement and to make
all necessary filings with the Secretary of State of the Commonwealth of
Massachusetts.
c. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other
and furnish to the other the information relating to the Acquired Fund or
Acquiring Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be,
to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The Acquired Fund shall promptly prepare and
provide the Prospectus/Proxy Statement to the Acquiring Fund and the
Acquiring Fund shall promptly prepare and file with the SEC the
Registration Statement, in which the Prospectus/Proxy Statement will be
included as a prospectus. In connection with the Registration Statement,
insofar as it relates to the Acquired Fund and its affiliated persons, the
Acquiring Fund shall only include such information as is approved by the
Acquired Fund for use in the Registration Statement. The Acquiring Fund
shall not amend or supplement any such information regarding the Acquired
Fund and such affiliates without the prior written consent of the Acquired
Fund which consent shall not be unreasonably withheld or delayed. The
Acquiring Fund shall promptly notify and provide the Acquired Fund with
copies of all amendments or supplements filed with respect to the
Registration Statement. The Acquiring Fund shall use all reasonable efforts
to have the Registration Statement declared effective under the Securities
Act as promptly as practicable after such filing. The Acquiring Fund shall
also take any action (other than qualifying to do business in any
jurisdiction in which it is now not so qualified) required to be taken
under any applicable state securities laws in connection with the issuance
of the Acquiring Fund's shares of beneficial interest in the transactions
contemplated by this Agreement, and the Acquired Fund shall furnish all
information concerning the Acquired Fund and the holders of the Acquired
Fund's shares of beneficial interest as may be reasonably requested in
connection with any such action.
d. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Acquired Fund shall make available to the Acquiring Fund a copy of each
report, schedule, registration statement and other documents (each, a
"Document", collectively, the "Documents") filed or received by it during
such period pursuant to the requirements of federal or state securities
laws (other than Documents which such party is not permitted to disclose
under applicable law). During the period prior to the Closing Date, the
Acquiring Fund shall make available to the Acquired Fund each Document
pertaining to the transactions contemplated hereby filed or received by it
during such period pursuant to federal or state securities laws (other than
Documents which such party is not permitted to disclose under applicable
law).
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e. SHAREHOLDERS MEETING. The Acquired Fund shall call a meeting of the
Acquired Fund shareholders to be held as promptly as practicable for the
purpose of voting upon the approval of this Agreement and the transactions
contemplated herein, and shall furnish a copy of the Prospectus/Proxy
Statement and form of proxy to each shareholder of the Acquired Fund as of
the record date for such meeting of shareholders. The Board shall recommend
to the Acquired Fund shareholders' approval of this Agreement and the
transactions contemplated herein, subject to fiduciary obligations under
applicable law.
f. COORDINATION OF PORTFOLIOS. The Acquired Fund and Acquiring Fund
covenant and agree to coordinate the respective portfolios of the Acquired
Fund and Acquiring Fund from the date of the Agreement up to and including
the Closing Date in order when the Assets are added to the Acquiring Fund's
portfolio, the resulting portfolio will meet the Acquiring Fund's
investment objective, policies and restrictions, as set forth in the
Acquiring Fund's Prospectus, a copy of which has been delivered to the
Acquired Fund.
g. DISTRIBUTION OF THE SHARES. On the Closing Date, the Acquired Fund
covenants that it shall cause to be distributed the Acquiring Fund Shares
in the proper pro rata amount for the benefit of Acquired Fund's
shareholders and such that the Acquired Fund shall not continue to hold
amounts of said shares so as to cause a violation of Section 12(d)(1) of
the 1940 Act. The Acquired Fund covenants further that, pursuant to Section
3G, it shall liquidate and dissolve as promptly as practicable after the
Closing Date. The Acquired Fund covenants to use all reasonable efforts to
cooperate with the Acquiring Fund and the Acquiring Fund's transfer agent
in the distribution of said shares.
h. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the Acquired Fund and the Acquiring Fund
represents that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee
or any other commission or similar fee in connection with any of the
transactions contemplated by this Agreement, and each party shall hold the
other harmless from and against any all claims, liabilities or obligations
with respect to any such fees, commissions or expenses asserted by any
person to be due or payable in connection with any of the transactions
contemplated by this Agreement on the basis of any act or statement alleged
to have been made by such first party or its affiliate.
i. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes
of this Agreement the appropriate party or parties to this Agreement shall
take all such necessary action.
j. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Acquired Fund and the Acquiring Fund
will consult with each other before issuing any press releases or otherwise
making any public statements with respect to this Agreement or the
transactions contemplated herein and shall not issue any press release or
make any public statement prior to such consultation, except as may be
required by law or the rules of any national securities exchange on which
such party's securities are traded.
k. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Acquired Fund Trust, the Acquiring Fund nor
the Acquired Fund shall take any action, or cause any action to be taken
(including, without limitation, the filing of any tax return) that is
inconsistent with such treatment or results in the failure of the
transaction to qualify as a reorganization within meaning of Section 368(a)
of the Code. At or prior to the Closing Date, the Acquired Fund Trust, the
Acquiring Fund and the Acquired Fund will take such action, or cause such
action to be taken, as is reasonably necessary to enable Vedder, Price,
Kaufman & Kammholz, counsel to both Funds, to render the tax opinion
contemplated herein.
l. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date,
the Acquired Fund may declare and pay to its stockholders a dividend or
other distribution in an amount large enough so that it will have
distributed substantially all (and in any event not less than 98%) of its
investment
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company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current
taxable year through the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
Acquired Fund, of the following conditions:
a. ACQUIRED FUND SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of at least a majority of the outstanding shares of beneficial
interest in the Acquired Fund.
b. ACQUIRING FUND SHAREHOLDER APPROVAL. A new investment objective and
policies shall have been approved by a majority of the outstanding voting
securities of the Acquiring Fund.
c. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Acquiring Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition,
results of operations, business properties or assets of the Acquiring Fund,
and the Acquired Fund shall have received a certificate of an authorized
officer of the Acquiring Fund satisfactory in form and substance to the
Acquired Fund so stating. The Acquiring Fund shall have performed and
complied in all material respects with all agreements, obligations and
covenants required by this Agreement to be so performed or complied with by
it on or prior to the Closing Date.
d. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
e. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been
obtained.
f. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated
by this Agreement shall be in effect, nor shall any proceeding by any
state, local or federal government agency or entity asking any of the
foregoing be pending. There shall not be any action taken or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable
to the transactions contemplated by this Agreement, which makes the
consummation of the transactions contemplated by this Agreement illegal or
which has a material adverse effect on business operations of the Acquiring
Fund.
g. TAX OPINION. The Acquired Fund shall have obtained an opinion from
Vedder, Price, Kaufman & Kammholz, counsel for the Acquired Fund, dated as
of the Closing Date, addressed to the Acquired Fund Trust, Acquired Fund
and Acquiring Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as
described in Section 368(a) of the Code, substantially in the form attached
as Annex A.
h. OPINION OF COUNSEL. The Acquired Fund shall have received the opinion of
Vedder, Price, Kaufman & Kammholz, counsel for the Acquiring Fund, dated as
of the Closing Date, addressed to the Acquired Fund substantially in the
form and to the effect that (i) the Acquiring Fund is duly organized and
existing under the laws of the Commonwealth of Massachusetts as a voluntary
association with transferable shares of beneficial interest commonly
referred to as a "Massachusetts business trust"; (ii) the Acquiring Fund is
registered as an open-end management company under the 1940 Act, (iii) this
Agreement and the reorganization provided for herein and the execution of
this Agreement have been duly authorized and approved by all requisite
action of the Acquiring Fund and this Agreement has been duly executed and
delivered by the Acquiring Fund and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) is a valid and binding
obligation of the Acquiring Fund, except as such enforceability may be
limited by bankruptcy, insolvency,
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fraudulent transfer, reorganization, moratorium or similar law affecting
creditors' rights generally, or by general principals of equity (regardless
of whether enforcement is sought in a proceeding at equity at law); (iv)
neither the execution or delivery by the Acquiring Fund of this Agreement
nor the consummation by the Acquiring Fund of the transactions contemplated
thereby contravene the Acquiring Fund's Declaration of Trust, or, to the
best of their knowledge, violate any provision of any statute or any
published regulation or any judgment or order disclosed to it by the
Acquiring Fund as being applicable to the Acquiring Fund, (v) to the best
of their knowledge based solely on the certificate of an appropriate
officer of the Acquiring Fund attached hereto, there is no pending or
threatened litigation which would have the effect of prohibiting any
material business practice or the acquisition of any material property or
the conduct of any material business of the Acquiring Fund or might have a
material adverse effect on the value of any assets of the Acquiring Fund;
(vi) the Acquiring Fund Shares have been duly authorized and upon issuance
thereof in accordance with this Agreement will, subject to certain matters
regarding the liability of a shareholder of a Massachusetts business trust,
be validly issued, fully paid and nonassessable; (vii) except as to
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and
customary qualifications with respect to Rule 10b-5 type opinions, as of
the effective date of the Registration Statement filed pursuant to the
Agreement, the portions thereof pertaining to the Acquiring Fund comply as
to form in all material respects with the requirements of the Securities
Act, the Securities Exchange Act and the 1940 Act and the rules and
regulations of the SEC thereunder and no facts have come to counsel's
attention which would cause them to believe that as of the effectiveness of
the portions of the Registration Statement applicable to the Acquiring
Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(viii) to the best of its knowledge and information and subject to the
qualifications set forth below, the execution and delivery by the Acquiring
Fund of the Agreement and the consummation of the transactions therein
contemplated do not require, under the laws of the Commonwealth of
Massachusetts, laws of the State of Illinois or the federal laws of the
United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency
or body (except such as have been obtained). Counsel need express no
opinion, however, as to any such consent, approval, authorization,
registration, qualification, order or filing (a) which may be required as a
result of the involvement of parties to the Agreement in the transactions
contemplated by the Agreement because of their legal or regulatory status
or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the Acquired Fund of any material benefit
under the Agreement; or (c) which can be readily obtained without
significant delay or expense to the Acquired Fund, without loss to the
Acquired Fund of any material benefit under the Agreement and without any
material adverse effect on the Acquired Fund during the period such
consent, approval, authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a)
laws which are specifically referred to in this opinion, (b) laws of the
Commonwealth of Massachusetts, laws of the State of Illinois or the federal
laws of the United States which, in counsel's experience, are normally
applicable to transactions of th e type provided for in the Agreement and
(c) court orders and judgments disclosed to counsel by the Acquiring Fund
in connection with the opinion. In addition, although counsel need not
specifically have considered the possible applicability to the Acquiring
Fund of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the Acquiring Fund in
this transaction that has caused them to conclude that any other consent,
approval, authorization, registration, qualification, order or filing is
required. In giving the opinions set forth above, counsel may state that it
is relying on certificates of officers of the Acquiring Fund with regard to
matters of fact and certain certificates and written statements of
government officers with respect to the good standing of the Acquiring Fund
and on the opinion of Ropes & Gray as to matters of Massachusetts law.
i. OFFICER CERTIFICATES. The Acquired Fund shall have received a
certificate of an authorized officer of the Acquiring Fund, dated as of the
Closing Date, certifying that (i) the representations and
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warranties set forth in Section 5 are true and correct on the Closing Date,
together with certified copies of the resolutions adopted by the Board of
Trustees shall be furnished to the Acquired Fund and that (ii) from the
date hereof through the Closing Date, there shall not have been any change
in the business, results of operations, assets or financial condition or
the manner of conducting the business of the Acquiring Fund, other than
changes in the ordinary course of its business, which has had a material
adverse effect on such business, results of operations, assets or financial
condition.
8. CONDITIONS TO OBLIGATIONS OF ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
Acquiring Fund of the following conditions:
a. ACQUIRED FUND SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of at least a majority of the outstanding shares of beneficial
interest of the Acquired Fund.
b. ACQUIRING FUND SHAREHOLDER APPROVAL. A new investment objective and
policies shall have been approved by a majority of the outstanding voting
securities of the Acquiring Fund.
c. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Acquired Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition,
results of operations, business, properties or assets of the Acquired Fund,
and the Acquiring Fund shall have received a certificate of an authorized
officer of the Acquired Fund satisfactory in form and substance to the
Acquiring Fund so stating. The Acquired Fund shall have performed and
complied in all material respects with all agreements, obligations and
covenants required by this Agreement to be so performed or complied with by
them on or prior to the Closing Date.
d. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
e. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been
obtained.
f. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not
be any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the transactions contemplated by
this Agreement, which makes the consummation of the transactions
contemplated by this Agreement illegal.
g. TAX OPINION. The Acquiring Fund shall have obtained an opinion from
Vedder, Price, Kaufman & Kammholz, counsel for the Acquired Fund, dated as
of the Closing Date, addressed to the Acquiring Fund, Acquired Fund Trust,
Acquired Fund and Acquiring Fund, that the consummation of the transactions
set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Code substantially in
the form attached as Annex A.
h. OPINION OF COUNSEL. The Acquiring Fund shall have received the opinion
of Vedder, Price, Kaufman & Kammholz, counsel for the Acquired Fund Trust
and the Acquired Fund, dated as of the Closing Date, addressed to the
Acquiring Fund, substantially in the form and to the effect that: (i) the
Acquired Fund Trust is duly organized and existing under the laws of the
Commonwealth of Massachusetts as a voluntary association with transferable
shares of beneficial interest commonly referred to as a "Massachusetts
business trust"; (ii) the Board of Trustees of the Acquired Fund Trust has
duly designated the Acquired Fund as a series of the Acquired Fund Trust
pursuant to the terms of the Declaration of Trust of the Acquired Fund
Trust, (iii) the Acquired Fund Trust is registered as an open-end
management company under the 1940 Act; (iv) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized by all requisite
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action of the Acquired Fund Trust and this Agreement has been duly executed
and delivered by the Acquired Fund Trust on behalf of the Acquired Fund and
(assuming the Agreement is a valid and binding obligation of the other
parties thereto) is a valid and binding obligation of the Acquired Fund,
except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar law affecting
creditors' rights generally, or by general principals of equity (regardless
of whether enforcement is sought in a proceeding at equity or law); (v)
neither the execution or delivery by the Acquired Fund Trust on behalf of
the Acquired Fund of this Agreement nor the consummation by the Acquired
Fund Trust or Acquired Fund of the transactions contemplated thereby
contravene the Acquired Fund Trust's Declaration of Trust or, to their
knowledge, violate any provision of any statute, or any published
regulation or any judgment or order disclosed to them by the Acquired Fund
Trust as being applicable to the Acquired Fund Trust or Acquired Fund; (vi)
to the best of their knowledge based solely on the certificate of an
appropriate officer of the Acquired Fund attached thereto, there is no
pending, or threatened litigation involving the Acquired Fund except as
disclosed therein; (vii) except as to financial statements and schedules
and other financial and statistical data included or incorporated by
reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions, as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions
thereof pertaining to the Acquired Fund comply as to form in all material
respects with their requirements of the Securities Act, the Securities
Exchange Act and the 1940 Act and the rules and regulations of the SEC
thereunder and no facts have come to counsel's attention which cause them
to believe that as of the effectiveness of the portions of the Registration
Statement applicable to the Acquired Fund, the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (viii) to their knowledge and
subject to the qualifications set forth below, the execution and delivery
by the Acquired Fund Trust on behalf of the Acquired Fund of the Agreement
and the consummation of the transactions therein contemplated do not
require, under the laws of the Commonwealth of Massachusetts, laws of the
State of Illinois or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained), except for the filing of an amendment to the Acquired Fund
Trust's Designation of Series in connection with the termination of the
Acquired Fund. Counsel need express no opinion, however, as to any such
consent, approval, authorization, registration, qualification, order or
filing (a) which may be required as a result of the involvement of other
parties to the Agreement in the transactions contemplated by the Agreement
because of their legal or regulatory status or because of any other facts
specifically pertaining to them; (b) the absence of which does not deprive
the Acquiring Fund of any material benefit under such agreements; or (c)
which can be readily obtained without significant delay or expense to the
Acquiring Fund, without loss to the Acquiring Fund of any material benefit
under the Agreement and without any material adverse effect on them during
the period such consent, approval authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders
or filings under (a) laws which are specifically referred to in the
opinion, (b) laws of the Commonwealth of Massachusetts, laws of the State
of Illinois or the federal laws of the United States which, in our
experience, are normally applicable to transactions of the type provided
for in the Agreement and (c) court orders and judgments disclosed to
counsel by the Acquired Fund in connection with the opinion. In addition,
although counsel need not specifically consider the possible applicability
to the Acquired Fund of any other laws, orders or judgments, nothing has
come to their attention in connection with their representation of the
Acquired Fund in this transaction that has caused them to conclude that any
other consent, approval, authorization, registration, qualification, order
or filing is required. In giving the opinion set forth above, counsel may
state that it is relying on certificates of officers of the Acquired Fund
with regard to matters of fact and certain certificates and written
statutes of government officers with respect to the good standing of the
Acquired Fund and on the opinion of Ropes & Gray as to matters of
Massachusetts law.
A-12
<PAGE> 152
i. SHAREHOLDER LIST. The Acquired Fund shall have delivered to the
Acquiring Fund an updated list of all shareholders of the Acquired Fund, as
reported by the Acquired Fund's transfer agent, as of one (1) business day
prior to the Closing Date with each shareholder's respective holdings in
the Acquired Fund, taxpayer identification numbers, Form W9 and last known
address.
j. OFFICER CERTIFICATES. The Acquiring Fund shall have received a
certificate of an authorized officer of the Acquired Fund, dated as of the
Closing Date, certifying that (i) the representations and warranties set
forth in Section 4 are true and correct on the Closing Date, together with
certified copies of the resolutions adopted by the Board of Trustees and
shareholders and that (ii) from the date of this Agreement through the
Closing Date, there shall not have been:
i. any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the
Acquired Fund, other than changes in the ordinary course of its
business, or any pending or threatened litigation, which has had or may
have a material adverse effect on such business, results of operations,
assets or financial condition;
ii. issued any option to purchase or other right to acquire shares of
the Acquired Fund granted by the Acquired Fund to any person other than
subscriptions to purchase shares at net asset value in accordance with
terms in the Prospectus for the Acquired Fund;
iii. any entering into, amendment or termination of any contract or
agreement by Acquired Fund, except as otherwise contemplated by this
Agreement;
iv. any indebtedness incurred, other than in the ordinary course of
business, by the Acquired Fund for borrowed money or any commitment to
borrow money entered into by the Acquired Fund;
v. any amendment of the Acquired Fund Trust's Declaration of Trust or
Designation of Series of the Acquired Fund; or
vi. any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with
respect to covered options) upon any asset of the Acquired Fund other
than a lien for taxes not yet due and payable.
9. AMENDMENT, WAIVER AND TERMINATION.
a. The parties hereto may, by agreement in writing authorized by the Board,
amend this Agreement at any time before or after approval thereof by the
shareholders of the Acquired Fund; provided, however, that after receipt of
Acquired Fund shareholder approval, no amendment shall be made by the
parties hereto which substantially changes the terms of Sections 1, 2 and 3
hereof without obtaining Acquired Fund's shareholder approval thereof.
b. At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any such right, power or
privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any
other such right, power or privilege.
c. This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
i. by the mutual consents of the Board of the Acquiring Fund and the
Acquired Fund Trust on behalf of the Acquired Fund;
ii. by the Acquired Fund, if the Acquiring Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement and fails to cure promptly such breach after
receipt of notice thereof;
A-13
<PAGE> 153
iii. by the Acquiring Fund, if the Acquired Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement and fails to cure promptly such
breach after receipt of notice thereof;
iv. by either the Acquired Fund or Acquiring Fund, if the Closing has
not occurred on or prior to [MARCH 31, 1999] (provided that the rights
to terminate this Agreement pursuant to this subsection (C)(iv) shall
not be available to any party whose failure to fulfill any of its
obligations under this Agreement has been the cause of or resulted in
the failure of the Closing to occur on or before such date).
10. REMEDIES.
In the event of termination of this Agreement by either or both of the Acquired
Fund and Acquiring Fund pursuant to Section 9C, written notice thereof shall
forthwith be given by the terminating party to the other party hereto, and this
Agreement shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without further
action by the parties hereto. However, this Section 10 shall not limit the
remedies available for a breach of this Agreement prior to its termination.
11. SURVIVAL.
The provisions set forth in Sections 10 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever. The representations and
warranties included or provided for herein, or in the Schedules or other
instruments delivered or to be delivered pursuant hereto shall not survive the
Closing Date.
12. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder if
in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the Acquired Fund shall be addressed to Kemper
Portfolios -- Kemper Short-Intermediate Government Fund, 222 South Riverside
Drive, Chicago, Illinois 60606, Attention: Secretary, with a copy to Vedder,
Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601,
Attention: David A. Sturms, or at such other address and to the attention of
such other person as the Acquired Fund may designate by written notice to the
Acquiring Fund. Notice to the Acquiring Fund shall be addressed to Kemper
Adjustable Rate U.S. Government Fund, 222 South Riverside Drive, Chicago,
Illinois, 60606, Attention: Secretary, with a copy to Vedder, Price, Kaufman &
Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601, Attention: David A.
Sturms, or at such other address and to the attention of such other person as
the Acquiring Fund may designate by written notice to the Acquired Fund. Any
notice shall be deemed to have been served or given as of the date such notice
is delivered personally or mailed.
13. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. This Agreement shall not be assigned by
any party without the prior written consent of the other party hereto.
14. BOOKS AND RECORDS.
The Acquired Fund and the Acquiring Fund agree that copies of the books and
records of the Acquired Fund relating to the Assets including, but not limited
to all files, records, written materials; e.g., closing transcripts,
surveillance files and credit reports shall be delivered by the Acquired Fund to
the Acquiring Fund at the Closing Date. In addition to, and without limiting the
foregoing, the Acquired Fund and the Acquiring Fund agree to take such action as
may be necessary in order that the Acquiring Fund shall have reasonable access
to such other books and records as may be reasonably requested, all for three
years after the Closing Date and for the last three tax years ending,
, and ;
A-14
<PAGE> 154
namely, general ledger, journal entries, voucher registers; distribution
journal; payroll register, monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.
15. GENERAL.
This Agreement supersedes all prior agreements between the parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Acquired Fund
and Acquiring Fund and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. This Agreement is
for the sole benefit of the parties thereto, and nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois without
regard to principles of conflicts or choice of law.
16. LIMITATION OF LIABILITY.
Consistent with the Acquiring Fund's and the Acquired Fund Trust's Declarations
of Trust, notice is hereby given and the parties hereto acknowledge and agree
that this instrument is executed on behalf of the Trustees of each Trust on
behalf of the Acquired Fund, as Trustee and not individually and that the
obligations of this instrument are not binding upon any of the Trustees or
shareholders of the Acquiring Fund, Acquired Fund Trust, or Acquired Fund
individually but binding only upon the assets and property of the Acquiring Fund
or the Acquired Fund as the case may be.
[Signature page follows]
A-15
<PAGE> 155
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
KEMPER ADJUSTABLE RATE U.S.
GOVERNMENT FUND
By:
--------------------------------------
Attest:
- -------------------------------------------------
KEMPER SHORT-INTERMEDIATE
GOVERNMENT FUND
By:
--------------------------------------
Attest:
- -------------------------------------------------
The undersigned is a party to this Agreement for the purposes of Section 3F
only.
SCUDDER KEMPER INVESTMENTS, INC.
By:
--------------------------------------
Attest:
- -------------------------------------------------
A-16
<PAGE> 156
ANNEX A
, 1998
Kemper Short-Intermediate Government Fund
222 South Riverside Plaza
Chicago, IL 60606
Kemper Adjustable Rate U.S. Government Fund
222 South Riverside Plaza
Chicago, IL 60606
Gentlemen:
You have requested our opinion regarding certain federal income tax consequences
of the proposed reorganization ("Reorganization") of Kemper Short-Intermediate
Government Fund ("Acquired Fund"), a separate portfolio of Kemper Portfolios, an
open-end management investment company organized as a business trust under the
laws of the Commonwealth of Massachusetts ("Acquired Trust") into Kemper
Adjustable Rate U.S. Government Fund ("Acquiring Fund"), an open-end management
investment company organized as a business trust under the laws of the
Commonwealth of Massachusetts. The Reorganization contemplates the acquisition
by the Acquiring Fund of substantially all the assets of the Acquired Fund in
exchange for voting shares of beneficial interest ("shares") of the Acquiring
Fund and the assumption of the Acquired Fund's liabilities. Thereafter, the
shares of the Acquiring Fund will be distributed to the shareholders of the
Acquired Fund and the Acquired Fund will be completely liquidated and
terminated. The foregoing will be accomplished pursuant to an Agreement and Plan
of Reorganization, dated as of (the "Plan"), entered into by the
Acquired Trust, on behalf of the Acquired Fund, and the Acquiring Fund.
In rendering this opinion, we have reviewed and relied upon statements made to
us by certain of your officers. We have also examined certificates of such
officers and such other agreements, documents, and corporate records that have
been made available to us and such other matters as we have deemed relevant for
purposes of this opinion. In such examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies and the authenticity of the originals of such latter documents.
Our opinion is based, in part, on the assumption that the proposed
Reorganization described herein will occur in accordance with the agreements and
the facts and representations set forth or referred to in this opinion letter,
and that such facts and representations are accurate as of the date hereof and
will be accurate on the effective date of the Reorganization (the "Effective
Time"). As more fully discussed below, we have also assumed in issuing our
opinion that the shareholders of the Acquired Fund do not have any plan or
intention to dispose of a certain number of the Acquiring Fund shares received
by them in the Reorganization. We have undertaken no independent investigation
of the accuracy of the facts, representations and assumptions set forth or
referred to herein.
For the purposes indicated above, and based upon the facts, assumptions and
conditions as set forth herein, and the representations made to us by duly
authorized officers on behalf of the Acquired Fund and the Acquiring Fund in a
letter dated , 1998, it is our opinion that:
(1) The acquisition by the Acquiring Fund of substantially all the assets
of the Acquired Fund in exchange solely for Acquiring Fund voting shares
and the assumption by the Acquiring Fund of the Acquired Fund's
liabilities, if any, followed by the distribution by the Acquired Fund of
the Acquiring Fund shares to the shareholders of the Acquired Fund in
exchange for their Acquired Fund shares in complete liquidation of the
Acquired Fund, will constitute a "reorganization" within the meaning of
Section 368 (a)(1) C) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the Acquiring Fund and the Acquired Fund will each be "a party
to a reorganization" within the meaning of Section 368(b) of the Code;
A-1
<PAGE> 157
Kemper Short-Intermediate Government Fund
Kemper Adjustable Rate U.S. Government Fund
, 1998
Page 2
(2) The Acquired Fund shareholders will recognize no gain or loss upon the
exchange of all of their Acquired Fund shares for Acquiring Fund shares in
complete liquidation of the Acquired Fund (Code Section 354(a)(1));
(3) No gain or loss will be recognized by the Acquired Fund upon the
transfer of substantially all its assets to the Acquiring Fund in exchange
solely for Acquiring Fund shares and the assumption by the Acquiring Fund
of the Acquired Fund's liabilities, if any, and with respect to the
subsequent distribution of those Acquiring Fund shares to the Acquired Fund
shareholders in complete liquidation of the Acquired Fund (Code Section
361);
(4) No gain or loss will be recognized by the Acquiring Fund upon the
acquisition of substantially all the Acquired Fund's assets in exchange
solely for Acquiring Fund shares and the assumption of the Acquired Fund's
liabilities, if any (Code Section 1032(a));
(5) The basis of the assets acquired by the Acquiring Fund will be, in each
instance, the same as the basis of those assets immediately before the
transfer when such assets were held by the Acquired Fund, and the holding
period of such assets acquired by the Acquiring Fund will include the
holding period thereof when such assets were held by the Acquired Fund
(Code Sections 362(b) and 1223(2));
(6) The basis of the Acquiring Fund shares to be received by the Acquired
Fund shareholders upon liquidation of the Acquired Fund will be, in each
instance, the same as the basis of the Acquired Fund shares surrendered in
exchange therefor (Code Section 358(a)(1)); and
(7) The holding period of the Acquiring Fund shares to be received by the
Acquired Fund shareholders will include the period during which the
Acquired Fund shares to be surrendered in exchange therefor were held,
provided such Acquired Fund shares were held as capital assets by those
shareholders on the date of the exchange (Code Section 1223(1)).
FACTS
Our opinion is based upon the above referenced representations and the following
facts and assumptions, any alteration of which could adversely affect our
conclusions.
The Acquired Fund has been registered and operated since it commenced operations
as a series of an open-end, management investment company under the Investment
Company Act of 1940, 15 U.S.C. Section 80a, et seq. (the "1940 Act"). The
Acquired Fund has qualified and will qualify as a regulated investment company
under Section 851 of the Code for each of its taxable years, and has distributed
and will distribute all or substantially all its income so that it and its
shareholders have been and will be taxed in accordance with Section 852 of the
Code.
The Acquiring Fund is registered, has operated, and will continue to operate an
open-end, management investment company under the 1940 Act. It has qualified as
a regulated investment company under Section 851 of the Code for each of its
taxable years and anticipates so qualifying for all future years, and has
distributed and will distribute all or substantially all its income so that it
and its shareholders will be taxed in accordance with Section 852 of the Code.
Upon satisfaction of certain terms and conditions set forth in the Plan on or
before the Effective Time, the following will occur: (a) the Acquiring Fund will
acquire substantially all the assets of the Acquired Fund in exchange for the
Acquiring Fund's assumption of substantially all the liabilities of the Acquired
Fund and the issuance of Acquiring Fund shares to the Acquired Fund; (b) the
Acquiring Fund shares will be distributed to the shareholders of the Acquired
Fund in exchange for their Acquired Fund shares; and
A-2
<PAGE> 158
Kemper Short-Intermediate Government Fund
Kemper Adjustable Rate U.S. Government Fund
, 1998
Page 3
(c) the Acquired Fund will be dissolved and liquidated. The assets of the
Acquired Fund to be acquired by the Acquiring Fund consist primarily of short
and intermediate-term U.S. Government securities, cash and other securities held
in the Acquired Fund's portfolio.
As soon as practicable after the Effective Time, the Acquired Fund will be
liquidated and will distribute the newly issued Acquiring Fund shares it
receives pro rata to its shareholders of record in exchange for such
shareholders' interests in the Acquired Fund. The liquidation and distribution
will be accomplished by opening accounts on the books of the Acquiring Fund in
the names of the shareholders of the Acquired Fund (on a class by class basis)
and transferring to those shareholder accounts the pro rata number of Acquiring
Fund shares of each respective class as was previously credited to the Acquired
Fund on the books.
As a result of the Reorganization, every shareholder of the Acquired Fund will
own Acquiring Fund shares that would have an aggregate per share net asset value
immediately after the Effective Time equal to the aggregate per share net asset
value of that shareholder's Acquired Fund shares immediately prior to the
Effective Time. Since the Acquiring Fund shares issued to the shareholders of
the Acquired Fund will be issued at net asset value in exchange for the net
assets of the Acquired Fund having a value equal to the aggregate per share net
asset value of those Acquiring Fund shares so issued, the net asset value of the
Acquiring Fund shares should remain virtually unchanged by the Reorganization.
[THE INVESTMENT OBJECTIVES OF THE ACQUIRING FUND WILL BE SUBSTANTIALLY SIMILAR
TO THOSE OF THE ACQUIRED FUND AND THE ACQUIRING FUND WILL CONTINUE THE HISTORIC
BUSINESS OF THE ACQUIRED FUND OR USE A SIGNIFICANT PORTION OF THE ACQUIRED
FUND'S HISTORIC ASSETS IN ITS BUSINESS.]
The management of the Acquired Fund has represented to us that, to the best of
their knowledge, there is no current plan or intention on the part of any
Acquired Fund shareholders to sell, exchange, or otherwise dispose of a number
of Acquiring Fund shares received in the Reorganization that would reduce the
ownership by shareholders of the Acquired Fund to a number of shares of
Acquiring Fund having a value, as of the Effective Time, of less than 50 percent
of all the formerly outstanding shares of the Acquired Fund as of the same time.
In issuing our opinion, we have assumed that there is, in fact, no such plan or
intention. If such assumption were inaccurate, it could adversely affect the
opinions contained herein.
In approving the Reorganization, the Board of Trustees of the Acquired Trust
identified certain benefits that are likely to result from combining the funds,
including administrative and operating efficiencies, and greater portfolio
diversity. The Board also considered the possible risks and costs of combining
the funds and determined that the Reorganization is likely to provide benefits
to the shareholders of the fund that outweigh the costs incurred.
CONCLUSION
Based on the foregoing, it is our opinion that the acquisition by the Acquiring
Fund, pursuant to the Plan, of substantially all the assets and liabilities of
the Acquired Fund in exchange for voting shares of the Acquiring Fund will
qualify as a reorganization under Code Section 368(a)(1)(C).
Our opinions set forth above with respect to (1) the nonrecognition of gain or
loss to the Acquired Fund and the Acquiring Fund, (2) the basis and holding
period of the assets received by the Acquiring Fund, (3) the nonrecognition of
gain or loss to the Acquired Fund shareholders upon the receipt of the Acquiring
Fund shares, and (4) the basis and holding period of the Acquiring Fund shares
received by the Acquired Fund shareholders, follow as a matter of law from the
opinion that the acquisition under the Plan will qualify as a reorganization
under Code Section 368(a)(1)(C).
A-3
<PAGE> 159
Kemper Short-Intermediate Government Fund
Kemper Adjustable Rate U.S. Government Fund
, 1998
Page 4
The opinions expressed in this letter are based on the Code, the Income Tax
Regulations promulgated by the Treasury Department thereunder and judicial
authority reported as of the date hereof. We have also considered the position
of the Internal Revenue Service (the "Service") reflected in published and
private rulings. Although we are not aware of any pending changes to these
authorities that would alter our opinions, there can be no assurances that
future legislative or administrative changes, court decisions or Service
interpretations will not significantly modify the statements or opinions
expressed herein.
Our opinions are limited to those federal income tax issues specifically
considered herein and are addressed to and are only for the benefit of the
Acquired Fund, the Acquired Trust and the Acquiring Fund. We do not express any
opinion as to any other federal income tax issues, or any state or local law
issues, arising from the transactions contemplated by the Plan. Although the
discussion herein is based upon our best interpretation of existing sources of
law and expresses what we believe a court would properly conclude if presented
with these issues, no assurance can be given that such interpretations would be
followed if they were to become the subject of judicial or administrative
proceedings.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the captions "Proposal
No. 1--The Proposed Reorganization--Certain federal Income Tax Consequences" and
"Legal Matters" in the Prospectus/Proxy Statement contained in such Registration
Statement. In giving such consent, we do not thereby concede that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
A-4
<PAGE> 160
KEMPER EQUITY FUNDS/GROWTH STYLE
Kemper Aggressive Growth Fund
Kemper Blue Chip Fund
Kemper Growth Fund
Kemper Quantitative Equity Fund
Kemper Small Capitalization Equity Fund
Kemper Technology Fund
Kemper Total Return Fund
Kemper Value Plus Growth Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED FEBRUARY 1, 1998
-------------------------
KEMPER INCOME FUNDS
Kemper Adjustable Rate U.S. Government Fund
Kemper Diversified Income Fund
Kemper U.S. Government Securities Fund
Kemper High Yield Series
comprised of the following two series:
Kemper High Yield Fund
Kemper High Yield Opportunity Fund
Kemper Income and Capital Preservation Fund
Kemper Portfolios including the following two series:
Kemper U.S. Mortgage Fund
Kemper Short-Intermediate Government Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 30, 1997
-------------------------
KEMPER CASH RESERVES FUNDS
(A SERIES OF KEMPER PORTFOLIOS)
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 30, 1997
-------------------------
KEMPER GLOBAL AND INTERNATIONAL FUNDS
Kemper Asian Growth Fund
Kemper Europe Fund
Kemper Global Income Fund
Kemper International Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED MARCH 1, 1998
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper-Dreman Financial Services Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED MARCH 9, 1998
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper U.S. Growth and Income Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED JANUARY 30, 1998
-------------------------
KEMPER TAX-FREE INCOME FUNDS
Kemper National Tax-Free Income Series
comprised of the following two series:
Kemper Municipal Bond Fund
Kemper Intermediate Municipal Bond Fund
Kemper State Tax-Free Income Series
comprised of the following eight series:
Kemper California Tax-Free Income Fund
Kemper Florida Tax-Free Income Fund
Kemper Michigan Tax-Free Income Fund
Kemper New Jersey Tax-Free Income Fund
Kemper New York Tax-Free Income Fund
Kemper Ohio Tax-Free Income Fund
Kemper Pennsylvania Tax-Free Income Fund
Kemper Texas Tax-Free Income Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED NOVEMBER 26, 1997
-------------------------
KEMPER ASSET ALLOCATION FUNDS
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED NOVEMBER 21, 1997
-------------------------
KEMPER EQUITY FUNDS/VALUE STYLE
Kemper Value Series, Inc.
comprised of the following three series:
Kemper Contrarian Fund
Kemper-Dreman High Return Equity Fund
Kemper Small Cap Value Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED APRIL 1, 1998
-------------------------
KEMPER TARGET EQUITY FUND
Kemper Retirement Fund Series VII
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED NOVEMBER 1, 1997
-------------------------
<PAGE> 161
KEMPER GLOBAL AND INTERNATIONAL FUNDS
Kemper Global Blue Chip Fund
Kemper International Growth and Income Fund
Kemper Emerging Markets Income Fund
Kemper Emerging Markets Growth Fund
Kemper Latin America Fund
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 31, 1997
AS REVISED JANUARY 14, 1998
The following disclosure supplements information in each Fund's Statement of
Additional Information.
PURCHASE AND REDEMPTION OF SHARES
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than Kemper Distributors, Inc. ("KDI"),
to accept purchase and redemption orders for the Fund's shares. Those brokers
may also designate other parties to accept purchase and redemption orders on the
Fund's behalf. Orders for purchase or redemption will be deemed to have been
received by the Fund when such brokers or their authorized designees accept the
orders. Subject to the terms of the contract between the Fund and the broker,
ordinarily orders will be priced at the Fund's net asset value next computed
after acceptance by such brokers or their authorized designees. Further, if
purchases or redemptions of the Fund's shares are arranged and settlement is
made at an investor's election through any other authorized NASD member, that
member may, at its discretion, charge a fee for that service. The Board of
Trustees or Directors as the case may be ("Board") of the Fund and KDI each has
the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Board and KDI may suspend or terminate the offering of shares of the
Fund at any time for any reason.
April 30, 1998
KMF-1SS
2
<PAGE> 162
<TABLE>
<S> <C>
KEMPER EQUITY FUNDS/GROWTH STYLE KEMPER INCOME FUNDS
Kemper Aggressive Growth Fund ("KAGGF") Kemper Adjustable Rate U.S. Government Fund ("KARGF")
Kemper Blue Chip Fund ("KBCF") Kemper Diversified Income Fund ("KDIF")
Kemper Growth Fund ("KGF") Kemper U.S. Government Securities Fund ("KGSF")
Kemper Quantitative Equity Fund ("KQEF") Kemper High Yield Series ("KHYS")
Kemper Small Capitalization Equity Fund ("KSCF") comprised of the following two series:
Kemper Technology Fund ("KTEC") Kemper High Yield Fund ("KHYF")
Kemper Total Return Fund ("KTRF") Kemper High Yield Opportunity Fund ("KHYOF")
Kemper Value+Growth Fund ("KVGF") Kemper Income and Capital Preservation Fund ("KICPF")
SUPPLEMENT TO STATEMENT OF Kemper Portfolios ("KP") including the following
ADDITIONAL INFORMATION series:
DATED DECEMBER 31, 1996 Kemper U.S. Mortgage Fund ("KUSMF")
Kemper Short-Intermediate Government Fund ("KSIGF")
------------------------- SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 30, 1997
KEMPER GLOBAL INCOME FUND ("KGIF") -------------------------
KEMPER INTERNATIONAL FUND ("KIF") KEMPER CASH RESERVES FUND ("KCRF")
SUPPLEMENT TO STATEMENT OF (A SERIES OF KEMPER PORTFOLIOS)
ADDITIONAL INFORMATION SUPPLEMENT TO STATEMENT OF
DATED MARCH 1, 1997 ADDITIONAL INFORMATION
------------------------- DATED DECEMBER 30, 1997
-------------------------
KEMPER ASIAN GROWTH FUND ("KAGF")
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED APRIL 1, 1997
-------------------------
</TABLE>
KEMPER TAX-FREE INCOME FUNDS
Kemper National Tax-Free Income Series ("KNTIS")
comprised of the following two series:
Kemper Municipal Bond Fund ("KMBF")
Kemper Intermediate Municipal Bond Fund ("KIMBF")
Kemper State Tax-Free Income Series ("KSTIS")
comprised of the following eight series:
Kemper California Tax-Free Income Fund ("KCATF")
Kemper Florida Tax-Free Income Fund ("KFLTF")
Kemper Michigan Tax-Free Income Fund ("KMITF")
Kemper New Jersey Tax-Free Income Fund ("KNJTF")
Kemper New York Tax-Free Income Fund ("KNYTF")
Kemper Ohio Tax-Free Income Fund ("KOHTF")
Kemper Pennsylvania Tax-Free Income Fund ("KPATF")
Kemper Texas Tax-Free Income Fund ("KTXTF")
SUPPLEMENT TO STATEMENT OF
ADDITIONAL INFORMATION
DATED NOVEMBER 26, 1997
INVESTMENT RESTRICTIONS--MASTER/FEEDER FUND STRUCTURE
Certain Series, Portfolios or Funds have amended their fundamental policies to
permit a master/feeder fund structure. Following is a list of each Series',
Portfolio's or Fund's fundamental policies that were so
<PAGE> 163
amended. Where necessary, the number identifying each Fund's policies that were
amended is indicated in brackets following each Series', Portfolio's or Fund's
name, as applicable. As a matter of fundamental policy, each Series, Portfolio
or Fund will not:
KTEC[(1)], KGSF[(2)], KMBF[(3)]:
Purchase securities of any issuer (other than obligations of, or guaranteed by,
the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the Fund.
KSTIS (EXCEPT KCATF AND KTXTF):
(11) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the total value of the Fund's assets would be invested
in securities of that issuer, except that, with respect to 50% of the Fund's
total assets, the Fund may invest up to 25% of its total assets in securities of
any one issuer, and except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the Fund.
KCATF:
(3) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the total value of the Fund's assets would be invested
in securities of that issuer, except that, with respect to 50% of the Fund's
total assets, the Fund may invest up to 25% of its total assets in securities of
any one issuer, and except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the Fund.
KHYOF:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
KTEC:
(2) Purchase more than 10% of any class of securities of any issuer, except that
all or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund. All debt securities and
all preferred stocks are each considered as one class.
KSTIS (EXCEPT KCATF AND KTXTF):
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or of a state or its political subdivisions)
if as a result of such purchase 25% or more of its total assets would be
invested in any industry, except that all or substantially all of the assets of
the Fund may be
<PAGE> 164
invested in another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
KTEC:
(7) Invest 25% of more of its total assets in any one industry, except that all
or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund. Water, communications,
electric and gas utilities shall each be considered a separate industry.
KHYOF:
(7) Concentrate more than 25% of the value of its assets in any one industry,
except that all or substantially all of the assets of the Fund may be invested
in another registered investment company having the same investment objective
and substantially similar investment policies as the Fund. Water,
communications, electric and gas utilities shall each be considered a separate
industry.
KMBF:
(2) With respect to temporary investments, purchase securities (other than
securities of the United States Government, its agencies or instrumentalities)
if as a result of such purchase more than 25% of the Fund's total assets would
be invested in any industry, except that all or substantially all of the assets
of the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund.
KCATF:
(2) Purchase securities (other than securities of the United States Government,
its agencies or instrumentalities, or the State of California or its political
subdivisions) if as a result of such purchase more than 25% of the Fund's total
assets would be invested in any one industry, except that all or substantially
all of the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund.
KGSF:
(1) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies, some of which may be subject to
repurchase agreements, except that the Fund may engage in options and financial
futures transactions, and except that all or substantially all of the assets of
the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund.
KTEC[(9)], KHYOF[(9)], KMBF[(10)], KSTIS (EXCEPT KTXTF)[(7)], KCATF [(10)]:
Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities, and except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund.
KGSF:
(7) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the disposition of portfolio
securities, and except that all or substantially all of the assets
<PAGE> 165
of the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as the
Fund.
KCATF:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies, except that all or substantially all of the
assets of the Fund may be invested in another registered investment company
having the same investment objective and substantially similar investment
policies as the Fund.
KMBF, KSTIS (EXCEPT KCATF AND KTXTF):
(1) Make investments other than in accordance with its investment objective and
policies, except that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the same investment
objective and substantially similar investment policies as the Fund.
In addition, with respect to Kemper Equity Funds/Growth Style, the following
non-fundamental investment restrictions are deleted:
INVESTMENT RESTRICTIONS--DELETIONS
(with respect to all Kemper Equity Funds/Growth Style except KAGGF and KSCF)
Each Fund may not:
Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
(with respect to all Kemper Equity Funds/Growth Style except KAGGF) Each Fund
may not:
(i) Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs.
(ii) Invest in oil, gas and other mineral leases.
(with respect to all Kemper Equity Funds/Growth Style except KAGGF and KBCF)
Each Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years
continuous operation and equity securities of issuers which are not readily
marketable.
(ii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to
securities may be deemed to be without value for such purposes.
(iii) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 that have been determined to be liquid
pursuant to procedures adopted by the Board of Trustees, provided that the
total amounts of Fund assets invested in restricted securities and
securities of issuers which with their predecessors have a record of less
than three years continuous operation will not exceed 15% of total assets.
(iv) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real estate
investment trusts and readily marketable securities of companies which
invest in real estate).
<PAGE> 166
(with respect to all Kemper Equity Funds/Growth Style except KAGGF and KTRF)
Each Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment trusts. (The Quantitative Fund currently does not intend to
invest more than 5% of its net assets in securities of real estate
investment trusts).
(with respect to KBCF) The Fund may not:
Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guarantees by, the U.S. Government, its
agencies or instrumentalities) which with their predecessors have a record
of less than three years continuous operation and equity securities of
issuers which are not readily marketable.
(with respect to KSCF) The Fund may not:
Purchase or retain the securities of any issuer if any of the officers or
trustees of the Fund or its investment adviser owns beneficially more than
1/2 of 1% of the securities of such issuer and together own more than 5% of
the securities of such issuer.
(with respect to KTRF) The Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment funds.
With respect to KGIF and KIF, the following non-fundamental investment
restrictions are deleted:
(with respect to KGIF and KIF) Each Fund may not:
(i) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
(ii) Invest in oil, gas and other mineral leases.
(iii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to
securities may be deemed to be without value for such purposes.
(iv) Invest more than 5% of its total assets in restricted securities,
excluding restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933 that have been determined to be liquid
pursuant to procedures adopted by the Board of Trustees, provided that the
total amount of Fund assets invested in restricted securities and
securities of issuers which with their predecessors have a record of less
than three years continuous operation will not exceed 15% of total assets.
(v) Invest more than 10% of its total assets in securities of real estate
investment trusts.
(with respect to KIF only) The Fund may not:
(i) Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs.
(ii) Invest more than 5% of the Fund's total assets in securities of
issuers which with their predecessors have a record of less than three
years continuous operation and equity securities of issuers which are not
readily marketable.
(iii) Purchase or sell real property (including limited partnership
interests but excluding readily marketable interests in real estate
investment trusts and readily marketable securities of companies which
invest in real estate).
<PAGE> 167
(with respect to KGIF only) The Fund may not:
(i) Invest in interests in oil or gas exploration or development programs,
although it may invest in the securities of issuers which invest in or
sponsor such programs.
(ii) Invest more than 5% of the Fund's total assets in securities of
issuers (other than obligations of, or guaranteed by, the U.S. Government,
its agencies or instrumentalities) which with their predecessors have a
record of less than three years continuous operation and equity securities
of issuers which are not readily marketable.
With respect to Kemper Income Funds and KCRF, the following non-fundamental
investment restrictions are deleted:
(with respect to KARGF, KDIF, KHYF, KICPF, KSIGF) Each Fund may not:
Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund, or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.
(with respect to KARGF, KDIF, KICPF, KHYF, KSIGF) Each Fund may not:
Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs.
(with respect to KCRF, KUSMF, KSIGF) Each Fund may not:
Invest in oil, gas or other mineral exploration or development programs.
(with respect to KARGF, KDIF, KHYF, and KICPF) Each Fund may not:
Invest in oil, gas and other mineral leases.
(with respect to KARGF and KSIGF) Each Fund may not:
Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities including collateralized obligations thereof)
which with their predecessors have a record of less than three years
continuous operations.
(with respect to KDIF, KICPF and KHYF) Each Fund may not:
Invest more than 5% of the Fund's total assets in securities of issuers
which with their predecessors have a record of less than three years
continuous operation and equity securities of issuers which are not readily
marketable.
(with respect to KARGF, KCRF, KUSMF, KSIGF, KDIF, KHYF, KICPF) Each Fund may
not:
Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of
the Fund's net assets, may be warrants not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to
securities may be deemed to be without value for such purposes.
(with respect to KARGF and KSIGF) Each Fund may not:
Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount
of Fund assets invested in restricted securities and securities of issuers
which with their predecessor have a record of less than three years
continuous operation will not exceed 15% of total assets.
<PAGE> 168
(with respect to KARGF, KDIF, KHYF and KICPF) Each Fund may not:
Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(with respect to KCRF, KUSMF, KSIGF) Each Fund may not:
Invest in limited partnership interests in real estate.
(with respect to KARGF, KHYF and KSIGF) Each Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment trusts.
(with respect to KDIF and KICPF) Each Fund may not:
Invest more than 10% of its total assets in securities of real estate
investment trusts.
OFFICERS AND TRUSTEES
Mr. Morax and Mr. Timbers are no longer trustees of the Funds for which they
served as trustees. The following are new trustees:
DANIEL PIERCE (03/18/34), Trustee*, (63), 345 Park Avenue, New York, Managing
Director, Scudder Kemper. New York; Director, Fiduciary Trust Company; Director,
Fiduciary Company Incorporated.
EDMOND D. VILLANI (03/04/47), Trustee*, (50), 345 Park Avenue, New York, New
York; Chief Executive Officer, Scudder Kemper.
PORTFOLIO TRANSACTIONS
To the maximum extent feasible, it is expected that Scudder Kemper will place
orders for portfolio transactions through Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110 ("SIS"), a corporation
registered as a broker-dealer and a subsidiary of Scudder. SIS will place orders
on behalf of the Funds with issuers, underwriters or other brokers and dealers.
SIS will not receive any commission, fee or other remuneration from the Funds
for this service.
December 31, 1997
KMF-IQQ
<PAGE> 169
EXHIBIT B
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 30, 1997
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (THE "ADJUSTABLE
RATE FUND")
KEMPER DIVERSIFIED INCOME FUND (THE "DIVERSIFIED FUND")
KEMPER U.S. GOVERNMENT SECURITIES FUND (THE "GOVERNMENT FUND")
KEMPER HIGH YIELD FUND (THE "HIGH YIELD FUND")
KEMPER HIGH YIELD OPPORTUNITY FUND (THE "OPPORTUNITY FUND")
KEMPER INCOME AND CAPITAL PRESERVATION FUND (THE "INCOME AND
CAPITAL FUND")
KEMPER U.S. MORTGAGE FUND (THE "MORTGAGE FUND")
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (THE "SHORT-INTERMEDIATE
GOVERNMENT FUND")
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the combined
Statement of Additional Information for each of the funds (the "Funds") listed
above. It should be read in conjunction with the combined prospectus of the
Funds dated December 30, 1997. The prospectus may be obtained without charge
from the Funds.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions..................................... B-2
Investment Policies and Techniques.......................... B-11
Portfolio Transactions...................................... B-18
Investment Manager and Underwriter.......................... B-20
Purchase and Redemption of Shares........................... B-27
Dividends and Taxes......................................... B-28
Performance................................................. B-30
Officers and Trustees....................................... B-45
Shareholder Rights.......................................... B-51
Opportunity Fund -- Report of Independent Auditors
(September 18, 1997)...................................... B-53
Opportunity Fund -- Statement of Net Assets (September 18,
1997)..................................................... B-54
Appendix--Rating of Investments............................. B-55
</TABLE>
The financial statements appearing in each Fund's 1997 Annual Report to
Shareholders are incorporated herein by reference. The Annual Report for the
Fund for which this Statement of Additional Information is requested accompanies
this document.
KFIF-13 12/97 (LOGO)printed on recycled paper
<PAGE> 170
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-2
<PAGE> 171
(11) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(12) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 4 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Adjustable
Rate Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Invest more than 15% of its net assets in illiquid securities.
THE DIVERSIFIED FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described in the prospectus.
(3) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(4) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are equal in
amount to and of the same issue as the securities sold short and such securities
are not subject to outstanding call options, and unless not more than 10% of the
Fund's net assets is held as collateral for such sales at any one time.
(Management does not intend to make such sales except for the purpose of
deferring realization of gain or loss for federal income tax purposes.)
(5) Write (sell) put or call options, combinations thereof or similar options;
nor may it purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on the purchase of put and call options,
combinations thereof or similar options; except that the Fund may write covered
call options with respect to its portfolio securities or securities indices, or
write secured put options; and the Fund may enter into closing transactions with
respect to such options, and may buy or sell options on financial futures
contracts.
(6) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(7) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options of such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
B-3
<PAGE> 172
(8) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(9) Issue senior securities except as permitted under the Investment Company Act
of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 3 in the latest
fiscal year, though it may borrow in the future as permitted by that investment
restriction. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
Diversified Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets, unless
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company would be owned by the Fund, (ii) 5% of the Fund's total
assets would be invested in any one such company, and (iii) 10% of the Fund's
total assets would be invested in such securities.
(iii) Invest more than 15% of its net assets in illiquid securities.
THE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase any securities other than obligations issued or guaranteed by the
United States Government or its agencies, some of which may be subject to
repurchase agreements, except that the Fund may engage in options and financial
futures transactions.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of that issuer.
(3) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(4) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts; or in real
estate (including real estate limited partnerships), although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate including real estate investment trusts.
(5) Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the value of the Fund's assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets except in connection
with any such borrowing and in amounts not in excess of 7 1/2% of the value of
the Fund's assets at the time of such borrowing. (This borrowing provision is
not for investment leverage, but solely to facilitate management of the
portfolio by enabling the Fund to meet redemption requests where the liquidation
of portfolio securities is deemed to be disadvantageous or inconvenient.)
Borrowings may take the form of a sale of portfolio securities accompanied by a
simultaneous agreement as to their repurchase.
(6) Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph 1 above and
may enter into repurchase agreements for such securities, and may lend its
portfolio securities against collateral consisting of cash, or securities issued
or guaranteed by the U.S. Government or its agencies, which is equal at all
times to at least 100% of the value of the securities loaned.
(7) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the disposition of portfolio
securities.
B-4
<PAGE> 173
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Government Fund has adopted the following non-fundamental restriction
which may be changed by the Board of Trustees without shareholder approval. The
Government Fund may not:
(1) Invest more than 15% of its net assets in illiquid securities.
THE HIGH YIELD FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objectives and policies are not prohibited and it may
lend its securities as discussed under "Investment Objectives, Policies and Risk
Factors -- Additional Investment Information" in the prospectus.
(3) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(4) Invest more than 25% of the Fund's total assets in fixed income securities
which are payable in currencies other than United States Dollars. (Investments
in such securities may involve risks which differ from investments in securities
of U.S. issuers, such as future political and economic developments, the
possible imposition of governmental restrictions and taxes, as well as currency
fluctuation.)
(5) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are equal in
amount to and of the same issue as the securities sold short and such securities
are not subject to outstanding call options, and unless not more than 10% of the
Fund's net assets is held as collateral for such sales at any one time.
(Management does not intend to make such sales except for the purpose of
deferring realization of gain or loss for federal income tax purposes.)
(6) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(7) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
(8) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(9) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
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(10) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 3 in the latest
fiscal year; though it may borrow in the future as permitted by that investment
restriction. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
High Yield Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets, unless
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company would be owned by the Fund, (ii) 5% of the Fund's total
assets would be invested in any one such company, and (iii) 10% of the Fund's
total assets would be invested in such securities.
(iii) Invest more than 15% of its net assets in illiquid securities.
THE INCOME AND CAPITAL FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Invest in securities other than those specified under "Investment
Objectives, Policies and Risk Factors" in the prospectus. This restriction does
not prevent the Fund from holding common stocks or other corporate securities
not qualifying as debt obligations if such securities are acquired through
conversion provisions of debt securities or from corporate reorganizations. Nor
does it prevent the holding of debt securities whose quality rating is reduced
by the rating services below those specified under "Investment Objectives,
Policies and Risk Factors" after purchase by the Fund.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States or Canadian governments, their agencies or
instrumentalities) if, as a result, more than 5% of the Fund's total assets
would be invested in securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(4) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited and the Fund
may lend its portfolio securities as described under "Investment Objectives,
Policies and Risk Factors -- Additional Investment Information" in the
prospectus.
(5) Borrow money except for temporary or emergency purposes (but not for the
purpose of purchase of investments) and then only in an amount not to exceed 5%
of the Fund's net assets; or pledge the Fund's securities or receivables or
transfer or assign or otherwise encumber them in an amount exceeding the amount
of the borrowing secured thereby.
(6) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and options transactions.
(7) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(8) Concentrate more than 25% of the value of its assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry.
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(9) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(10) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Income and
Capital Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(iii) Invest more than 15% of its net assets in illiquid securities.
THE MORTGAGE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(4) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) which with their predecessors have a record of less than
three years continuous operation.
(5) Enter into repurchase agreements if more than 10% of the Fund's net assets
valued at the time of the transaction would be subject to repurchase agreements
maturing in more than seven days.
(6) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
(7) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the Fund's total assets falls below an
amount equal to three times the amount of its indebtedness from money borrowed,
the Fund will, within three business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(8) Concentrate more than 25% of the Fund's net assets in any one industry.
(9) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of Kemper Portfolios or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and together
they own more than 5% of the securities of such issuer.
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(10) Invest more than 5% of the Fund's total assets in securities restricted as
to disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933) and no more than 10% of its
assets will be invested in securities which are considered illiquid. [Repurchase
agreements maturing in more than 7 days are considered illiquid for purposes of
this restriction.]
(11) Invest for the purpose of exercising control or management of another
issuer.
(12) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(13) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(14) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(15) Issue senior securities as defined in the Investment Company Act of 1940.
(16) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and option transactions.
(17) Write (sell) put or call options, combinations thereof or similar options
except that the Fund may write covered call options on up to 100% of the Fund's
net assets and may write secured put options on up to 50% of the Fund's net
assets; nor may the Fund purchase put or call options if more than 5% of the
Fund's net assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Fund may buy or sell
options on financial futures contracts.
(18) Invest in commodities or commodity futures contracts although the Fund may
buy or sell financial futures contracts and options on such contracts; or in
real estate, although it may invest in securities which are secured by real
estate and securities of issuers which invest or deal in real estate.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or total assets will not be considered a violation. The Fund
did not borrow money as permitted by investment restriction number 7 in the
latest fiscal year, and it has no present intention of borrowing during the
current year.
THE OPPORTUNITY FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting securities of that
issuer.
(2) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objectives and policies are not prohibited and it may
lend its securities as discussed under "Investment Objectives, Policies and Risk
Factors -- Additional Investment Information" in the prospectus.
(3) Borrow money except (i) for leverage purposes, but not for more than 20% of
the Fund's total assets, including the amount borrowed, and (ii) as a temporary
measure for extraordinary or emergency purposes, and then only in an amount up
to one-third of the value of its total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling any portfolio
securities. The maximum amount that the Fund may borrow is one-third of the
value of its assets (including the amount borrowed). If, for any reason, the
current value of the Fund's total assets falls below an amount equal to three
times the amount of its indebtedness
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from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary.
(4) Engage in margin purchases except to obtain such short-term credits as may
be necessary for the clearance of transactions; however, the Fund may make
margin deposits in connection with financial futures and options transactions;
nor may the Fund make short sales of securities or maintain a short position
unless, at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for
securities, without payment of additional consideration, which are equal in
amount to and of the same issue as the securities sold short and such securities
are not subject to outstanding call options, and unless not more than 10% of the
Fund's net assets is held as collateral for such sales at any one time.
(Management does not intend to make such sales except for the purpose of
deferring realization of gain or loss for federal income tax purposes.)
(5) Invest 25% or more of its total assets in any one industry.
(6) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(8) Issue senior securities except as permitted under the Investment Company Act
of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation except as
otherwise provided for in restriction number (3) above. The Fund has adopted the
following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. The Opportunity Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets, unless
immediately thereafter not more than (i) 3% of the total outstanding voting
stock of such company would be owned by the Fund, (ii) 5% of the Fund's total
assets would be invested in any one such company, and (iii) 10% of the Fund's
total assets would be invested in such securities.
(iii) Invest more than 15% of its net assets in illiquid securities.
(iv) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
THE SHORT-INTERMEDIATE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) Purchase securities or make investments other than in accordance with its
investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as one class.
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance with
its investment objective and policies).
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<PAGE> 178
(5) Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its total
assets (any such borrowings under this section will not be collateralized). If,
for any reason, the current value of the Fund's total assets falls below an
amount equal to three times the amount of its indebtedness from money borrowed,
the Fund will, within three business days, reduce its indebtedness to the extent
necessary. [The Fund will not borrow for leverage purposes, and while borrowings
are outstanding securities will not be purchased.]
(6) Concentrate more than 10% of the Fund's net assets in any one industry.
(7) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(8) Issue senior securities except as permitted under the Investment Company Act
of 1940.
(9) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
financial futures and option transactions.
(10) Engage in put or call option transactions; however, the Fund may write
(sell) put or call options on up to 25% of its net assets and may purchase put
or call options if no more than 5% of its net assets would be invested in
premiums on put and call options, combinations thereof or similar options; and
the Fund may buy and sell options on financial futures contracts.
(11) Invest in commodities or commodity futures contracts, although it may buy
or sell financial futures contracts and options on such contracts; or in real
estate, although it may invest in securities which are secured by real estate
and securities of issuers which invest or deal in real estate.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund did
not borrow money as permitted by investment restriction number 5 in the latest
fiscal year and it has no present intention of borrowing during the current
year. The Fund has adopted the following non-fundamental restrictions, which may
be changed by the Board of Trustees without shareholder approval. The Short-
Intermediate Government Fund may not:
(i) Invest for the purpose of exercising control or management of another
issuer.
(ii) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets. This
restriction does not apply to the Fund to the extent that certain collateralized
obligations may be considered to be issued by an "investment company" (see
"Investment Policies and Techniques --Collateralized Obligations").
(iii) Invest more than 15% of its net assets in illiquid securities.
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INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Each Fund may engage in options and financial futures and other
derivatives transactions in accordance with its respective investment objectives
and policies. Each such Fund intends to engage in such transactions if it
appears to the investment manager to be advantageous to do so in order to pursue
its investment objective and also to hedge against the effects of market risks
but not for speculative purposes. The use of futures and options, and possible
benefits and attendant risks, are discussed below along with information
concerning other investment policies and techniques.
OPTIONS ON SECURITIES. A Fund may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Fund may write "covered" put options provided that, as long as the
Fund is obligated as a writer of a put option, the Fund will own an option to
sell the underlying securities subject to the option, having an exercise price
equal to or greater than the exercise price of the "covered" option, or it will
deposit and maintain in a segregated account eligible securities having a value
equal to or greater than the exercise price of the option. A call option gives
the purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during or at the end of the option
period. A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price during or at
the end of the option period. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the price
volatility of the underlying security, the option period, supply and demand and
interest rates. The Funds may write or purchase spread options, which are
options for which the exercise price may be a fixed dollar spread or yield
spread between the security underlying the option and another security that is
used as a bench mark. The exercise price of an option may be below, equal to or
above the current market value of the underlying security at the time the option
is written. The buyer of a put who also owns the related security is protected
by ownership of a put option against any decline in that security's price below
the exercise price less the amount paid for the option. The ability to purchase
put options allows a Fund to protect capital gains in an appreciated security it
owns, without being required to actually sell that security. At times a Fund
would like to establish a position in a security upon which call options are
available. By purchasing a call option, a Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because a Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received.
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OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives, Policies and Risk Factors"), the Funds may deal in over-the-counter
traded options ("OTC options"). OTC options differ from exchange traded options
in several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event a Fund may
experience material losses. However, in writing options the premium is paid in
advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Funds have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Funds' portfolios. A brief description of
such procedures is set forth below.
A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Fund's Board of Trustees. The investment manager believes that the
approved dealers should be able to enter into closing transactions if necessary
and, therefore, present minimal credit risks to a Fund. The investment manager
will monitor the creditworthiness of the approved dealers on an ongoing basis. A
Fund currently will not engage in OTC options transactions if the amount
invested by the Fund in OTC options, plus a "liquidity charge" related to OTC
options written by the Fund, plus the amount invested by the Fund in illiquid
securities, would exceed 15% of the Fund's net assets (10% of total assets for
the Mortgage Fund). The "liquidity charge" referred to above is computed as
described below.
The Funds anticipate entering into agreements with dealers to which a Fund sells
OTC options. Under these agreements a Fund would have the absolute right to
repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
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OPTIONS ON SECURITIES INDICES. A Fund also may purchase and write call and put
options on securities indices in an attempt to hedge against market conditions
affecting the value of securities that the Fund owns or intends to purchase, and
not for speculation. Through the writing or purchase of index options, a Fund
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index since the prices of such securities may be affected by
somewhat different factors and, therefore, the Fund bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.
When a Fund writes an option on a securities index, it will segregate, and
mark-to-market, eligible securities to the extent required by applicable
regulation. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
A Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on a securities index
involve risks similar to those risks relating to transactions in financial
futures contracts described below. Also, an option purchased by a Fund may
expire worthless, in which case the Fund would lose the premium paid therefor.
FINANCIAL FUTURES CONTRACTS. The Funds may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or an amount of foreign currency or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might affect adversely the value of securities or other assets which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index or foreign currency called for by the contract at a specified
price during a specified delivery period. A "purchase" of a futures contract
means the undertaking of a contractual obligation to acquire the securities or
cash value of an index or foreign currency at a specified price during a
specified delivery period. At the time of delivery, in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery of the underlying assets by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the underlying securities or other assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded. A
Fund will incur brokerage fees when it purchases or sells contracts, and will be
required to maintain margin deposits. At the time a Fund enters into a futures
contract, it is required to deposit with its custodian, on behalf of the broker,
a specified amount of cash or eligible securities, called "initial margin." The
initial margin required for a futures contract is set by the exchange on which
the contract is traded. Subsequent payments, called "variation margin," to and
from the broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures transactions
could reduce a Fund's return. Futures
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contracts entail risks. If the investment manager's judgment about the general
direction of markets or exchange rates is wrong, the overall performance may be
poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Fund could lose money on
the financial futures contracts and also on the value of its portfolio assets.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. A Fund may purchase and write call and
put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. A Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by a Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. The Funds may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Fund to purchase or sell
securities with payment and delivery to take place in the future in order to
secure what is considered to be an advantageous price or yield to the Fund at
the time of entering into the transaction. When the Fund enters into a delayed
delivery transaction, it becomes obligated to purchase securities and it has all
of the rights and risks attendant to ownership of a security, although delivery
and payment occur at a later date. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Fund makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for the
purchase and the value of the security in determining its net asset value.
Likewise, at the time a Fund makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. The Fund generally has the ability to close out a purchase obligation on
or before the settlement date, rather than take delivery of the security.
To the extent a Fund engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with the
Fund's investment objective and policies. A Fund reserves the right to sell
these securities before the settlement date if deemed advisable.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase or a forward currency exchange purchase, a Fund
will maintain eligible securities in a segregated account. A Fund will use cover
in connection with selling a futures contract.
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A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only in an attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Fund holds or intends to purchase.
FOREIGN CURRENCY OPTIONS. The Diversified, High Yield, Income and Capital and
Opportunity Funds may engage in foreign currency options transactions. A foreign
currency option provides the option buyer with the right to buy or sell a stated
amount of foreign currency at the exercise price at a specified date or during
the option period. A call option gives its owner the right, but not the
obligation, to buy the currency, while a put option gives its owner the right,
but not the obligation, to sell the currency. The option seller (writer) is
obligated to fulfill the terms of the option sold if it is exercised. However,
either seller or buyer may close its position during the option period in the
secondary market for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if a Fund were
holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the Fund would not have to exercise its
call but could acquire in the spot market the amount of foreign currency needed
for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Diversified, High Yield, Income and Capital and
Opportunity Funds may use foreign currency futures contracts and options on such
futures contracts. Through the purchase or sale of such contracts, a Fund may be
able to achieve many of the same objectives as through forward foreign currency
exchange contracts more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Diversified, High Yield, Income
and Capital and Opportunity Funds may engage in forward foreign currency
transactions. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days ("term") from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders (usually large commercial banks) and
their customers. The investment manager believes that it is important to have
the flexibility to enter into such forward contracts when it determines that to
do so is in the best interests of a Fund. A Fund will not speculate in foreign
currency exchange.
If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such
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currency increase. A Fund may have to convert its holdings of foreign currencies
into U.S. Dollars from time to time in order to meet such needs as Fund expenses
and redemption requests. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts when the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. See "Foreign Currency Transactions" under
"Investment Objectives, Policies and Risk Factors--Additional Investment
Information" in the prospectus. A Fund segregates eligible securities to the
extent required by applicable regulation in connection with forward foreign
currency exchange contracts entered into for the purchase of foreign currency.
The Diversified, High Yield, Income and Capital and Opportunity Funds do not
intend to enter into forward contracts for the purchase of a foreign currency if
they would have more than 15% of the value of their total assets committed to
such contracts. A Fund generally will not enter into a forward contract with a
term longer than one year.
COLLATERALIZED OBLIGATIONS. A Fund will currently invest in only those
collateralized obligations that are fully collateralized and that meet the
quality standards otherwise applicable to the Fund's investments. Fully
collateralized means that the collateral will generate cash flows sufficient to
meet obligations to holders of the collateralized obligations under even the
most conservative prepayment and interest rate projections. Thus, the
collateralized obligations are structured to anticipate a worst case prepayment
condition and to minimize the reinvestment rate risk for cash flows between
coupon dates for the collateralized obligations. A worst case prepayment
condition generally assumes immediate prepayment of all securities purchased at
a premium and zero prepayment of all securities purchased at a discount.
Reinvestment rate risk may be minimized by assuming very conservative
reinvestment rates and by other means such as by maintaining the flexibility to
increase principal distributions in a low interest rate environment. The
effective credit quality of the collateralized obligations in such instances is
the credit quality of the issuer of the collateral. The requirements as to
collateralization are determined by the issuer or sponsor of the collateralized
obligation in order to satisfy rating agencies, if rated. No Fund currently
intends to invest more than 5% of its total assets in collateralized obligations
that are collateralized by a pool of credit card or automobile receivables or
other types of assets rather than a pool of mortgages, Mortgage-Backed
Securities or U.S. Government Securities. Currently, none of the Funds intends
to invest more than 10% of its total assets in inverse floaters.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations often are issued in two or more classes with
varying maturities and stated rates of interest. Because interest and principal
payments on the underlying securities are not passed through directly to holders
of collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments, sometimes called
interest only (IO) and principal only (PO) securities. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 10% of a Fund's total assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Fund's limitation on illiquid securities, however, the Board of Trustees of a
Fund may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
ZERO COUPON GOVERNMENT SECURITIES. Subject to its investment objective and
policies, a Fund may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any
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periodic interest payments. These securities may include those created directly
by the U.S. Treasury and those created as collateralized obligations through
various proprietary custodial, trust or other relationships (see "Investment
Objectives, Policies and Risk Factors--Additional Investment
Information--Collateralized Obligations" in the prospectus). The effect of
owning instruments which do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on all
discount accretion during the life of the obligation. This implicit reinvestment
of earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yield on the zero coupon bond,
but at the same time eliminates any opportunity to reinvest earnings at higher
rates. For this reason, zero coupon bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than those
of comparable securities that pay interest currently, which fluctuation is
greater as the period to maturity is longer. Zero coupon bonds created as
collateralized obligations are similar to those created through the U.S.
Treasury, but the former investments do not provide absolute certainty of
maturity or of cash flows after prior classes of the collateralized obligations
are retired. No Fund currently intends to invest more than 5% of its net assets
in zero coupon U.S. Government Securities during the current year.
SHORT SALES AGAINST-THE-BOX. The Adjustable Rate, Diversified and Mortgage
Funds may each make short sales against-the-box. A short sale "against-the-box"
is a short sale in which the Fund owns at least an equal amount of the
securities sold short or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same issue as,
and at least equal in amount to, the securities sold short. A Fund may engage in
such short sales only to the extent that not more than 10% of the Fund's total
assets (determined at the time of the short sale) is held as collateral for such
sales. No Fund currently intends, however, to engage in such short sales to the
extent that more than 5% of its net assets will be held as collateral therefor
during the current year.
INTEREST RATE SWAPS AND SWAP-RELATED PRODUCTS. Each of the Adjustable Rate and
Opportunity Funds usually will enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with a Fund receiving or paying,
as the case may be, only the net amounts of the two payments. The net amount of
the excess, if any, of the Fund's obligations over its entitlement with respect
to each interest rate swap will be accrued on a daily basis and an amount of
cash or eligible securities having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account by the Fund's
custodian. To the extent that a Fund enters into interest rate swaps on other
than a net basis, the amount maintained in a segregated account will be the full
amount of the Fund's obligations, if any, with respect to such interest rate
swaps, accrued on a daily basis.
Each of the Adjustable Rate and Opportunity Funds will not enter into any swap
transaction unless the unsecured senior debt or the claims-paying ability of the
other party thereto is rated in the highest rating category for the Adjustable
Rate Fund, and, within the top three rating categories for the Opportunity Fund,
by at least one nationally recognized rating organization at the time of
entering into such transaction. If there is a default by the other party to such
a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents using standardized swap documents. As a result,
the swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documents have not yet been developed and,
accordingly, they are less liquid than swaps. It is anticipated that neither the
Adjustable Rate nor Opportunity Fund will invest more than 5% of its total
assets in interest rate caps and floors and that the aggregate notional (agreed
upon) principal amount of interest rate swaps entered into by a Fund and the
aggregate contract value of outstanding futures contracts of a Fund and futures
contracts subject to outstanding options written by a Fund will not exceed 50%
of the Fund's total assets.
ADDITIONAL INFORMATION--ADJUSTABLE RATE SECURITIES. The interest rates paid on
the adjustable rate securities in which the Adjustable Rate Fund invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are three main categories of
indices: those based on U.S. Treasury securities, those derived from a
calculated measure such as a cost of funds index or those based on a moving
average of mortgage rates. Commonly used indices include the one-year,
three-year and five-year constant
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maturity Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the 11th District
Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the
one-month, three-month, six-month or one-year London Interbank Offered Rate
("LIBOR"), the prime rate of a specific bank or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District Home
Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels
and tend to be somewhat less volatile.
The Mortgage-Backed Securities either issued or guaranteed by GNMA, FHLMC or
FNMA ("Certificates") are called pass-through Certificates because a pro rata
share of both regular interest and principal payments (less GNMA's FHLMC's or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly to
the holder of the Certificate (i.e., the Fund). The principal and interest on
GNMA securities are guaranteed by GNMA and backed by the full faith and credit
of the U.S. Government. FNMA guarantees full and timely payment of all interest
and principal, while FHLMC guarantees timely payment of interest and ultimate
collection of principal. Mortgage-Backed Securities from FNMA and FHLMC are not
backed by the full faith and credit of the United States; however, they are
generally considered to offer minimal credit risks. The yields provided by these
Mortgage-Backed Securities have historically exceeded the yields on other types
of U.S. Government Securities with comparable maturities in large measure due to
the prepayment risk discussed below.
If prepayments of principal are made on the underlying mortgages during periods
of rising interest rates, the Adjustable Rate Fund generally will be able to
reinvest such amounts in securities with a higher current rate of return.
However, the Adjustable Rate Fund will not benefit from increases in interest
rates to the extent that interest rates rise to the point where they cause the
current coupon of adjustable rate mortgages held as investments by the
Adjustable Rate Fund to exceed the maximum allowable annual or lifetime reset
limits (or "cap rates") for a particular mortgage. Also, the Adjustable Rate
Fund's net asset value could vary to the extent that current yields on
Mortgage-Backed Securities are different than market yields during interim
periods between coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Adjustable Rate Fund.
Further, because of this feature, the value of adjustable rate mortgages is
unlikely to rise during periods of declining interest rates to the same extent
as fixed-rate instruments. As with other Mortgage-Backed Securities, interest
rate declines may result in accelerated prepayment of mortgages, and the
proceeds from such prepayments must be reinvested at lower prevailing interest
rates.
One additional difference between adjustable rate mortgages and fixed rate
mortgages is that for certain types of adjustable rate mortgage securities, the
rate of amortization of principal, as well as interest payments, can and does
change in accordance with movements in a specified, published interest rate
index. The amount of interest due to an adjustable rate mortgage security holder
is calculated by adding a specified additional amount, the "margin," to the
index, subject to limitations or "caps" on the maximum and minimum interest that
is charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period. It is these special
characteristics that are unique to adjustable rate mortgages that the Fund
believes make them attractive investments in seeking to accomplish the
Adjustable Rate Fund's objective.
PORTFOLIO TRANSACTIONS
Zurich Kemper Investments, Inc. ("ZKI") and its affiliates furnish investment
management services for the Kemper Funds, Zurich Money Market Funds and other
clients including affiliated insurance companies. Zurich Investment Management
Limited ("ZIML") is the sub-adviser for the Diversified, High Yield, Income and
Capital and Opportunity Funds. ZKI and its affiliates share some common research
and trading facilities. ZIML is the subadviser for other Kemper Funds. At times
investment decisions may be made to purchase or sell the same investment
securities for a Fund and for one or more of the other clients managed by ZKI or
its affiliates. When two or more of such clients are simultaneously engaged in
the purchase or sale of the same security through the
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same trading facility, the transactions are allocated as to amount and price in
a manner considered equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options a Fund
will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or futures contracts available to a Fund. On the
other hand, the ability of a Fund to participate in volume transactions may
produce better executions for a Fund in some cases.
ZKI and ZIML, in effecting purchases and sales of portfolio securities for the
account of a Fund, will implement each Fund's policy of seeking best execution
of orders. ZKI and ZIML may be permitted to pay higher brokerage commissions for
research services as described below. Consistent with this policy, orders for
portfolio transactions are placed with broker-dealer firms giving consideration
to the quality, quantity and nature of each firm's professional services, which
include execution, financial responsibility, responsiveness, clearance
procedures, wire service quotations and statistical and other research
information provided to a Fund and ZKI and its affiliates. Subject to seeking
best execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of ZKI and
its affiliates. In selecting among firms believed to meet the criteria for
handling a particular transaction, ZKI and ZIML may give consideration to those
firms that have sold or are selling shares of the Funds and of other funds
managed by ZKI or its affiliates, as well as to those firms that provide market,
statistical and other research information to a Fund and ZKI and its affiliates,
although ZKI and ZIML are not authorized to pay higher commissions to firms that
provide such services, except as described below.
ZKI and ZIML may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include, among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of the products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by ZKI or one of its affiliates in cash. Subject to
Section 28(e) and procedures adopted by the Board of Trustees of each Fund, a
Fund (except the Mortgage and Short-Intermediate Government Funds) could pay a
firm that provides research services commissions for effecting a securities
transaction for the Fund in excess of the amount other firms would have charged
for the transaction if ZKI or ZIML determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing firm viewed in terms either of a particular
transaction or ZKI's or ZIML's overall responsibilities to the Fund and other
clients. Not all of such research services may be useful or of value in advising
a particular Fund. Research benefits will be available for all clients of ZKI
and its affiliates. The investment management fee paid by a Fund to ZKI is not
reduced because these research services are received.
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The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years and for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided (except the
Opportunity Fund which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
ALLOCATED TO FIRMS
BASED ON
RESEARCH IN
FUND FISCAL 1997 FISCAL 1997 FISCAL 1996 FISCAL 1995
---- ----------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate............................ $ 8,000 0% $ 29,000 $ 99,000
Diversified................................ $ 3,860,000 11% $ 2,927,000 $ 1,323,000
Government................................. $ 887,000 0% $ 806,000 $ 823,000
High Yield................................. $43,566,000 18% $46,280,000 $21,136,000
Income and Capital......................... $ 2,156,000 0% $ 1,624,000 $ 1,576,000
Mortgage................................... $ 570,000 0% $ 545,000 $ 1,598,000+
Short-Intermediate Government.............. $ 15,000 0% $ 44,000 $ 125,000+
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
The change in portfolio turnover rates during the last two fiscal years for the
Income and Capital Fund (see "Financial Highlights" in the prospectus) was due
primarily to strategies related to Government securities transactions.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is each Fund's investment manager. ZKI is wholly
owned by ZKI Holding Corp. ZKI Holding Corp. is a more than 90% owned subsidiary
of Zurich Holding Company of America, Inc., which is a wholly owned subsidiary
of Zurich Insurance Company, a leading internationally recognized provider of
insurance and financial services in property/casualty and life insurance,
reinsurance and structured financial solutions as well as asset management.
Pursuant to investment management agreements, ZKI acts as each Fund's investment
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, bookkeeping and
administrative services, and permits any of its officers or employees to serve
without compensation as trustees or officers of a Fund if elected to such
positions. Each investment management agreement provides that each Fund pays the
charges and expenses of its operations, including the fees and expenses of the
trustees (except those who are affiliated with ZKI), independent auditors,
counsel, custodian and transfer agent and the cost of share certificates,
reports and notices to shareholders, brokerage commissions or transaction costs,
costs of calculating net asset value, taxes and membership dues. Each Fund bears
the expenses of registration of its shares with the Securities and Exchange
Commission, while Kemper Distributors, Inc. ("KDI"), as principal underwriter,
pays the cost of qualifying and maintaining the qualification of each Fund's
shares for sale under the securities laws of the various states. ZKI has agreed
to reimburse the Government Fund should all operating expenses of the Fund,
including the compensation of ZKI, but excluding taxes, interest, distribution
services fee, extraordinary expenses and brokerage commissions or transaction
costs, exceed 1% of average daily net assets of the fund on an annual basis.
The investment management agreements provide that ZKI shall not be liable for
any error of judgment or of law, or for any loss suffered by a Fund in
connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZKI in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by (a) a majority
of the trustees who are not parties to such agreement or interested
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persons of any such party except in their capacity as trustees of the Fund and
(b) by the shareholders or the Board of Trustees of the Fund. Each Fund's
investment management agreement may be terminated at any time upon 60 days'
notice by either party, or by a majority vote of the outstanding shares of the
Fund, and will terminate automatically upon assignment. If additional Funds
become subject to an investment management agreement, the provisions concerning
continuation, amendment and termination shall be on a Fund by Fund basis.
Additional Funds may be subject to a different agreement.
The current investment management fee rates paid by the Funds are in the
prospectus, see "Investment Manager and Underwriter." The investment management
fees paid by each Fund for its last three fiscal years are shown in the table
below (except for the Opportunity Fund which commenced operations on October 1,
1997).
<TABLE>
<CAPTION>
FUND 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate............................................. $ 493,000 627,000 887,000
Diversified................................................. $ 4,664,000 4,239,000 4,152,000
Government.................................................. $15,888,000 18,159,000 19,681,000
High Yield.................................................. $23,419,000 19,436,000 17,917,000
Income and Capital.......................................... $ 3,162,000 3,194,000 2,923,000
Mortgage.................................................... $13,793,000 16,340,000 21,526,000+
Short-Intermediate Government............................... $ 1,014,000 1,230,000 1,626,000+
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
FUND SUB-ADVISER. ZIML, 1 Fleet Place, London, U.K. EC4M 7RQ, an affiliate of
ZKI, is the sub-adviser for the foreign securities portion of the Diversified,
High Yield, Opportunity, and Income and Capital Funds. ZIML acts as sub-adviser
pursuant to the terms of a Sub-Advisory Agreement between it and ZKI for each
such Fund.
Under the terms of the Sub-Advisory Agreement for a Fund, ZIML renders
investment advisory and management services with regard to that portion of the
Fund's portfolio as may be allocated to ZIML by ZKI from time to time for
management of foreign securities, including foreign currency transactions and
related investments. ZIML may, under the terms of each Sub-Advisory Agreement,
render similar services to others including other investment companies. For its
services, ZIML receives from ZKI a monthly fee at the annual rate of .30% of the
portion of the average daily net assets of each Fund allocated by ZKI to ZIML
for management. ZIML permits any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
Each Sub-Advisory Agreement provides that ZIML will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Sub-Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZIML in the performance of its duties or from reckless disregard by ZIML of its
obligations and duties under the Sub-Advisory Agreement.
Each Sub-Advisory Agreement continues in effect from year to year so long as its
continuation is approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of the Fund and (b) by the shareholders or the
Board of Trustees. Each Sub-Advisory Agreement may be terminated at any time for
a Fund upon 60 days notice by ZKI, ZIML or the Board of Trustees, or by a
majority vote of the outstanding shares of the Fund, and will terminate
automatically upon assignment or upon the termination of the Fund's investment
management agreement. If additional Funds become subject to a Sub-Advisory
Agreement, the provisions concerning continuation, amendment and termination
shall be on a Fund-by-Fund basis. Additional Funds may be subject to a different
agreement. The sub-advisory fees paid by ZKI to ZIML for the Diversified, High
Yield and Income and Capital Fund's 1997 fiscal year were $3,821, $0 and $0,
respectively. The Opportunity Fund commenced operations on October 1, 1997.
B-21
<PAGE> 190
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-22
<PAGE> 191
CLASS A SHARES. The following information concerns the underwriting commissions
paid in connection with the distribution of each Fund's Class A shares for the
fiscal years noted (except for the Opportunity Fund which commenced operations
on October 1, 1997).
<TABLE>
<CAPTION>
COMMISSIONS
COMMISSIONS COMMISSIONS PAID TO
CLASS A SHARES FISCAL YEAR RETAINED BY KDI KDI PAID TO ALL FIRMS KDI AFFILIATED FIRMS
-------------- ----------- --------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Adjustable Rate...................... 1997 $ 8,000 58,000 0
1996 $ 11,000 88,000 0
1995 $ 22,000 161,000 40,000
Diversified.......................... 1997 $ 178,000 1,166,000 0
1996 $ 129,000 737,000 69,000
1995 $ 75,000 462,000 68,000
Government........................... 1997 $ 221,000 1,410,000 10,000
1996 $ 330,000 2,024,000 91,000
1995 $ 380,000 2,427,000 325,000
High Yield........................... 1997 $1,714,000 11,779,000 181,000
1996 $ 857,000 6,035,000 226,000
1995 $ 476,000 3,430,000 435,000
Income and Capital................... 1997 $ 53,000 1,283,000 0
1996 $ 115,000 914,000 74,000
1995 $ 96,000 767,000 110,000
Mortgage............................. 1997 $ 29,000 201,000 0
1996 $ 38,000 226,000 11,000
1995+ $ 20,000 183,000 29,000
Short-Intermediate Government........ 1997 $ 8,000 82,000 0
1996 $ 9,000 70,000 1,000
1995+ $ 23,000 220,000 77,000
</TABLE>
- ---------------
+ Includes amounts paid during fiscal year ended July 31, 1995 and fiscal
period from August 1, 1995 to September 30, 1995.
CLASS B SHARES AND CLASS C SHARES. Since the distribution agreement provides for
fees charged to Class B and Class C shares that are used by KDI to pay for
distribution services (see the prospectus under "Investment Manager and
Underwriter"), the agreement (the "Plan"), is approved and renewed separately
for the Class B and Class C shares in accordance with Rule 12b-1 under the
Investment Company Act of 1940, which regulates the manner in which an
investment company may, directly or indirectly, bear expenses of distributing
its shares. As of December 1997, each Fund's Rule 12b-1 Plan has been separated
from its distribution agreement.
B-23
<PAGE> 192
Expenses of the Funds and of KDI in connection with the Rule 12b-1 plans for the
Class B and Class C shares are set forth below (except for the Opportunity Fund
which commenced operations on October 1, 1997). A portion of the marketing,
sales and operating expenses shown below could be considered overhead expense.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED DISTRIBUTION
DISTRIBUTION SALES TOTAL FEES PAID BY
FEES PAID CHARGES DISTRIBUTION KDI TO KDI
FISCAL BY FUND PAID TO FEES PAID BY AFFILIATED
CLASS B SHARES YEAR TO KDI KDI KDI TO FIRMS FIRMS
-------------- ------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 1997 $ 51,000 31,000 112,000 0
1996 $ 42,000 19,000 56,000 5,000
1995 $ 35,000 30,000 116,000 41,000
Diversified.......... 1997 $ 2,148,000 419,000 2,911,000 0
1996 $ 1,909,000 446,000 1,739,000 54,000
1995 $ 1,925,000 688,000 1,155,000 133,000
Government........... 1997 $ 528,000 234,000 665,000 0
1996 $ 475,000 181,000 1,206,000 34,000
1995 $ 254,000 91,000 1,495,000 200,000
High Yield........... 1997 $ 8,925,000 1,473,000 16,578,000 0
1996 $ 7,450,000 1,324,000 7,288,000 91,000
1995 $ 7,344,000 1,785,000 3,986,000 574,000
Income and
Capital............ 1997 $ 600,000 211,000 588,000 0
1996 $ 572,000 146,000 1,393,000 89,000
1995 $ 289,000 86,000 876,000 113,000
Mortgage............. 1997 $ 6,685,000 1,362,000 640,000 0
1996 $ 9,328,000 2,147,000 982,000 22,000
1995+ $15,132,000 4,977,000 1,496,000 156,000
Short-Intermediate
Government......... 1997 $ 1,071,000 327,000 335,000 0
1996 $ 1,403,000 486,000 378,000 2,000
1995+ $ 1,979,000 1,011,000 699,000 64,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY KDI
------------------------------------------------------------
ADVERTISING MARKETING MISC.
AND PROSPECTUS AND SALES OPERATING INTEREST
CLASS B SHARES LITERATURE PRINTING EXPENSES EXPENSES EXPENSE
-------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 10,000 1,000 25,000 492,000 36,000
13,000 1,000 31,000 12,000 26,000
13,000 3,000 69,000 22,000 18,000
Diversified.......... 368,000 26,000 1,018,000 121,000 640,000
409,000 33,000 871,000 165,000 468,000
115,000 16,000 586,000 97,000 452,000
Government........... 116,000 8,000 303,000 43,000 405,000
336,000 27,000 690,000 135,000 308,000
131,000 8,000 681,000 86,000 136,000
High Yield........... 2,127,000 153,000 5,700,000 583,000 1,500,000
1,549,000 119,000 3,416,000 638,000 567,000
335,000 45,000 2,075,000 281,000 461,000
Income and
Capital............ 97,000 7,000 254,000 39,000 378,000
390,000 31,000 804,000 132,000 295,000
70,000 7,000 354,000 59,000 104,000
Mortgage............. 116,000 8,000 300,000 57,000 -0-
325,000 23,000 656,000 119,000 514,000
165,000 72,000 979,000 147,000 1,911,000
Short-Intermediate
Government......... 52,000 4,000 136,000 31,000 -0-
111,000 9,000 235,000 44,000 -0-
78,000 21,000 416,000 73,000 14,000
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
B-24
<PAGE> 193
<TABLE>
<CAPTION>
DISTRIBUTION
CONTINGENT TOTAL FEES PAID
DISTRIBUTION DEFERRED DISTRIBUTION BY KDI
FEES PAID SALES FEES PAID TO KDI
BY FUND CHARGES BY KDI TO AFFILIATED
CLASS C SHARES FISCAL YEAR TO KDI TO KDI FIRMS FIRMS
-------------- ----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 1997 $ 9,000 0 8,000 0
1996 $ 9,000 0 9,000 0
1995 $ 8,000 N/A 11,000 4,000
Diversified.......... 1997 $ 83,000 5,000 106,000 0
1996 $ 33,000 0 52,000 0
1995 $ 14,000 N/A 14,000 1,000
Government........... 1997 $ 62,000 1,000 72,000 0
1996 $ 51,000 1,000 60,000 0
1995 $ 19,000 N/A 19,000 2,000
High Yield........... 1997 $657,000 58,000 944,000 0
1996 $245,000 3,000 370,000 0
1995 $ 68,000 N/A 67,000 8,000
Income and Capital... 1997 $ 53,000 2,000 60,000 0
1996 $ 31,000 1,000 42,000 0
1995 $ 12,000 N/A 12,000 1,000
Mortgage............. 1997 $ 16,000 1,000 21,000 0
1996 $ 12,000 0 15,000 0
1995+ $ 5,000 N/A 5,000 1,000
Short-Intermediate
Government......... 1997 $ 34,000 3,000 42,000 0
1996 $ 25,000 1,000 29,000 0
1995+ $ 19,000 N/A 42,000 3,000
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY KDI
-----------------------------------------------------------
ADVERTISING MARKETING MISC.
AND PROSPECTUS AND SALES OPERATING INTEREST
CLASS C SHARES LITERATURE PRINTING EXPENSES EXPENSES EXPENSES
-------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Adjustable Rate...... 4,000 0 11,000 61,000 12,000
9,000 1,000 20,000 8,000 8,000
6,000 2,000 32,000 14,000 4,000
Diversified.......... 49,000 4,000 136,000 24,000 29,000
34,000 3,000 54,000 14,000 12,000
8,000 1,000 42,000 14,000 5,000
Government........... 16,000 1,000 44,000 8,000 30,000
57,000 5,000 113,000 8,000 19,000
11,000 1,000 60,000 14,000 4,000
High Yield........... 411,000 29,000 1,111,000 128,000 210,000
316,000 23,000 559,000 90,000 79,000
41,000 4,000 250,000 44,000 18,000
Income and Capital... 23,000 2,000 60,000 16,000 24,000
40,000 3,000 86,000 2,000 12,000
7,000 1,000 34,000 11,000 2,000
Mortgage............. 7,000 0 19,000 5,000 8,000
8,000 1,000 17,000 1,000 5,000
4,000 1,000 23,000 12,000 2,000
Short-Intermediate
Government......... 18,000 1,000 50,000 16,000 28,000
36,000 3,000 76,000 12,000 17,000
15,000 4,000 79,000 21,000 8,000
</TABLE>
- ---------------
+ Includes amounts paid during the fiscal year ended July 31, 1995 and the
fiscal period from August 1, 1995 to September 30, 1995.
ADMINISTRATIVE SERVICES. Administrative services are provided to each Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. For
the services under the administrative agreement, each Fund pays KDI an
administrative services fee, payable monthly, at the annual rate of up to .25%
of average daily net assets of Class A, B and C shares of the Fund.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are investors of the Fund. The
firms provide such office space and equipment, telephone facilities and
personnel as is necessary or beneficial for providing information and services
to their clients. Such services and assistance may include, but are not limited
to, establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A shares, KDI pays each firm a service fee,
normally payable quarterly, at an annual rate of (a) up to .15% (.25% for the
Mortgage and Short-Intermediate Government Funds) of the net assets in Fund
accounts that it maintains and services attributable to Class A shares acquired
prior to October 1, 1993, and (b) up to .25% of net assets of those accounts
that it maintains and services attributable to Class A shares acquired on or
after October 1, 1993, in each case commencing with the month after investment.
With respect to Class B shares and Class C shares, KDI currently advances to
firms the first-year service fee at a rate of up to .25% of the purchase price
of such shares. For periods after the first year, KDI currently intends to pay
firms a service fee at an annual rate of up to .25% (calculated monthly and
normally paid quarterly) of the net assets attributable to Class B and Class C
shares
B-25
<PAGE> 194
maintained and serviced by the firm and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include affiliates of
KDI.
The following information concerns the administrative services fee paid by each
Fund to KDI (except the Opportunity Fund which commenced operations on October
1, 1997).
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE FEES TOTAL SERVICE FEES PAID BY SERVICE FEES PAID BY KDI
PAID BY FUND KDI TO FIRMS TO KDI AFFILIATED FIRMS
-------------------------------- --------------------------- ------------------------
FUND FISCAL YEAR CLASS A CLASS B CLASS C
---- ----------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate.......... 1997 $ 169,000 17,000 3,000 188,000 0
1996 $ 213,000 14,000 3,000 231,000 5,000
1995 $ 299,000 11,000 2,000 320,000 76,000
Diversified.............. 1997 $1,131,000 705,000 28,000 1,930,000 9,000
1996 $1,020,000 624,000 11,000 1,692,000 55,000
1995 $ 952,000 620,000 5,000 1,582,000 203,000
Government............... 1997 $6,821,000 173,000 19,000 7,053,000 35,000
1996 $7,542,000 159,000 15,000 7,728,000 329,000
1995 $7,831,000 84,000 6,000 7,965,000 1,161,000
High Yield............... 1997 $6,462,000 2,917,000 217,000 10,067,000 49,000
1996 $5,075,000 2,469,000 83,000 7,844,000 134,000
1995 $4,323,000 2,400,000 22,000 6,730,000 783,000
Income and Capital....... 1997 $ 992,000 199,000 18,000 1,207,000 6,000
1996 $ 950,000 185,000 10,000 1,167,000 39,000
1995 $ 856,000 95,000 4,000 980,000 108,000
Mortgage................. 1997 $4,354,000 2,139,000 5,000 6,503,000 73,000
1996 $4,751,000 2,978,000 4,000 7,729,000 301,000
1995+ $5,402,000 4,811,000 2,000 10,164,000 1,280,000
Short-Intermediate
Government............. 1997 $ 88,000 345,000 12,000 450,000 0
1996 $ 80,000 453,000 8,000 546,000 11,000
1995+ $ 69,000 640,000 6,000 698,000 60,000
</TABLE>
- ---------------
+ Includes amounts paid during fiscal year ended July 31, 1995 and the fiscal
period from August 1, 1995 to September 30, 1995.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, however,
the administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from a
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of a Fund while this procedure is in
effect will depend upon the proportion of Fund assets that is in accounts for
which a firm of record provides administrative services, as well as (except for
the Mortgage and Short-Intermediate Government Funds), with respect to Class A
shares, the date when shares representing such assets were purchased. The Board
of Trustees of a Fund, in its discretion, may approve basing the fee to KDI on
all Fund assets in the future.
Certain trustees or officers of the Funds are also directors or officers of ZKI,
ZIML or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of each Fund maintained in the United States. The Chase Manhattan Bank, Chase
MetroTech Center, Brooklyn,
B-26
<PAGE> 195
New York 11245, as custodian, has custody of all securities and cash of each
Fund held outside of the United States. They attend to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by each Fund. IFTC is also each Fund's transfer agent and
dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper
Service Company ("KSvC"), an affiliate of ZKI, serves as "Shareholder Service
Agent" of each Fund, and as such, performs all of IFTC's duties as transfer
agent and dividend paying agent. IFTC receives as transfer agent, and pays to
ZKSC, annual account fees of $6 per account plus account set up, transaction and
maintenance charges, annual fees associated with the contingent deferred sales
charge (Class B only) and out-of-pocket expense reimbursement. IFTC's fee is
reduced by certain earnings credits in favor of the Fund. The following shows
for each Fund's 1997 fiscal year the shareholder service fees IFTC remitted to
KSvC (except for the Opportunity Fund which commenced operations on October 1,
1997).
<TABLE>
<CAPTION>
FUND FEES TO KSVC
- ---- ------------
<S> <C>
Adjustable Rate............................................. $ 249,000
Diversified................................................. 1,681,000
Government.................................................. 3,598,000
High Yield.................................................. 4,802,000
Income and Capital.......................................... 937,000
Mortgage.................................................... 3,192,000
Short-Intermediate Government............................... 560,000
</TABLE>
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
LEGAL COUNSEL. Vedder, Price, Kaufmann & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to each Fund.
PURCHASE AND REDEMPTION OF SHARES
As described in the Funds' prospectus, shares of a Fund are sold at their public
offering price, which is the net asset value per share of the Fund next
determined after an order is received in proper form plus, with respect to Class
A shares of each Fund, an initial sales charge. The minimum initial investment
is $1,000 and the minimum subsequent investment is $100 but such minimum amounts
may be changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described in the Funds' prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemption of Class B or Class C shares by certain classes of persons or through
certain types of transactions as described in the prospectus are provided
because of anticipated economies in sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange ("Exchange") is closed
other than customary weekend and holiday closings or during any period in which
trading on the Exchange is restricted, (b) during any period when an emergency
exists as a result of which (i) disposal of a Fund's investments is not
reasonably practicable, or (ii) it is not reasonably
B-27
<PAGE> 196
practicable for the Fund to determine the value of its net assets, or (c) for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of a Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. Each Fund normally declares and distributes monthly dividends of net
investment income and distributes any net realized capital gains at least
annually.
A Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and long-
term capital gains as the Board of Trustees of the Fund determines appropriate
under the then current circumstances. In particular, and without limiting the
foregoing, a Fund may make additional distributions of net investment income or
capital gain net income in order to satisfy the minimum distribution
requirements contained in the Internal Revenue Code (the "Code"). Dividends will
be reinvested in shares of the Fund paying such dividends unless shareholders
indicate in writing that they wish to receive them in cash or in shares of other
Kemper Funds as described in the prospectus.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
TAXES. Each Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed. One of the
Subchapter M requirements to be satisfied is that less than 30% of a Fund's
gross income during its fiscal year must be derived from gains (not reduced by
losses) from the sale or other disposition of securities and certain other
investments held for less than three months. This requirement has been
eliminated by the Taxpayer Relief Act of 1997 for fiscal years beginning after
August 5, 1997. As long as the requirement applies a Fund may be limited in its
options, futures and foreign currency transactions in order to prevent
recognition of such gains.
A Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain or loss
recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts on foreign currency are
marked-to-market, the gain or loss is generally ordinary under Section 988 of
the Code. In addition, the straddle rules of the Code would require deferral of
certain losses realized on positions of a straddle to the extent that the Fund
had unrealized gains in offsetting positions at year end.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the
B-28
<PAGE> 197
currency gain or loss may be treated as ordinary income or loss. If such
transactions result in greater net ordinary income, the dividends paid by the
Fund will be increased; if the result of such transactions is lower net ordinary
income, a portion of dividends paid could be classified as a return of capital.
At August 31, 1997 the Adjustable Rate Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $10,622,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1998 through 2004. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At October 31, 1997 the Diversified Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $126,968,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2003. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1997, the Government Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $679,036,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2004. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1997, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $16,124,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 2002 through 2003. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1997, the High Yield Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $151,654,000,
which is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1998 through 2006. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1997, the Mortgage Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $894,044,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 1998 through 2006. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At September 30, 1997, the Short-Intermediate Government Fund had an accumulated
net realized capital loss for federal income tax purposes of approximately
$22,500,000, which is available to offset future taxable capital gains. If not
applied, the carryover expires during the period 2002 through 2006. The Fund
does not intend to distribute realized capital gains until the capital loss
carryover is exhausted.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. Each Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of a Fund (other than shares of the Kemper Cash Reserves
Fund not acquired by exchange from another Kemper Mutual Fund) or other Kemper
Mutual Fund listed in the prospectus
B-29
<PAGE> 198
under "Special Features--Class A Shares--Combined Purchases" may reinvest the
amount redeemed at net asset value at the time of the reinvestment in shares of
any Fund or in shares of a Kemper Mutual Fund within six months of the
redemption as described in the prospectus under "Redemption or Repurchase of
Shares--Reinvestment Privilege." If redeemed shares were purchased after October
3, 1989 and were held less than 91 days, then the lesser of (a) the sales charge
waived on the reinvested shares, or (b) the sales charge incurred on the
redeemed shares, is included in the basis of the reinvested shares and is not
included in the basis of the redeemed shares. If a shareholder realized a loss
on the redemption or exchange of a Fund's shares and reinvests in shares of the
same Fund within 30 days before or after the redemption or exchange, the
transactions may be subject to the wash sale rules resulting in a postponement
of the recognition of such loss for federal income tax purposes. An exchange of
a Fund's shares for shares of another fund is treated as a redemption and
reinvestment for federal income tax purposes upon which gain or loss may be
recognized.
A Fund's investment income derived from foreign securities and certain American
Depositary Receipts may be subject to foreign income taxes withheld at the
source. Because the amount of a Fund's investments in various countries will
change from time to time, it is not possible to determine the effective rate of
such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the prospectus, each Fund's historical performance or return for
a class of shares may be shown in the form of "yield" and "average annual total
return" and "total return" figures. These various measures of performance are
described below. Performance information will be computed separately for each
class. ZKI agreed to waive its management fee and to absorb certain operating
expenses for the Adjustable Rate Fund for the periods and to the extent
specified in this Statement of Additional Information. See "Investment Manager
and Underwriter." Because of this waiver and expense absorption, the performance
results for the Adjustable Rate Fund may be shown with and without the effect of
this waiver and expense absorption. Performance results not giving effect to
waivers and expense absorptions will be lower.
Yield is a measure of the net investment income per share earned over a specific
one month or 30-day period expressed as a percentage of the maximum offering
price of a Fund's shares at the end of the period. Average annual total return
and total return measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of, the
underlying investments in the Fund's portfolio.
A Fund's yield is computed in accordance with a standardized method prescribed
by rules of the Securities and Exchange Commission. Each Fund's yield shown
below is based on the one month period ended as noted (except for the
Opportunity Fund which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
FUND (PERIOD ENDED) SHARES SHARES SHARES
- ------------------- ------- ------- -------
<S> <C> <C> <C>
Adjustable Rate (8/31/97)................................... 5.00% 4.48% 4.52%
Diversified (10/31/97)...................................... 6.54 5.86 5.95
Government (10/31/97)....................................... 6.11 5.44 5.48
High Yield (9/30/97)........................................ 7.86 7.34 7.36
Income and Capital (10/31/97)............................... 5.42 4.75 4.77
Mortgage (9/30/97).......................................... 6.07 5.48 5.60
Short-Intermediate Government (9/30/97)..................... 4.87 4.23 4.38
</TABLE>
Each Fund's yield is computed by dividing the net investment income per share
earned during the specified one month or 30-day period by the maximum offering
price per share (which is net asset value for Class B and Class C shares) on the
last day of the period, according to the following formula:
<TABLE>
<S><C>
a - b
-----
YIELD = 2 [ ( cd +1 )6 - 1]
</TABLE>
B-30
<PAGE> 199
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period
(which is net asset value for Class B and Class C shares).
In computing the foregoing yield, each Fund follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that each Fund uses to
prepare its annual and interim financial statements in conformity with generally
accepted accounting principles.
Each Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $1,000 investment ("initial investment") in
the Fund's shares on the first day of the period, adjusting to deduct the
maximum sales charge (in the case of Class A shares), and computing the
"redeemable value" of that investment at the end of the period. The redeemable
value in the case of Class B shares or Class C shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value on the reinvestment
dates during the period. Average annual total return may also be calculated
without deducting the maximum sales charge.
Calculation of a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the Fund's "Financial Highlights" table
in the Fund's financial statements and prospectus. Total return performance for
a specific period is calculated by first taking a hypothetical investment
("initial investment") in a Fund's shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B and Class C shares may or may not include the effect of
the applicable contingent deferred sales charge that may be imposed at the end
of the period. The calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge would be
reduced if such charge were included.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 4.5% of the offering price (3.5% for
the Adjustable Rate and Short-Intermediate Government Funds). Class B and Class
C shares are sold at net asset value. Redemptions of Class B shares may be
subject to a contingent deferred sales charge that is 4% in the first year
following the purchase, declines by a specified percentage each year thereafter
and becomes zero after six years. Redemption of Class C shares may be subject to
a 1% contingent deferred sales charge in the first year following purchase.
Returns and net asset value will fluctuate. Factors affecting each Fund's
performance include general market conditions, operating expenses and investment
management. Any additional fees charged by a dealer or other financial services
firm would reduce the returns described in this section. Shares of each Fund are
redeemable at the then current net asset value, which may be more or less than
original cost.
The figures below show performance information for the Funds for various
periods. Comparative information with respect to certain indices is also
included. Please note the differences and similarities between the investments
which a Fund may purchase and the investments measured by the applicable
indices. The Consumer Price Index is
B-31
<PAGE> 200
generally considered to be a measure of inflation. The Lehman Brothers
Adjustable Rate Index generally represents the performance of adjustable rate
mortgages during various market conditions. The Lehman Brothers Aggregate Bond
Index generally represents the performance of intermediate and long-term
government bonds and investment grade corporate debt securities and
mortgage-backed securities during various market conditions. The Lehman Brothers
Government/Corporate Bond Index generally represents the performance of
intermediate and long-term government and investment grade corporate debt
securities during various market conditions. The Merrill Lynch Market Weighted
Index generally represents the performance of short- and intermediate-term
Treasury and GNMA securities during various market conditions. The Salomon
Brothers High Grade Corporate Bond Index generally represents the performance of
high grade long-term corporate bonds during various market conditions. The
Salomon Brothers Long-Term High Yield Index generally represents the performance
of high yield debt securities during various market conditions. The Salomon
Brothers 30 Year GNMA Index generally represents the performance of GNMA 30-year
pass-through mortgages. The foregoing bond indices are unmanaged. The market
prices and yields of corporate and government bonds will fluctuate. The net
asset values and returns of each class of shares of the Funds will also
fluctuate. No adjustment has been made for taxes payable on dividends. The
period indicated was one of fluctuating securities prices and interest rates. As
indicated previously, the Opportunity Fund commenced operations on October 1,
1997.
ADJUSTABLE RATE FUND--AUGUST 31, 1997
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------ ------------- ------------ -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,949 9 9,372 18,330 83.3 19,002
Five Years 9,338 0 2,767 12,105 21.1 12,540
One Year 9,799 0 500 10,299 3.0 10,674
CLASS B SHARES
Life of Fund(++) 9,980 0 1,589 11,370 13.7 11,569
One Year 10,150 0 446 10,296 3.0 10,596
CLASS C SHARES
Life of Fund(++) 9,993 0 1,602 * * 11,595
One Year 10,150 0 448 * * 10,598
<CAPTION>
---------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
------ ---------------
<S> <C>
Life of Fund(+) 90.0
Five Years 25.4
One Year 6.7
Life of Fund(++) 15.7
One Year 6.0
Life of Fund(++) 16.0
One Year 6.0
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
------------------------------------------------
Consumer Salomon Lehman Lehman
TOTAL Price Bros. High Bros. Bros.
RETURN Index Grade Corp. Govt./Corp. ARM
TABLE (1) Index(2) Index(3) Index(4)
------ -------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Life of Fund(+) 40.6 172.4 137.0 *
Life of Fund(++) 9.0 36.8 28.3 26.0
Five Years 14.1 48.8 39.6 33.2
One Year 2.2 13.0 9.8 8.0
</TABLE>
<TABLE>
<CAPTION>
Salomon Lehman Lehman
AVERAGE ANNUAL Fund Fund Fund Consumer Bros. High Bros. Bros.
TOTAL RETURN Class A Class B Class C Price Grade Corp. Govt./Corp. ARM
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(4)
-------------- ------- ------- ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 6.3 * * 3.5 10.5 9.0 *
Life of Fund(++) * 4.0 4.6 2.7 10.1 8.2 7.4
Five Years 3.9 * * 2.7 8.3 6.9 5.9
One Year 3.0 3.0 6.0 2.2 13.0 9.8 8.0
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since September 1, 1987 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-32
<PAGE> 201
DIVERSIFIED FUND--OCTOBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(***)
------ ------------- ------------ -------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 5,589 712 68,480 74,781 647.8 78,322
Fifteen Years 6,206 339 35,907 42,452 324.5 44,442
Ten Years 9,324 0 20,416 29,740 197.4 31,149
Since 2/1/89(+++) 9,281 0 15,228 24,509 145.1 25,664
Five Years 10,071 0 5,716 15,787 57.9 16,533
One Year 9,505 0 824 10,329 3.3 10,812
<CAPTION>
-----------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(***)
------ -----------------
<S> <C>
Life of Fund(+) 683.2
Fifteen Years 344.4
Ten Years 211.5
Since 2/1/89(+++) 156.6
Five Years 65.3
One Year 8.1
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES
Life of Fund(++) 10,034 0 3,103 12,937 29.4 13,137 31.4
One Year 9,950 0 763 10,414 4.1 10,713 7.1
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS C SHARES
Life of Fund(++) 10,067 0 3,147 * * 13,124 31.2
One Year 9,967 0 770 * * 10,737 7.4
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------------
Salomon Lehman Merrill Lynch
TOTAL Consumer Bros. Bros. High Yield
RETURN Price High Grade Govt./Corp. Master
TABLE Index(1) Corp. Index(2) Index(3) Index(5)
------ -------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Life of Fund(+) 166.2 592.3 536.1 *
Life of Fund(++) 9.6 42.6 33.4 50.8
Fifteen Years 64.6 443.4 333.4 *
Ten Years 40.2 182.1 140.9 219.2
Since 2/1/89(+++) 33.4 141.5 116.6 166.7
Five Years 14.0 55.9 44.4 75.4
One Year 2.1 10.8 8.8 13.8
</TABLE>
<TABLE>
<CAPTION>
Salomon Merrill Lynch
AVERAGE ANNUAL Fund Fund Fund Consumer Bros. Lehman Bros. High Yield
TOTAL RETURN Class A Class B Class C Price High Grade Govt./Corp. Master
TABLE Shares Shares Shares Index(1) Corp. Index(2) Index(3) Index(5)
- -------------- ------- ------- ------- -------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 10.4 * * 4.9 10.0 9.5 *
Life of
Fund(++) * 7.8 8.5 2.7 10.9 8.8 12.8
Fifteen Years 10.1 * * 3.4 12.0 10.3 *
Ten Years 11.5 * * 3.4 10.9 9.2 12.3
Five Years 9.6 * * 2.7 9.3 7.6 11.9
One Year 3.3 4.1 7.4 2.1 10.8 8.8 13.8
</TABLE>
- ---------------
* -- Data not available on not applicable.
(+) Since June 23, 1977 for Class A Shares. (Index begins 6/30/77)
(++) Since May 31, 1994 for Class B and Class C Shares.
(+++) The Fund's current objective became effective February 1, 1989.
B-33
<PAGE> 202
GOVERNMENT FUND--OCTOBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
TOTAL Initial Capital Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------ ------------- ------------ -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 7,901 0 39,531 47,432 374.3 49,659
Fifteen Years 9,402 0 29,417 38,819 288.2 40,641
Ten Years 9,215 0 12,272 21,487 114.9 22,499
Five Year 9,045 0 4,022 13,067 30.7 13,685
One Year 9,628 0 726 10,354 3.5 10,840
CLASS B SHARES
Life of Fund(++) 10,150 0 2,500 12,450 24.5 12,650
One Year 10,080 0 659 10,439 4.4 10,739
CLASS C SHARES
Life of Fund(++) 10,173 0 2,518 * * 12,691
One Year 10,080 0 661 * * 10,241
<CAPTION>
-----------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
------ ---------------
<S> <C>
Life of Fund(+) 396.6
Fifteen Years 306.4
Ten Years 125.0
Five Year 36.9
One Year 8.4
Life of Fund(++) 26.5
One Year 7.4
Life of Fund(++) 26.9
One Year 7.4
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------
Consumer Salomon Lehman Salomon
TOTAL Price Bros. High Bros. Bros. 30 Yr.
RETURN Index Grade Corp. Govt./Corp. GNMA
TABLE (1) Index(2) Index(3) Index(6)
------ -------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Life of Fund(+) 116.6 564.4 491.5 *
Life of Fund(++) 9.6 42.6 33.4 35.0
Fifteen Years 64.6 443.4 333.4 368.2
Ten Years 40.2 182.1 140.9 151.5
Five Year 14.0 55.9 44.4 43.0
One Year 2.1 10.8 8.8 9.1
</TABLE>
<TABLE>
<CAPTION>
Salomon Lehman Salomon
AVERAGE ANNUAL Fund Fund Fund Consumer Bros. High Bros. Bros. 30 Yr.
TOTAL RETURN Class A Class B Class C Price Grade Corp. Govt./Corp. GNMA
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(6)
-------------- ------- ------- ------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 9.0 * * 4.4 11.0 10.3 *
Life of Fund(++) * 6.6 7.2 2.7 10.9 8.8 9.2
Fifteen Years 9.5 * * 3.4 12.0 10.3 10.8
Ten Years 8.0 * * 3.4 10.9 9.2 9.7
Five Year 5.5 * * 2.7 9.3 7.6 7.4
One Year 3.5 4.4 7.4 2.1 10.8 8.8 9.1
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since October 1, 1979 for Class A Shares (when ZKI assumed investment
advisory responsibilities for the Fund; prior to that date, the Fund was managed
by another investment adviser that was not affiliated with ZKI)
(++) Since May 31, 1994 for Class B and Class C Shares.
B-34
<PAGE> 203
HIGH YIELD FUND--SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Capital
TOTAL Initial Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------ ------------- ---------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,426 1,164 80,645 90,235 802.4 94,452
Fifteen Years 10,692 821 52,106 63,619 536.2 66,639
Ten Years 8,798 368 19,387 28,553 185.5 29,896
Five Years 10,320 0 6,372 16,692 66.9 17,473
One Year 9,861 0 993 10,854 8.5 11,368
CLASS B SHARES
Life of Fund(++) 10,666 0 3,614 14,080 40.8 14,280
One Year 10,328 0 943 10,971 9.7 11,271
CLASS C SHARES
Life of Fund(++) 10,703 0 3,644 * * 14,347
One Year 10,340 0 947 * * 11,287
<CAPTION>
-----------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)
------ ------------
<S> <C>
Life of Fund(+) 844.5
Fifteen Years 566.4
Ten Years 199.0
Five Years 74.7
One Year 13.7
Life of Fund(++) 42.8
One Year 12.7
Life of Fund(++) 43.5
One Year 12.9
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
---------------------------------------------------
Salomon
Consumer Bros. Lehman Merrill Lynch
TOTAL Price High Grade Bros. High Yield
RETURN Index Corp. Govt./Corp. Master
TABLE (1) Index(2) Index(3) Index(5)
------ -------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Life of Fund(+) 157.9 583.7 522.4 *
Life of Fund(++) 9.3 39.9 31.3 49.8
Fifteen Years 64.7 473.7 348.5 *
Ten Years 40.2 190.9 146.0 208.6
Five Years 14.1 50.6 39.9 72.1
One Year 2.2 12.7 9.6 14.3
</TABLE>
<TABLE>
<CAPTION>
Salomon
Fund Bros. Lehman Merrill Lynch
AVERAGE ANNUAL Fund Class Fund Consumer High Grade Bros. High Yield
TOTAL RETURN Class A B Class C Price Corp. Govt./Corp. Master
TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(5)
- -------------- ------- ------ ------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 11.8 * * 4.9 10.3 9.7 *
Life of Fund
(++) * 10.8 11.4 2.7 10.6 8.5 12.9
Fifteen Years 13.1 * * 3.4 12.4 10.5 *
Ten Years 11.1 * * 3.4 11.3 9.4 11.9
Five Years 10.8 * * 2.7 8.5 7.0 11.5
One Year 8.5 9.7 12.9 2.2 12.7 9.6 14.3
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since January 26, 1978 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-35
<PAGE> 204
INCOME AND CAPITAL FUND--OCTOBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Capital
TOTAL Initial Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------ ------------- ---------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,156 463 71,794 80,143 704.1 84,193
Fifteen Years 9,884 178 31,381 41,443 314.4 43,402
Ten Years 9,660 97 12,783 22,540 125.4 23,609
Five Years 9,783 60 4,161 14,004 40.0 14,659
One Year 9,639 0 674 10,313 3.1 10,800
CLASS B SHARES
Life of Fund(++) 10,429 0 2,473 12,702 27.0 12,902
One Year 10,095 0 607 10,402 4.0 10,702
CLASS C SHARES
Life of Fund(++) 10,454 0 2,480 * * 12,934
One Year 10,095 0 608 * * 10,703
<CAPTION>
---------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
------ ---------------
<S> <C>
Life of Fund(+) 741.9
Fifteen Years 334.0
Ten Years 136.1
Five Years 46.6
One Year 8.0
Life of Fund(++) 29.0
One Year 7.0
Life of Fund(++) 29.3
One Year 7.0
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-----------------------------------------------
Salomon Lehman
Bros. Bros. Lehman
TABLE Consumer High Grade Aggregate Bros.
RETURN Price Corp. Bond Bond Govt./Corp.
TABLE Index(1) Index(2) Index(7) Index(3)
------ -------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Life of Fund(+) 238.1 859.7 * 760.7
Life of Fund(++) 9.6 42.6 33.7 33.4
Fifteen Years 64.6 443.4 340.7 333.4
Ten Years 40.2 182.1 142.3 140.9
Five Years 14.0 55.9 43.6 44.4
One Year 2.1 10.8 8.9 8.8
</TABLE>
<TABLE>
<CAPTION>
Lehman
Salomon Bros.
Bros. Aggregate Lehman
AVERAGE ANNUAL Fund Fund Fund Consumer High Grade Bond Bros.
TOTAL RETURN Class A Class B Class C Price Corp. Bond Index Govt./Corp.
TABLE Shares Shares Shares Index(1) Index(2) (7) Index(3)
- -------------- ------- ------- ------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of
Fund(+) 9.3 * * 5.3 10.1 * 9.6
Life of
Fund(++) * 7.2 7.8 2.7 10.9 8.9 8.8
Fifteen Years 9.9 * * 3.4 12.0 10.4 10.3
Ten Years 8.5 * * 3.4 10.9 9.3 9.2
Five Years 7.0 * * 2.7 9.3 7.5 7.6
One Year 3.1 4.0 7.0 2.1 10.8 8.9 8.8
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since April 15, 1974 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
B-36
<PAGE> 205
MORTGAGE FUND--SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Capital
TOTAL Initial Gain Income Ending Percentage Ending
RETURN $10,000 Dividends Dividends Value Increase Value
TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(***) (adjusted)(*) (unadjusted)(*)
------ ------------- ---------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,570 0 4,726 13,296 33.0 13,926
One Year 9,682 0 746 10,428 4.3 10,926
Five Years 8,622 0 3,922 12,544 25.4 13,142
CLASS B SHARES
Life of Fund(++) 8,235 0 16,059 * * 24,294
Ten Years 9,126 0 11,143 * * 20,269
Five Years 9,032 0 3,579 12,521 25.2 12,611
One Year 10,131 0 686 10,517 5.2 10,817
CLASS C SHARES
Life of Fund(+++) 10,015 0 2,492 * * 12,507
One Year 10,145 0 700 * * 10,845
<CAPTION>
---------------
TOTAL Percentage
RETURN Increase
TABLE (unadjusted)(*)
------ ---------------
<S> <C>
Life of Fund(+) 39.3
One Year 9.3
Five Years 31.4
Life of Fund(++) 142.9
Ten Years 102.7
Five Years 26.1
One Year 8.2
Life of Fund(+++) 25.1
One Year 8.5
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
-------------------------------------------------
Salomon
Bros. Lehman Merrill Lynch
TOTAL Consumer 30 Yr. Brothers Mortgage
RETURN Price GNMA Govt./Corp. Master
TABLE Index(1) Index(6) Index(3) Index(8)
------ -------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Life of Fund(+) 16.9 49.8 50.4 49.4
Life of Fund(++) 53.1 171.7 244.0 265.2
Life of Fund(+++) 9.3 33.7 31.3 33.3
Ten Years 40.2 157.3 146.0 154.6
Five Years 14.1 40.6 39.9 40.2
One Year 2.2 10.2 9.6 10.1
</TABLE>
<TABLE>
<CAPTION>
Salomon
AVERAGE Bros. Lehman Merrill Lynch
ANNUAL Fund Fund Fund Consumer 30 Yr. Brothers Mortgage
TOTAL RETURN Class A Class B Class C Price GNMA Govt./Corp. Master
TABLE Shares Shares Shares Index(1) Index(6) Index(3) Index(8)
------------ ------- ------- ------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 5.1 * * 2.8 7.3 7.4 7.2
Life of Fund(++) * 7.1 * 3.4 8.1 10.0 10.6
Life of Fund(+++) * * 6.9 2.7 9.1 8.5 9.0
Ten Years * 7.3 * 3.4 9.9 9.4 9.8
Five Years 4.6 4.6 * 2.7 7.1 7.0 7.0
One Year 4.3 5.2 8.5 2.2 10.2 9.6 10.1
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since January 10, 1992 for Class A Shares.
(++) Since October 26, 1984 for Class B Shares.
(+++) Since May 31, 1994 for Class C Shares.
B-37
<PAGE> 206
SHORT-INTERMEDIATE GOVERNMENT FUND--SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Initial Capital Gain Income Ending Percentage Ending
TOTAL $10,000 Distributions Dividends Value Increase Value
RETURN TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*)
------------ ------------- ------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of Fund(+) $ 8,764 70 3,956 12,790 27.9 13,252
Five Years 8,647 66 3,275 11,988 19.9 12,429
One Year 9,535 0 669 10,204 2.0 10,579
CLASS B SHARES
Life of Fund(++) 9,141 92 6,936 * * 16,169
Five Years 8,941 68 2,913 11,833 18.3 11,922
One Year 9,898 0 612 10,213 2.1 10,510
CLASS C SHARES
Life of Fund(+++) 9,617 0 2,089 * * 11,706
One Year 9,898 0 626 * * 10,524
<CAPTION>
---------------
Percentage
TOTAL Increase
RETURN TABLE (unadjusted)(*)
------------ ---------------
<S> <C>
Life of Fund(+) 32.5
Five Years 24.3
One Year 5.8
Life of Fund(++) 61.7
Five Years 19.2
One Year 5.1
Life of Fund(+++) 17.1
One Year 5.2
</TABLE>
<TABLE>
<CAPTION>
COMPARED TO
----------------------------------------------------------------------------------------
TOTAL Consumer Salomon Bros. Lehman Bros. Govt./Corp. Lehman Govt Bond
RETURN TABLE Price Index(1) 30 Yr. GNMA Index(6) Index(3) Intermediate Index(9)
------------ -------------- -------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
Life of Fund(+) 16.9 49.8 50.4 42.6
Life of Fund(++) 33.1 118.7 113.2 98.9
Life of Fund(+++) 9.3 33.7 31.3 26.3
Five Years 14.1 40.6 39.9 32.9
One Year 2.2 10.2 9.6 7.8
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL Fund Fund Fund Consumer Salomon Bros. Lehman Bros. Lehman Govt Bond
TOTAL RETURN Class A Class B Class C Price 30 Yr. Govt./Corp. Intermediate
TABLE Shares Shares Shares Index(1) GNMA Index(6) Index(3) Index(9)
-------------- ------- ------- ------- -------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund(+) 4.4 * * 2.8 7.3 7.4 6.4
Life of Fund(++) * 5.7 * 3.4 9.4 9.1 8.3
Life of Fund(+++) * * 4.8 2.7 9.1 8.5 7.3
Five Years 3.7 3.4 * 2.7 7.1 7.0 5.9
One Year 2.0 2.1 5.2 2.2 10.2 9.6 7.8
</TABLE>
- ---------------
* -- Data not available or not applicable.
(+) Since January 10, 1992 for Class A Shares. (Index at December 31, 1991)
(++) Since February 1, 1989 for Class B Shares. (Index at January 31, 1989)
(+++) Since May 31, 1994 for Class C Shares.
FOOTNOTES FOR ALL FUNDS
* The Initial Investment and adjusted amounts for Class A shares were adjusted
for the maximum initial sales charge at the beginning of the period, which is
4.5% for the Diversified Fund, Government Fund, High Yield Fund, Income and
Capital Fund and Mortgage Fund and 3.5% for the Adjustable Rate Fund and
Short-Intermediate Government Fund. The Initial Investment for Class B and Class
C shares was not adjusted. Amounts were adjusted for Class B shares for the
contingent deferred sales charge that may be imposed at the end of the period
based upon the schedule for shares sold currently, see "Redemption or Repurchase
of Shares" in the prospectus. No adjustments were made to Class C shares.
** Includes short-term capital gain dividends.
(1) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(2) Salomon Brothers High Grade Corporate Bond Index is on a total return basis
with all dividends reinvested and is comprised of high grade long-term
industrial and utility bonds rated in the top two rating categories. This index
is unmanaged. Source is Towers Data Systems.
(3) The Lehman Brothers Government/Corporate Bond Index is on a total return
basis and is comprised of all publicly issued, non-convertible, domestic debt of
the U.S. Government or any agency thereof, quasi-federal corporation, or
corporate debt guaranteed by the U.S. Government and all publicly issued,
fixed-rate, non-convertible, domestic debt of the three major corporate
classifications: industrial, utility, and financial. Only notes and bonds with a
minimum outstanding principal amount of $1,000,000 and a minimum of one year to
maturity are included. Bonds included must have a rating of at least Baa by
Moody's Investors Service, Inc., BBB by Standard & Poor's Corporation or in the
case of bank bonds not rated by either Moody's or S&P, BBB by Fitch Investors
Service. This index is unmanaged. Source is Towers Data Systems.
(4) The Lehman Brothers Adjustable Rate Mortgage Index is a broad market
capitalization index of the U.S. Government agency adjustable rate mortgage
market. All securities in the index have coupons that periodically adjust based
on a spread over a published index, and all are guaranteed by an agency of the
U.S. Government. This index is unmanaged. Source is Lehman Brothers Inc.
(5) Merrill Lynch High Yield Master Index consists of fixed-rate, coupon-bearing
bonds with an outstanding par which is greater than or equal to $50 million, a
maturity range greater than or equal to one year and must be less than BBB/Baa3
rated but not in default.
(6) The Salomon Brothers 30 Year GNMA Index is on a total return basis with all
dividends reinvested and is comprised of GNMA 30-year pass throughs of single
family and graduated payment mortgages. In order for a GNMA coupon to be
included in the index, it must have at least $200 million of outstanding coupon
product. This index is unmanaged. Source is Salomon Brothers Inc.
(7) The Lehman Brothers Aggregate Bond Index is on a total return basis and is
comprised of intermediate and long-term government bonds, investment grade
corporate debt securities and mortgage-backed securities. This index is
unmanaged. Source is Lipper Analytical Services, Inc.
(8) Merrill Lynch Mortgage Master Index consists of fixed-rate, coupon-bearing
bonds which are comprised of generic pass-through securities which are composed
of numerous mortgage pools with various maturities. The amount outstanding in
each agency/type/coupon subdivision of the mortgage index must be greater than
or equal to $200 million. CMOs are excluded to avoid double-counting.
(9) The Lehman Government Bond Intermediate Index is made up of the Treasury
Bond Index (all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues) and the Agency Bond Index (all publicly issued debt
of U.S. Government agencies and quasi-federal corporations, and corporate debt
guaranteed by the U.S. Government). Includes securities with maturities between
1 and 10 years.
B-38
<PAGE> 207
Investors may want to compare the performance of a Fund to that of certificates
of deposit issued by banks and other depository institutions. Certificates of
deposit represent an alternative income producing product. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution. The
shares of a Fund are not insured and net asset value as well as yield will
fluctuate. Shares of a Fund are redeemable at net asset value which may be more
or less than original cost. The bonds in which the Funds invest are generally of
longer term than most certificates of deposit and may reflect longer term market
interest rate fluctuations.
Investors also may want to compare the performance of a Fund to that of U.S.
Treasury bills, notes or bonds because such instruments represent alternative
income producing products. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. As noted in the prospectus, the government guarantee of the bonds in
the Adjustable Rate, Government, Mortgage and Short-Intermediate Government
Funds does not guarantee the market value of their respective shares. The net
asset value of a Fund will fluctuate. Shares of a Fund are redeemable at net
asset value which may be more or less than original cost. Each Fund's yield will
also fluctuate.
From time to time, the Adjustable Rate Fund may compare its yield or price
volatility to various securities, such as U.S. Government Securities, or to
certain indices including, but not limited to, the J.P. Morgan one-, three-, and
five-year constant maturity Treasury yield indices, which are based on estimated
Treasury security yields adjusted to constant maturity and the Federal Home Loan
Bank Board 11th District Cost of Funds Index (COFI), which represents the
weighted average cost of funds for savings institutions in Arizona, California
and Nevada and is based on the one month annualized yield of savings deposits,
Federal Home Loan Advances and other borrowings, such as repurchase agreements.
The following tables illustrate an assumed $10,000 investment in Class A shares
of each Fund other than the Mortgage, Opportunity and Short-Intermediate
Government Funds, which includes the current maximum sales charge of 4.5% (3.5%
for the Adjustable Rate Fund), with income and capital gain dividends reinvested
in additional shares. The tables for the Mortgage and Short-Intermediate
Government Funds illustrate an assumed $10,000 investment in Class B shares of
these Funds, with income and capital gain dividends reinvested in additional
shares, and do not include the effect of the contingent deferred sales charge.
Each table covers the period from commencement of operations of the Fund to
December 31, 1996.
ADJUSTABLE RATE FUND (9/1/87)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1987 $ 96 $ 0 $9,722 $ 96 $ 0 $ 9,818
1988 1,098 0 9,132 1,159 0 10,291
1989 1,122 10 9,185 2,294 10 11,489
1990 1,137 0 8,918 3,388 9 12,315
1991 1,222 0 9,207 4,756 10 13,973
1992 824 0 9,217 5,592 10 14,819
1993 767 0 9,196 6,341 10 15,547
1994 747 0 8,724 6,745 9 15,478
1995 948 0 8,929 7,857 9 16,795
1996 913 0 8,864 8,716 9 17,589
- ------------------------------------------------------------------------------------------------------
</TABLE>
B-39
<PAGE> 208
- --------------------------------------------------------------------------------
DIVERSIFIED FUND (6/23/77)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1977 $ 427 $ 0 $9,141 $ 427 $ 0 $ 9,567
1978 1,006 132 8,591 1,367 132 10,090
1979 1,350 18 8,898 2,787 154 11,839
1980 1,672 30 9,774 4,830 201 14,805
1981 2,052 0 8,738 6,297 179 15,214
1982 2,420 27 8,592 8,771 204 17,567
1983 2,941 0 8,577 11,697 204 20,478
1984 3,449 0 7,667 13,803 182 21,652
1985 3,604 66 7,534 17,181 248 24,963
1986 3,163 307 6,748 18,381 522 25,651
1987 3,379 367 5,412 17,484 690 23,586
1988 3,847 0 5,475 21,566 698 27,739
1989 4,603 0 5,064 24,238 646 29,948
1990 4,215 0 3,819 21,868 487 26,174
1991 4,665 0 5,050 34,010 644 39,704
1992 4,604 0 5,363 40,723 684 46,770
1993 5,096 0 5,879 49,906 749 56,534
1994 4,438 0 5,217 48,486 665 54,368
1995 5,061 0 5,734 58,572 731 65,037
1996 6,336 0 5,656 64,235 721 70,612
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
GOVERNMENT FUND (10/1/79)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1979 $ 203 $ 0 $9,192 $ 207 $ 0 $ 9,399
1980 1,009 0 8,164 1,145 0 9,309
1981 1,197 0 7,180 2,181 0 9,361
1982 1,314 0 8,119 3,912 0 12,031
1983 1,442 0 7,878 5,225 0 13,103
1984 1,686 0 7,806 6,903 0 14,709
1985 1,925 0 8,468 9,523 0 17,991
1986 2,076 0 8,853 12,061 0 20,913
1987 2,228 0 8,173 13,301 0 21,473
1988 2,265 0 7,851 14,985 0 22,836
1989 2,454 0 8,092 17,941 0 26,033
1990 2,526 0 8,066 20,486 0 28,552
1991 2,762 0 8,629 24,849 0 33,478
1992 2,781 0 8,341 26,780 0 35,125
1993 2,662 0 8,242 29,094 0 37,336
1994 2,684 0 7,422 28,770 0 36,192
1995 2,942 0 8,155 34,684 0 42,839
1996 3,097 0 7,797 36,255 0 44,052
- ------------------------------------------------------------------------------------------------------
</TABLE>
B-40
<PAGE> 209
- --------------------------------------------------------------------------------
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
1996 7,289 0 8,245 72,790 1,139 82,174
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
INCOME AND CAPITAL FUND (4/15/74)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1974 425 $ 0 $ 9,819 $ 436 $ 0 $10,255
1975 939 0 10,077 1,421 0 11,498
1976 955 69 10,535 2,481 72 13,088
1977 1,052 75 10,077 3,415 144 13,636
1978 1,133 0 9,580 4,365 137 14,082
1979 1,397 0 8,873 5,393 127 13,393
1980 1,701 0 7,632 6,229 109 13,970
1981 1,861 0 6,858 7,438 98 14,394
1982 2,183 0 7,994 11,122 115 19,231
1983 2,478 0 7,889 13,422 113 21,424
1984 2,892 0 7,775 16,175 111 24,061
1985 3,191 0 8,396 20,803 120 29,319
1986 3,273 0 8,673 24,793 124 33,590
1987 3,590 0 8,042 26,474 115 34,631
1988 3,933 0 7,975 30,152 114 38,241
1989 4,207 0 7,794 33,607 112 41,513
1990 4,209 0 7,507 36,590 108 44,205
1991 4,313 0 8,080 43,926 116 52,122
1992 4,168 0 8,061 48,039 115 56,215
1993 4,029 355 8,376 53,946 476 62,798
1994 4,578 0 7,507 52,743 426 60,676
1995 4,939 0 8,462 64,690 480 73,632
1996 4,957 0 8,061 66,597 458 75,116
- ---------------------------------------------------------------------------------------------
</TABLE>
B-41
<PAGE> 210
- --------------------------------------------------------------------------------
MORTGAGE FUND (10/26/84)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1984 $ 0 $0 $10,024 $ 0 $0 $10,024
1985 1,028 0 10,035 1,051 0 11,086
1986 1,286 0 10,036 2,344 0 12,380
1987 1,270 0 9,212 3,389 0 12,600
1988 1,315 0 8,694 4,474 0 13,168
1989 1,326 0 8,800 5,867 0 14,667
1990 1,325 0 8,612 7,098 0 15,710
1991 1,442 0 9,235 9,149 0 18,384
1992 1,457 0 8,917 10,285 0 19,202
1993 1,381 0 8,718 11,410 0 20,128
1994 1,259 0 7,835 11,461 0 19,296
1995 1,387 0 8,576 13,988 0 22,564
1996 1,433 0 8,177 14,785 0 22,962
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-INTERMEDIATE GOVERNMENT FUND (2/1/89)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
ANNUAL
ANNUAL CAPITAL REINVESTED
YEAR INCOME GAIN REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1989 $741 $ 0 $10,024 $ 737 $ 0 $10,761
1990 946 0 9,847 1,679 0 11,526
1991 934 0 10,118 2,690 0 12,808
1992 795 0 10,024 3,461 0 13,485
1993 769 100 9,859 4,157 99 14,115
1994 697 0 9,197 4,555 93 13,845
1995 853 0 9,577 5,609 96 15,282
1996 888 0 9,234 6,291 93 15,618
</TABLE>
- -------------------------------------------------------------------------------
* Includes short-term capital gain dividends
The following tables compare the performance of the Class A shares of the Funds
(other than the Mortgage, Opportunity and Short-Intermediate Government Funds,
for which the performance is of the Class B shares) over various periods with
that of other mutual funds within the categories described below according to
data reported by Lipper Analytical Services, Inc. ("Lipper"), New York, New
York, which is a mutual fund reporting service. Lipper performance figures are
based on changes in net asset value, with all income and capital gain dividends
reinvested. Such calculations do not include the effect of any sales charges.
Future performance cannot be guaranteed. Lipper publishes performance analyses
on a regular basis. Each category includes funds with a variety of objectives,
policies and market and credit risks that should be considered in reviewing
these rankings.
B-42
<PAGE> 211
ADJUSTABLE RATE FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Adjustable Rate
Mortgage Funds
---------------
<S> <C>
One Year (Period ended 9/30/97)............................. 23 of 44
Five Years (Period ended 9/30/97)........................... 15 of 27
</TABLE>
The Lipper Adjustable Rate Mortgage Funds category includes funds that invest at
least 65% of assets in adjustable rate mortgage securities or other securities
collateralized by or representing an interest in mortgages.
DIVERSIFIED FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Multi-Sector
Income
------------
<S> <C>
One Year (Period ended 9/30/97)............................. 66 of 75
Five Years (Period ended 9/30/97)........................... 2 of 13
Ten Years (Period ended 9/30/97)............................ 1 of 4
</TABLE>
The Lipper Multi-Sector Income Funds Category includes funds that intend to keep
the bulk of their assets in corporate and government debt issues.
GOVERNMENT FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
Certificate
Edition
------------
GNMA Funds
----------
<S> <C>
One Year (Period ended 9/30/97)............................. 32 of 53
Five Years (Period ended 9/30/97)........................... 21 of 30
Ten Years (Period ended 9/30/97)............................ 13 of 24
</TABLE>
The Lipper GNMA Funds category includes funds that invest a minimum of 65% of
their portfolio in Government National Mortgage Association securities.
B-43
<PAGE> 212
HIGH YIELD FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
High Current
Yield Funds
------------
<S> <C>
One Year (Period ended 9/30/97)............................. 134 of 171
Five Years (Period ended 9/30/97)........................... 21 of 65
Ten Years (Period ended 9/30/97)............................ 9 of 45
</TABLE>
The Lipper High Current Yield Funds category includes funds which are managed
with an emphasis on high current (relative) yield. There are no quality or
maturity restrictions. The Fund was ranked number 222 out of 4,997, 28 out of
2,152 and 14 out of 965 funds in the Fixed Income category for the one, five and
ten year periods ended September 30, 1997 according to data reported by Lipper
in the Lipper Mutual Fund Performance Analysis. The Lipper Fixed Income category
reported in the Lipper Mutual Fund Performance Analysis includes funds which
normally have more than 75% of their assets in fixed income issues.
INCOME AND CAPITAL FUND
A SHARES
<TABLE>
<CAPTION>
Lipper-Fixed
Income Fund
Performance
Analysis
------------
Corporate
Bond Funds:
"A" Rated
-----------
<S> <C>
One Year (Period ended 9/30/97)............................. 52 of 126
Five Years (Period ended 9/30/97)........................... 12 of 54
Ten Years (Period ended 9/30/97)............................ 19 of 33
</TABLE>
The Lipper Corporate Bond Funds "A" Rated category includes funds which invest
65% of their corporate holdings in the top three grades.
MORTGAGE FUND
B SHARES
<TABLE>
<CAPTION>
Lipper
Performance
Analysis
-------------
U.S. Mortgage
Funds
-------------
<S> <C>
One Year (Period ended 9/30/97)............................. 52 of 59
Five Years (Period ended 9/30/97)........................... 32 of 34
Ten Years (Period ended 9/30/97)............................ 17 of 17
</TABLE>
The Lipper U.S. Mortgage Funds category includes funds that invest at least 65%
of their assets in U.S. Mortgages/Securities issued or guaranteed as to
principal and interest by the U.S. government and certain federal agencies.
SHORT-INTERMEDIATE GOVERNMENT FUND
B SHARES
<TABLE>
<CAPTION>
Lipper
Performance
Analysis
-----------
Short U.S.
Gov't Funds
-----------
<S> <C>
One Year (Period ended 9/30/97)............................. 96 of 96
Five Years (Period ended 9/30/97)........................... 40 of 41
</TABLE>
The Lipper Short (1-5 year) U.S. Government Funds category includes funds that
invest at least 65% of their assets in securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities with average maturities of
five years or less.
B-44
<PAGE> 213
OFFICERS AND TRUSTEES
The officers and trustees of the Funds, their birthdates, their principal
occupations and their affiliations, if any, with ZKI, the investment manager,
ZIML, the sub-adviser of certain Funds, and KDI, the principal underwriter, are
as follows (the number following each person's title is the number of investment
companies managed by ZKI and its affiliates, for which he or she holds similar
positions):
ALL FUNDS:
DAVID W. BELIN (6/20/28), Trustee (26), 2000 Financial Center, 7th and Walnut,
Des Moines, Iowa; Member, Belin Lamson McCormick Zumbach Flynn, P.C.
(attorneys).
LEWIS A. BURNHAM (1/8/33), Trustee (26), 16410 Avila Boulevard, Tampa, Florida;
Director, Management Consulting Services, McNulty & Company; formerly Executive
Vice President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee (26), 7515 Pelican Bay Blvd., Naples,
Florida; Retired; formerly, Executive Vice President, A. O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee (26), 800 N. Lindbergh Boulevard, St.
Louis, Missouri; Vice Chairman, Monsanto Company (chemical products); prior
thereto, Vice President, FMC Corporation (manufacturer of machinery and
chemicals); prior thereto, Director, Executive Vice President and Chief
Financial Officer, Staley Continental, Inc. (food products).
DONALD R. JONES (1/17/30), Trustee (26), 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
SHIRLEY D. PETERSON (9/3/41), Trustee (26), 401 Rosemont Avenue, Frederick,
Maryland; President, Hood College, Maryland; prior thereto, Partner, Steptoe &
Johnson (attorneys); prior thereto, Commissioner, Internal Revenue Service;
prior thereto, Assistant Attorney General, U.S. Department of Justice; Director,
Bethlehem Steel Corp.
WILLIAM P. SOMMERS (7/22/33), Trustee (26), 333 Ravenswood Avenue, Menlo Park,
California; President and Chief Executive Officer, SRI International (research
and development); prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton, Inc. (management consulting
firm) (retired), Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton
Industries.
STEPHEN B. TIMBERS (8/8/44), President and Trustee* (39), 222 South Riverside
Plaza, Chicago, Illinois; President, Chief Executive Officer, Chief Investment
Officer and Director, ZKI; Director, KDI, and LTV Corporation; formerly,
President and Chief Operating Officer of Kemper Corporation.
CHARLES R. MANZONI, JR. (1/23/47), Vice President* (39), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, Secretary and General
Counsel of ZKI; Secretary, ZKI Holding Corp.; Secretary, ZKI Agency, Inc.;
formerly, Partner, Gardner, Carton & Douglas (attorneys).
JOHN E. NEAL (3/9/50), Vice President* (39), 222 South Riverside Plaza, Chicago,
Illinois; President, Kemper Funds Group, a unit of ZKI; Director, ZKI, Zurich
Kemper Value Advisors, Inc. and KDI.
JEROME L. DUFFY (6/29/36), Treasurer* (39), 222 South Riverside Plaza, Chicago,
Illinois; Senior Vice President, ZKI.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary* (39), 222 South
Riverside Plaza, Chicago, Illinois; Attorney, Senior Vice President and
Assistant Secretary, ZKI.
B-45
<PAGE> 214
ELIZABETH C. WERTH (10/1/47), Assistant Secretary* (32), 222 South Riverside
Plaza, Chicago, Illinois; Vice President, ZKI; Vice President and Director of
State Registrations, KDI.
ROBERT C. PECK, JR. (10/1/46), Vice President* (16), 222 South Riverside Plaza,
Chicago, Illinois; Executive Vice President, ZKI; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
ADJUSTABLE RATE FUND:
ELIZABETH A. BYRNES (2/8/57), Vice President* (2), 222 South Riverside Plaza,
Chicago, Illinois; First Vice President, ZKI.
RICHARD L. VANDENBERG (11/16/49), Vice President* (4), 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, ZKI; formerly, Senior Vice
President and Portfolio Manager with an unaffiliated investment management firm.
DIVERSIFIED FUND:
J. PATRICK BEIMFORD, JR. (5/25/50), Vice President* (3), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, ZKI.
ROBERT S. CESSINE (1/5/50), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI; formerly, Vice President,
Wellington Management Company.
MICHAEL A. McNAMARA (12/28/44), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI.
HARRY E. RESIS, JR. (11/24/45), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, ZKI; formerly, First Vice President,
PaineWebber Incorporated.
JONATHAN W. TRUTTER (11/29/57), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; First Vice President, ZKI.
GOVERNMENT FUND:
RICHARD L. VANDENBERG, see above.*
HIGH YIELD AND OPPORTUNITY FUNDS (KEMPER HIGH YIELD SERIES):
MICHAEL A. McNAMARA, see above.*
HARRY E. RESIS, JR., see above.*
INCOME AND CAPITAL PRESERVATION FUND:
ROBERT S. CESSINE, see above.*
MORTGAGE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS (KEMPER PORTFOLIOS):
FRANK J. RACHWALSKI, JR. (3/26/45), Vice President* (10), 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, ZKI.
RICHARD L. VANDENBERG, see above.*
* Interested persons of the Fund as defined in the Investment Company Act of
1940.
B-46
<PAGE> 215
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's 1997 fiscal year except that the information in the last column is for
calendar year 1996. The Opportunity Fund has not yet adopted a trustee
compensation table.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM
----------------------------------------------------------------------------
INCOME & TOTAL COMPENSATION
ADJUSTABLE DIVERSIFIED GOVERNMENT HIGH YIELD CAPITAL KEMPER KEMPER FUNDS
NAME OF TRUSTEE RATE FUND FUND FUND SERIES++ FUND PORTFOLIOS+ PAID TO TRUSTEES**
--------------- ---------- ----------- ---------- ---------- -------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin*............... $2,500 6,600 12,400 10,700 5,500 16,100 143,400
Lewis A. Burnham.............. 1,700 3,400 6,400 6,000 3,100 10,200 88,800
Donald L. Dunaway*............ 2,700 6,000 11,900 10,600 5,400 16,700 141,200
Robert B. Hoffman............. 1,800 3,400 6,400 6,000 3,100 9,600 92,100
Donald R. Jones............... 1,800 3,600 6,700 6,300 3,400 10,400 92,100
Shirley D. Peterson........... 1,700 3,400 6,300 5,900 3,000 9,900 89,800
William P. Sommers............ 1,700 3,300 6,100 5,700 3,000 9,700 87,500
</TABLE>
- ---------------
+ Includes Kemper Cash Reserves Fund, Mortgage Fund and Short-Intermediate
Government Fund.
++ Includes High Yield Fund only.
* Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with Kemper Funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds--Zurich Money
Market Fund. Total deferred amounts and interest accrued through each Fund's
fiscal year are $16,900, $55,900, $106,400, $78,400, $40,800 and $96,900 for
Mr. Belin and $14,900, $30,000, $70,100, $54,700, $27,000 and $73,900 for
Mr. Dunaway for the Adjustable Rate Fund, Diversified Fund, Government Fund,
High Yield Fund, Income and Capital Fund and Kemper Portfolios+,
respectively.
** Includes compensation for service on the boards of 25 Kemper funds with 41
fund portfolios. Each trustee currently serves as a trustee of 26 Kemper
Funds with 46 fund portfolios.
As of December 15, 1997, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund, except that
officers and trustees, as a group, owned 6.47% of Kemper Income and Capital
Preservation Fund, Class I shares and 1.18% of Kemper High Yield Fund, Class I
shares. No person owned of record 5% or more of the outstanding shares of any
class of any Fund, except that the following owned of record shares of the
following Funds.
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
Adjustable Rate Prudential Securities FBO A 7.42%
Standard Savings Bank
228 W. Garvey Ave.
Monterey Park, CA 91754
Builders Prime Window & Supply B 6.79
401K FBO Forfeiture Account
2nd & Merion
Bridgeport, PA 19405
National Financial Services Corp. B 9.10
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
MLPF&S B 8.25
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Junior Junction Inc. C 6.56
1400 Noyes York
Utica, NY 13502
MLPF&S C 16.43
4800 Deer Lake Dr. East
Jacksonville, FL 32246
</TABLE>
B-47
<PAGE> 216
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
Ameritrade Clearing C 10.35
P.O. Box 2226
Omaha, NE 68103
Estate of Arthur A. Ulrich C 6.21
870 84th LN NW
Minneapolis, MN 55433
Income & Capital MLPF&S A 21.75
4800 Deer Lake Dr. East
Jacksonville, FL 32246
BHC Securities, Inc. B 6.92
Attn: Mutual Funds
One Commerce Square
Philadelphia, PA 19103
Paul K. Christoff TTEE C 10.30
Lindsay Concrete Prod Inc. PSP
137 S. Main St., Suite 301
Akron, OH 44308-1136
MLPF&S C 24.29
4800 Deer Lake Dr. East
Jacksonville, FL 32246
ZKI Inc. I 6.06
Retirement Plan EE
811 Main Street
Kansas City, MO 64105
ZKI Inc. I 12.11
Retirement Plan PS
811 Main
Kansas City, MO 64105
High Yield National Financial Service Corp. C 6.27
One World Financial Center
200 Liberty Street, 4th fl.
New York, NY 10281-1003
MLPP&S FTSBO ITS Customers C 8.04
4800 Deer Lake Road
Jacksonville, FL 32246
PNB Personal Trust Account I 15.22
P.O. Box 7829
Philadelphia, PA 19101
Mutual Trust Life Ins. Co. I 11.11
1200 Jovis Boulevard
Oak Brook, IL 60523
High Yield Opportunity James C. Calano A 5.51
200 Boulder View Ln.
Boulder, CO 80304
National City Bank of PA TTEE A 11.98
McKeesport Healthcare Pension
P.O. Box 94777
Cleveland, OH 44101
Alan K. Schroeder, TOD A 5.61
2002 Cedar Dr.
Rapid City, SD 57702
Rauscher Pierce Refsnes C/F A 9.68
5945 S. Atlanta
Tulsa, OK 74105
</TABLE>
B-48
<PAGE> 217
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
Advest Inc. B 9.57
90 State House Square
Hartford, CT 06103
Donaldson Lufkin Jenrette B 16.83
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303
Khalil I. Hani B 7.59
2200 Bouterse St.
Park Ridge, IL 60068
Alexander L. Abraham & B 7.38
Adeline Y. Abraham Jiwros
2829 Harrison St.
Glenview, IL 60025
Stephens Inc. B 10.41
111 Center St.
Little Rock, AR 72201
M. L. Stern & Co. Inc. C 6.65
8350 Wilshire Blvd.
Beverly Hills, CA 90211
FBO Harper Family 1993 TR C 9.91
1 Baltusrol St.
Moraga, CA 94556
Zurich Kemper Investments C 13.21
222 S. Riverside Plaza
Chicago, IL 60606
BT Alex Brown Inc. C 10.51
P.O. Box 1346
Baltimore, MD 21203
Melvin H. Ploeckelman C 6.77
HCR 1 Box 27P
Athelstane, WI 54104
Leamon M. Fite C 7.69
511 Hillyer High Rd.
Anniston, AL 36207
Karin Muchemore C 9.85
3124 Quail Avenue North
Golden Valley, MN 55422
M. L. Stern & Co. Inc. (FBO) C 5.08
8350 Wilshire Blvd.
Beverly Hills, CA 90211
Diversified National Financial Service Corp. A 7.19
One World Financial Center
200 Liberty Street
New York, NY 10281
National Financial Service Corp. C 10.86
One World Financial Center
200 Liberty Street
New York, NY 10281
</TABLE>
B-49
<PAGE> 218
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
MLPF&S C 18.77
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Donaldson Lufkin Jenrette C 5.84
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
Invest Financial Corp. SSRP I 5.57
FBO Ian G. Clarke-Pounder
32 Saint Laurent Dr.
Hudson, NH 03051
Invest Financial Corp. SSRP I 6.11
FBO Craig B. Cacase
121 Fox Run Ct.
Newington CT, 06111
Invest Financial Corp. I 7.03
FBO Alfred J. Diorio
1011 Olde Hickory Rd.
Lancaster, PA 17601
Invest Financial Corp. SSRP I 16.51
FBO Sandra L. Tressler
23 Larkin Ln.
Harwich, MA 02645
Invest Financial Corp. I 14.66
FBO George R. Swyoert
6316 Pine Ln.
Lakeland, FL 33813
Invest Financial Corp. I 19.47
FBO Mary L. Sanders
1107 W. Charter St.
Tampa, FL 33602
Invest Financial Corp. I 6.15
FBO Debra S. Harrison
4804 Ridge Point Dr.
Tampa, FL 33624
Invest Financial Corp. I 11.74
FBO Ryland E. Syverson
3418 Belmont Rd.
Grand Forks, ND 58201
Government NFSC FEBO B 6.05
Home Savings of America
815 E. 6th St.
Ontario, CA 91764
BHC Securities Inc. B 5.72
Attn: Mutual Funds Dept.
One Commerce Square
Philadelphia, PA 19103
Donald Lufkin Jenrette C 5.45
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
MLPF&S C 9.61
4800 Deer Lake Dr. East
Jacksonville, FL 32246
</TABLE>
B-50
<PAGE> 219
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
---- ---------------- ----- ----------
<S> <C> <C> <C>
ZKI Inc. I 13.39
Retirement Plan
811 Main
Kansas City, MO 64105
ZKI Inc. I 10.22
Retirement Plan PS
811 Main
Kansas City, MO 64105
Mortgage PaineWebber C 26.29
P.O. Box 3321
Weehawken, NJ 07087-6727
MLPF&S C 12.86
Attn. Fund Administration
4800 Deer Lake Dr. East
Jacksonville, FL 32246
Robert W. Baird & Co. Inc. C 5.26
777 E. Wisconsin Ave
Milwaukee, WI 53202
Morango Bandof Mission Indians C 24.96
Community Service Reserve Act
11581 Portrero Rd
Banning CA 92220
Short-Intermediate Government National Financial Service Corp. B 9.49
One World Financial Center
200 Liberty Street, 4th Floor
New York, NY 10281-1003
PaineWebber C 7.48
P.O. Box 3321
Weehawken, NJ 07087-6727
National Financial Service Corp. C 28.81
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
First Trust Corp. C 5.03
P.O. Box 173201
Denver, CO 80217
</TABLE>
SHAREHOLDER RIGHTS
The Funds generally are not required to hold meetings of their shareholders.
Under the Agreement and Declaration of Trust of each Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters: (a) the election or removal of trustees if a meeting is
called for such purpose; (b) the adoption of any contract for which shareholder
approval is required by the Investment Company Act of 1940 ("1940 Act"); (c) any
termination of the Fund or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Fund, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); (e) (with respect to the Mortgage and Short-Intermediate
Government Funds only) as to whether a court action, proceeding or claim should
or should not be brought or maintained derivatively or as a class on behalf of
the Fund or the shareholders, to the same extent as the stockholders of a
Massachusetts business corporation; and (f) such additional matters as may be
required by law, the Declaration of Trust, the By- laws of the Fund, or any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the trustees may consider necessary or desirable. The shareholders
also would vote upon changes in fundamental investment objectives, policies or
restrictions.
B-51
<PAGE> 220
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-52
<PAGE> 221
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Kemper High Yield Series
Kemper High Yield Opportunity Fund
We have audited the accompanying statement of net assets of Kemper High Yield
Series--Kemper High Yield Opportunity Fund as of September 18, 1997. This
statement of net assets is the responsibility of Fund management. Our
responsibility is to express an opinion on this statement of net assets based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of net assets
presentation. We believe that our audit of the statement of net assets provides
a reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Kemper High Yield
Series--Kemper High Yield Opportunity Fund at September 18, 1997 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
September 18, 1997
B-53
<PAGE> 222
KEMPER HIGH YIELD SERIES--
KEMPER HIGH YIELD OPPORTUNITY FUND
STATEMENT OF NET ASSETS--SEPTEMBER 18, 1997
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $100,000
========
NET ASSETS
Net assets, applicable to shares of beneficial interest
(unlimited number of shares authorized, no par value)
outstanding as follows:
Class A--3,508.773
Class B--3,508.772
Class C--3,508.772........................................ $100,000
========
THE PRICING OF SHARES
Net asset value and redemption price per share
Class A ($33,333.34 / 3,508.773 shares outstanding)....... $ 9.50
Class B* ($33,333.33 / 3,508.772 shares outstanding)...... $ 9.50
Class C* ($33,333.33 / 3,508.772 shares outstanding)...... $ 9.50
Maximum offering price per share
Class A (net asset value, plus 4.71% of net asset value or
4.50% of offering price)............................... $ 9.95
Class B (net asset value)................................. $ 9.50
Class C (net asset value)................................. $ 9.50
</TABLE>
- ---------------
* Subject to contingent deferred sales charge.
NOTES:
Kemper High Yield Series ("KHYS") was organized as a business trust under the
laws of the commonwealth of Massachusetts on October 24, 1985. All shares of
beneficial interest of Kemper High Yield Opportunity Fund ("Fund") were issued
to Zurich Kemper Investments, Inc. ("ZKI"), the investment manager for the Fund,
on September 18, 1997 for $100,000 cash. KHYS may establish multiple series;
currently two series have been established.
The costs of organization of the KHYS will be paid by ZKI.
B-54
<PAGE> 223
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-55
<PAGE> 224
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-56
<PAGE> 225
EXHIBIT C
FINANCIAL STATEMENTS FOR THE ADJUSTABLE RATE FUND
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
Portfolio of Investments at February 28, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate 7.663-7.86 % 2022 $15,757 $16,276
MORTGAGE CORPORATION - mortgages (a) 7.699-7.886 2023 5,617 5,783
37.3% 7.882-7.992 2025 5,116 5,240
(Cost: $27,557)
Fixed rate 11.25 2010 220 242
collateralized 11.00 2014 58 58
mortgage obligations
-------------------------------------------------------------------------
27,599
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT Adjustable rate 7.375 2022 5,347 5,486
NATIONAL MORTGAGE mortgages (a) 7.00 2027 4,922 4,993
ASSOCIATION - 25.6% 6.00 2028 8,000 8,084
(Cost: $18,920)
Pass-through 11.00 2018 292 324
certificates
-------------------------------------------------------------------------
18,887
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 9.125 1999 5,000 5,205
SECURITIES - 24.2% 8.00 1999 3,000 3,101
(Cost: $18,063) 8.875 2000 6,000 6,405
7.50 2002 3,000 3,208
-------------------------------------------------------------------------
17,919
- ----------------------------------------------------------------------------------------------------------------
FEDERAL Adjustable rate 7.124 2019 3,083 3,163
NATIONAL MORTGAGE mortgages (a) 7.66 2021 1,660 1,717
ASSOCIATION - 14.1% 7.804 2023 2,123 2,194
(Cost: $10,435) 7.651 2025 3,249 3,348
-------------------------------------------------------------------------
10,422
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--101.2%
(Cost: $74,975) 74,827
-------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(1.2)% (882)
-------------------------------------------------------------------------
NET ASSETS--100% $73,945
-------------------------------------------------------------------------
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
(a) Adjustable rate securities. The interest rates on these securities vary with
a selected index at specified intervals and the rates shown above are the
effective rates on February 28, 1998. The dates shown represent the final
maturity of the obligations.
Based on the cost of investments of $74,975,000 for federal income tax purposes
at February 28, 1998, the gross unrealized appreciation was $192,000, the gross
unrealized depreciation was $340,000 and the net unrealized depreciation on
investments was $148,000.
See accompanying Notes to Financial Statements.
C- 1
PORTFOLIO OF Investments
<PAGE> 226
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------
Investments, at value
(Cost: $74,975) $ 74,827
- -------------------------------------------------------------------------
Cash 6,532
- -------------------------------------------------------------------------
Receivable for:
Fund shares sold 37
- -------------------------------------------------------------------------
Investments sold 1,063
- -------------------------------------------------------------------------
Interest 877
- -------------------------------------------------------------------------
TOTAL ASSETS 83,336
- -------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- -------------------------------------------------------------------------
Payable for:
Fund shares redeemed 1,169
- -------------------------------------------------------------------------
Investments purchased 8,113
- -------------------------------------------------------------------------
Management fee 35
- -------------------------------------------------------------------------
Distribution services fee 5
- -------------------------------------------------------------------------
Administrative services fee 15
- -------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 19
- -------------------------------------------------------------------------
Trustees' fees 35
- -------------------------------------------------------------------------
Total liabilities 9,391
- -------------------------------------------------------------------------
NET ASSETS $ 73,945
- -------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- -------------------------------------------------------------------------
Paid-in capital $ 84,288
- -------------------------------------------------------------------------
Accumulated net realized loss on investments (10,699)
- -------------------------------------------------------------------------
Net unrealized depreciation on investments (148)
- -------------------------------------------------------------------------
Undistributed net investment income 504
- -------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 73,945
- -------------------------------------------------------------------------
THE PRICING OF SHARES
- -------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($65,307 / 7,919 shares outstanding) $8.25
- -------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.55
- -------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($7,214 / 873 shares outstanding) $8.26
- -------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price per share
(subject to contingent deferred sales charge) per share
($1,424 / 172 shares outstanding) $8.27
- -------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
C-2
<PAGE> 227
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended February 28, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $2,575
- ----------------------------------------------------------------------
Expenses:
Management fee 219
- ----------------------------------------------------------------------
Distribution services fee 32
- ----------------------------------------------------------------------
Administrative services fee 86
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 128
- ----------------------------------------------------------------------
Professional fees 24
- ----------------------------------------------------------------------
Reports to shareholders 61
- ----------------------------------------------------------------------
Trustees' fees and other 10
- ----------------------------------------------------------------------
Total expenses 560
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 2,015
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 22
- ----------------------------------------------------------------------
Net realized loss from futures transactions (81)
- ----------------------------------------------------------------------
Net realized loss (59)
- ----------------------------------------------------------------------
Change in net unrealized appreciation on investments (395)
- ----------------------------------------------------------------------
Net loss on investments (454)
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,561
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
FEBRUARY 28, ENDED
1998 AUGUST 31,
(UNAUDITED) 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------------
Net investment income $ 2,015 4,875
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) (59) 522
- --------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (395) 341
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,561 5,738
- --------------------------------------------------------------------------------------------------
Net equalization charges (81) (127)
- --------------------------------------------------------------------------------------------------
Distribution from net investment income (2,087) (4,810)
- --------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (7,415) (13,311)
- --------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (8,022) (12,510)
- --------------------------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------------------------
Beginning of period 81,967 94,477
- --------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$504 and $657, respectively) $73,945 81,967
- --------------------------------------------------------------------------------------------------
</TABLE>
C-3
<PAGE> 228
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Adjustable Rate U.S. Government Fund (the
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 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 February 28,
1998) are offered to a limited group of investors,
are not subject to initial or contingent deferred
sales charges and have lower ongoing expenses than
other classes. Differences in class expenses will
result in the payment of different per share income
dividends by class. All shares of the Fund have
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
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 financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded fixed income options are valued based upon
prices provided by market makers. Other securities
and assets are valued at fair value as determined
in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). 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.
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
February 28, 1998, the Fund had $8,113,000 in
purchase commitments outstanding (11% 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
C-4
<PAGE> 229
NOTES TO FINANCIAL STATEMENTS
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 for the six
months ended February 28, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at February 28, 1998, amounting
to approximately $10,681,000, is available to
offset future taxable gains. If not applied, the
loss carryover expires during the period 1998
through 2006.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
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.
- --------------------------------------------------------------------------------
3 TRANSACTIONS
WITH AFFILIATES INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's Shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper, 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 $219,000 for the six months ended
February 28, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with KDI. Underwriting
commissions paid in connection with the
distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED COMMISSIONS ALLOWED
BY KDI BY KDI TO FIRMS
----------- --------------------
<S> <C> <C>
Six months ended February 28, 1998 $6,000 51,000
</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
C-5
<PAGE> 230
NOTES TO FINANCIAL STATEMENTS
firms at various rates for sales of Class B and
Class C shares. In addition, KDI receives any
contingent deferred sales charges (CDSC) from
redemptions of Class B and Class C shares.
Distribution fees, CDSC and commissions related to
Class B and Class C shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS AND
DISTRIBUTION FEES DISTRIBUTION FEES
AND CDSC PAID BY KDI
RECEIVED BY KDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Six months ended February 28, 1998 $42,000 50,000
</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 ASF PAID BY KDI
THE FUND TO KDI TO FIRMS
----------------- -----------------
<S> <C> <C>
Six months ended February 28, 1998 $86,000 87,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $121,000 for the six months ended
February 28, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended February
28, 1998, the Fund made no direct payments to its
officers and incurred trustees' fees of $8,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended February 28, 1998,
investment transactions (excluding short-term
instruments) are as follows (in thousands):
Purchases $ 96,385
Proceeds from sales 115,181
C-6
<PAGE> 231
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 1997
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,021 $ 8,397 1,089 $ 8,931
-----------------------------------------------------------------------------
Class B 206 1,712 626 5,196
-----------------------------------------------------------------------------
Class C 89 736 82 680
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 161 1,331 369 3,054
-----------------------------------------------------------------------------
Class B 17 147 33 271
-----------------------------------------------------------------------------
Class C 3 27 7 55
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (2,161) (17,792) (3,198) (26,282)
-----------------------------------------------------------------------------
Class B (191) (1,585) (523) (4,338)
-----------------------------------------------------------------------------
Class C (47) (388) (106) (878)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 49 412 11 93
-----------------------------------------------------------------------------
Class B (49) (412) (11) (93)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(7,415) $(13,311)
-----------------------------------------------------------------------------
</TABLE>
C-7
<PAGE> 232
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS A
-----------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 -------------------------
(UNAUDITED) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.31 8.22 8.30 8.33 8.68
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .22 .45 .46 .48 .34
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.29)
- --------------------------------------------------------------------------------------------
Total from investment operations .16 .54 .37 .44 .05
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .22 .45 .45 .47 .40
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.25 8.31 8.22 8.30 8.33
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.97% 6.75 4.55 5.52 .59
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.28% 1.25 1.15 1.10 .93
- --------------------------------------------------------------------------------------------
Net investment income 5.16% 5.50 5.49 5.76 3.96
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------
CLASS B
-----------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST MAY 31
FEBRUARY 28, 31, TO
1998 ------------------ AUGUST 31,
(UNAUDITED) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.32 8.23 8.31 8.32 8.37
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .39 .40 .43 .07
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.04)
- --------------------------------------------------------------------------------------------
Total from investment operations .13 .48 .31 .39 .03
- --------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .39 .39 .40 .08
- --------------------------------------------------------------------------------------------
Net asset value, end of period $8.26 8.32 8.23 8.31 8.32
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.61% 5.96 3.79 4.84 .34
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 2.01% 1.93 1.89 1.85 1.96
- --------------------------------------------------------------------------------------------
Net investment income 4.43% 4.82 4.75 5.01 3.36
- --------------------------------------------------------------------------------------------
</TABLE>
C-8
<PAGE> 233
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------------
CLASS C
SIX MONTHS
ENDED YEAR ENDED AUGUST MAY 31
FEBRUARY 28, 31, TO
1998 ------------------ AUGUST 31,
(UNAUDITED) 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.33 8.24 8.32 8.33 8.37
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .19 .39 .40 .43 .08
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.06) .09 (.09) (.04) (.04)
- ---------------------------------------------------------------------------------------------
Total from investment operations .13 .48 .31 .39 .04
- ---------------------------------------------------------------------------------------------
Less distribution from net investment
income .19 .39 .39 .40 .08
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $8.27 8.33 8.24 8.32 8.33
- ---------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 1.63% 5.98 3.82 4.89 .47
- ---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------
Expenses 1.98% 1.88 1.89 1.79 1.88
- ---------------------------------------------------------------------------------------------
Net investment income 4.46% 4.87 4.75 5.07 3.52
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1998 ------------------------------------
(UNAUDITED) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $73,945 81,967 94,477 129,757 202,815
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 226% 249 272 308 533
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTES: Scudder Kemper 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.
Total return does not reflect the effect of any sales charges.
C-9
<PAGE> 234
PORTFOLIO OF INVESTMENTS
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS AT AUGUST 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY Notes 9.25% 1998 $ 3,500 $ 3,610
SECURITIES - 23.2% 9.125 1999 4,000 4,203
(Cost: $19,125) 6.75 1999 3,000 3,039
6.25 1999 4,000 4,019
7.75 2000 4,000 4,150
------------------------------------------------------------------------
19,021
- ------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Adjustable rate 7.745-8.103 2022 18,601 19,308
MORTGAGE CORPORATION - mortgages (a) 7.826-7.882 2023 6,531 6,747
45.3% 7.944 2025 6,455 6,688
(Cost: $36,862) 7.572 2026 3,911 4,050
Fixed rate 11.25 2010 263 286
collateralized mortgage 11.00 2014 72 72
obligations
------------------------------------------------------------------------
37,151
- ------------------------------------------------------------------------------------------------------------------
GOVERNMENT Adjustable rate 7.375 2022 6,044 6,213
NATIONAL MORTGAGE mortgages (a) 6.00-7.00 2027 18,000 18,228
ASSOCIATION - 30.3% Pass-through 11.00 2018 344 381
(Cost: $24,814) certificates
------------------------------------------------------------------------
24,822
- ------------------------------------------------------------------------------------------------------------------
FEDERAL Adjustable rate 7.376 2019 3,403 3,495
NATIONAL MORTGAGE mortgages (a) 7.923 2021 1,708 1,776
ASSOCIATION - 15.9% 7.939 2023 2,643 2,746
(Cost: $12,948) 7.716 2025 4,790 4,985
------------------------------------------------------------------------
13,002
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--114.7%
(Cost: $93,749) 93,996
------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(14.7)% (12,029)
------------------------------------------------------------------------
NET ASSETS--100% $ 81,967
------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Adjustable rate securities. The interest rates on these securities vary with
a selected index at specified intervals and the rates shown above are the
effective rates on August 31, 1997. The dates shown represent the final maturity
of the obligations.
Based on the cost of investments of $93,749,000 for federal income tax purposes
at August 31, 1997, the gross unrealized appreciation was $415,000, the gross
unrealized depreciation was $168,000 and the net unrealized appreciation on
investments was $247,000.
See accompanying Notes to Financial Statements.
C-10
<PAGE> 235
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, 1997, 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 1993. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
August 31, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Kemper
Adjustable Rate U.S. Government Fund at August 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the fiscal periods since 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
October 16, 1997
C-11
<PAGE> 236
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $93,749) $ 93,996
- ------------------------------------------------------------------------
Cash 863
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 139
- ------------------------------------------------------------------------
Investments sold 4,874
- ------------------------------------------------------------------------
Interest 922
- ------------------------------------------------------------------------
TOTAL ASSETS 100,794
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Dividends 118
- ------------------------------------------------------------------------
Fund shares redeemed 272
- ------------------------------------------------------------------------
Investments purchased 18,311
- ------------------------------------------------------------------------
Management fee 38
- ------------------------------------------------------------------------
Distribution services fee 5
- ------------------------------------------------------------------------
Administrative services fee 15
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 36
- ------------------------------------------------------------------------
Trustees' fees 32
- ------------------------------------------------------------------------
Total liabilities 18,827
- ------------------------------------------------------------------------
NET ASSETS $ 81,967
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $ 91,703
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (10,640)
- ------------------------------------------------------------------------
Net unrealized appreciation on investments 247
- ------------------------------------------------------------------------
Undistributed net investment income 657
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $ 81,967
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($73,504 / 8,849 shares outstanding) $8.31
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.61
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($7,404 / 890 shares outstanding) $8.32
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($1,059 / 127 shares outstanding) $8.33
- ------------------------------------------------------------------------
</TABLE>
C-12
<PAGE> 237
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Year ended August 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $6,048
- ----------------------------------------------------------------------
Expenses:
Management fee 493
- ----------------------------------------------------------------------
Distribution services fee 60
- ----------------------------------------------------------------------
Administrative services fee 189
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 336
- ----------------------------------------------------------------------
Professional fees 50
- ----------------------------------------------------------------------
Reports to shareholders 26
- ----------------------------------------------------------------------
Trustees' fees and other 19
- ----------------------------------------------------------------------
Total expenses 1,173
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 4,875
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments (including
options purchased) 403
- ----------------------------------------------------------------------
Net realized gain from futures transactions 119
- ----------------------------------------------------------------------
Net realized gain 522
- ----------------------------------------------------------------------
Change in net unrealized depreciation on investments 341
- ----------------------------------------------------------------------
Net gain on investments 863
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,738
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 4,875 6,197
- -------------------------------------------------------------------------------------------
Net realized gain (loss) 522 (20)
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 341 (928)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,738 5,249
- -------------------------------------------------------------------------------------------
Net equalization charges (127) (272)
- -------------------------------------------------------------------------------------------
Distribution from net investment income (4,810) (6,117)
- -------------------------------------------------------------------------------------------
Net decrease from capital share transactions (13,311) (34,140)
- -------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (12,510) (35,280)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of year 94,477 129,757
- -------------------------------------------------------------------------------------------
END OF YEAR (including undistributed net investment income
of $657 and $718, respectively) $ 81,967 94,477
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
C-13
<PAGE> 238
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 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, 1997) are offered to a limited
group of investors, are not subject to initial or
contingent deferred sales charges and have lower
ongoing expenses than other classes. Differences in
class expenses will result in the payment of
different per share income dividends by class. All
shares of the Fund have equal rights with respect
to voting, dividends and assets, subject to class
specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
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 financial futures
and options are valued at the settlement price
established each day by the board of trade or
exchange on which they are traded. Over-the-counter
traded fixed income options are valued based upon
prices provided by market makers. Other securities
and assets are valued at fair value as determined
in good faith by the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date (date the order to buy or sell is
executed). 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.
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, 1997, the Fund had $13,443,000 in
purchase commitments outstanding (16% 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
C-14
<PAGE> 239
NOTES TO FINANCIAL STATEMENTS
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, 1997, amounting to approximately
$10,622,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 1998 through 2004.
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.
- --------------------------------------------------------------------------------
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 $493,000 for the year
ended August 31, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED COMMISSIONS ALLOWED
BY ZKDI BY ZKDI TO FIRMS
----------- --------------------
<S> <C> <C>
Year ended August 31, 1997 $8,000 58,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of the Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY PAID BY ZKDI
ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended August 31, 1997 $91,000 120,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to Class A, Class B and Class C shareholders, the
Fund pays ZKDI a fee at an annual rate of up to
.25% of average daily net assets of each class.
ZKDI in
C-15
<PAGE> 240
NOTES TO FINANCIAL STATEMENTS
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 ASF PAID BY ZKDI
THE FUND TO ZKDI TO FIRMS
----------------- -----------------
<S> <C> <C>
Year ended August 31, 1997 $189,000 188,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $249,000 for the year ended August 31, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended August 31, 1997, the Fund made
no direct payments to its officers and incurred
trustees' fees of $15,000 to independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended August 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $241,278
Proceeds from sales 247,926
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHARES SOLD
Class A 1,089 $ 8,931 3,196 $ 26,308
-----------------------------------------------------------------------------
Class B 626 5,196 352 2,925
-----------------------------------------------------------------------------
Class C 82 680 126 1,046
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
Class A 369 3,054 500 4,138
-----------------------------------------------------------------------------
Class B 33 271 27 224
-----------------------------------------------------------------------------
Class C 7 55 6 51
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
SHARES REDEEMED
Class A (3,198) (26,282) (8,043) (66,310)
-----------------------------------------------------------------------------
Class B (523) (4,338) (182) (1,513)
-----------------------------------------------------------------------------
Class C (106) (878) (122) (1,009)
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONVERSION OF SHARES
Class A 11 93 14 113
-----------------------------------------------------------------------------
Class B (11) (93) (14) (113)
-----------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $(13,311) $(34,140)
-----------------------------------------------------------------------------
</TABLE>
C-16
<PAGE> 241
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to protect itself from
anticipated market conditions and, as such, bears
the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
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 fluctuates. At August 31,
1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $89,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at August 31, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION GAIN AT
TYPE AMOUNT MONTH 8/31/97
-------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $5,080,000 Sep '97 $9,000
</TABLE>
C-17
<PAGE> 242
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
--------------------------------------------
CLASS A
--------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ------------------------------------------------------------------------------------------------
Net asset value, beginning of year $8.22 8.30 8.33 8.68 8.63
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .45 .46 .48 .34 .47
- ------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.29) .02
- ------------------------------------------------------------------------------------------------
Total from investment operations .54 .37 .44 .05 .49
- ------------------------------------------------------------------------------------------------
Less distribution from net investment income .45 .45 .47 .40 .44
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $8.31 8.22 8.30 8.33 8.68
- ------------------------------------------------------------------------------------------------
TOTAL RETURN 6.75% 4.55 5.52 .59 5.87
- ------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------------------------------
Expenses 1.25% 1.15 1.10 .93 .21
- ------------------------------------------------------------------------------------------------
Net investment income 5.50% 5.49 5.76 3.96 5.44
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------- ---------------------------------------
CLASS B CLASS C
---------------------------------------- ---------------------------------------
MAY 31 MAY 31
YEAR ENDED AUGUST 31, TO YEAR ENDED AUGUST 31, TO
--------------------------- AUGUST 31, -------------------------- AUGUST 31,
1997 1996 1995 1994 1997 1996 1995 1994
- ----------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
- ----------------------------------------------------------------------------------- ---------------------------------------
Net asset value, beginning of period $8.23 8.31 8.32 8.37 8.24 8.32 8.33 8.37
- ----------------------------------------------------------------------------------- ---------------------------------------
Income from investment operations:
Net investment income .39 .40 .43 .07 .39 .40 .43 .08
- ----------------------------------------------------------------------------------- ---------------------------------------
Net realized and unrealized gain (loss) .09 (.09) (.04) (.04) .09 (.09) (.04) (.04)
- ----------------------------------------------------------------------------------- ---------------------------------------
Total from investment operations .48 .31 .39 .03 .48 .31 .39 .04
- ----------------------------------------------------------------------------------- ---------------------------------------
Less distribution from net investment
income .39 .39 .40 .08 .39 .39 .40 .08
- ----------------------------------------------------------------------------------- ---------------------------------------
Net asset value, end of period $8.32 8.23 8.31 8.32 8.33 8.24 8.32 8.33
- ------------------------------------------------------------------------------- ---------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.96% 3.79 4.84 .34 5.98 3.82 4.89 .47
- ------------------------------------------------------------------------------- ---------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ------------------------------------------------------------------------------- ---------------------------------
Expenses 1.93% 1.89 1.85 1.96 1.88 1.89 1.79 1.88
- ----------------------------------------------------------------------------------- ---------------------------------------
Net investment income 4.82% 4.75 5.01 3.36 4.87 4.75 5.07 3.52
- ----------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net assets at end of year (in thousands) $81,967 94,477 129,757 202,815 212,694
- --------------------------------------------------------------------------------------------
Portfolio turnover rate 249% 272 308 533 138
- --------------------------------------------------------------------------------------------
</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, and .95% and 4.70% for the year ended August 31,
1993.
Total return does not reflect the effect of any sales charges.
C-18
<PAGE> 243
EXHIBIT D
FINANCIAL STATEMENTS FOR THE SHORT-INTERMEDIATE FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
Portfolio of Investments at March 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COUPON PRINCIPAL
U.S. GOVERNMENT OBLIGATIONS TYPE RATE MATURITY AMOUNT VALUE
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
U.S. TREASURY Notes 8.875% 2000 $14,000 $ 14,901
SECURITIES - 41.7%
(Cost: $70,302)
8.75 2000 37,000 39,538
8.50 2000 2,000 2,138
8.00 2001 8,000 8,529
7.50 2002 4,000 4,266
-------------------------------------------------------------------------------
69,372
- -----------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Agency notes 6.01 2000 5,000 5,028
MORTGAGE ASSOCIATION
- 25.6%
(Cost: $42,448)
Fixed rate collateralized
mortgage obligations 6.625 2001 8,876 8,962
Pass-through certificates 6.35 2018 10,000 10,044
6.50 2013-2028 9,050 9,005
7.50 2012 4,460 4,586
9.25 2018 4,600 4,941
-------------------------------------------------------------------------------
42,566
- -----------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Balloon rate mortgages 6.50 1999 9,641 9,689
MORTGAGE CORPORATION
- 13.8%
(Cost: $23,053)
Adjustable rate mortgages 7.665 2022 3,831 3,923
Pass-through certificates 7.00 2013 9,000 9,155
11.25 2010 219 240
-------------------------------------------------------------------------------
23,007
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Pass-through certificates 7.00 2015-2028 12,672 12,772
MORTGAGE ASSOCIATION
- 13.6%
(Cost: $22,605)
9.00 2019-2022 9,107 9,793
9.50 2016-2020 42 45
-------------------------------------------------------------------------------
22,610
- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - BellSouth Telecommunications,
11.6% Inc. 9.19 2003 934 1,011
(Cost: $19,233)
California Infrastructure PG&E 6.15 2002 1,000 1,003
California Infrastructure SCE 6.17 2003 1,000 1,004
Chase Credit Cards Master
Trust 6.30 2003 5,000 5,036
First Plus Home Loan Trust 6.57 2013 5,000 5,028
Rockwell International Corp. 8.375 2001 1,000 1,061
World Omni 6.90 2003 5,000 5,088
-------------------------------------------------------------------------------
19,231
-------------------------------------------------------------------------------
TOTAL INVESTMENTS--106.3%
(Cost: $177,641) 176,786
-------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(6.3)% (10,578)
-------------------------------------------------------------------------------
NET ASSETS--100% $166,208
-------------------------------------------------------------------------------
</TABLE>
NOTE TO PORTFOLIO OF INVESTMENTS
Based on the cost of investments of $177,641,000 for federal income tax purposes
at March 31, 1998, the gross unrealized appreciation was $229,000, the gross
unrealized depreciation was $1,084,000 and the net unrealized depreciation on
investments was $855,000.
See accompanying Notes to Financial Statements.
D- 1
<PAGE> 244
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $177,641) $176,786
- ------------------------------------------------------------------------
Cash 4,384
- ------------------------------------------------------------------------
Receivable for:
Investments sold 11,187
- ------------------------------------------------------------------------
Fund shares sold 730
- ------------------------------------------------------------------------
Interest 1,883
- ------------------------------------------------------------------------
TOTAL ASSETS 194,970
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 28,096
- ------------------------------------------------------------------------
Fund shares redeemed 402
- ------------------------------------------------------------------------
Management fee 76
- ------------------------------------------------------------------------
Distribution services fee 62
- ------------------------------------------------------------------------
Administrative services fee 32
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 69
- ------------------------------------------------------------------------
Trustees' fees 25
- ------------------------------------------------------------------------
Total liabilities 28,762
- ------------------------------------------------------------------------
NET ASSETS $166,208
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $188,888
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (22,856)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (855)
- ------------------------------------------------------------------------
Undistributed net investment income 1,031
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $166,208
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($68,588 / 8,821 shares outstanding) $7.78
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.06
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($92,651 / 11,981 shares outstanding) $7.73
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($4,969 / 641 shares outstanding) $7.75
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
D-2
<PAGE> 245
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
NET INVESTMENT INCOME
- ----------------------------------------------------------------------
Interest income $5,904
- ----------------------------------------------------------------------
Expenses:
Management fee 470
- ----------------------------------------------------------------------
Distribution services fee 419
- ----------------------------------------------------------------------
Administrative services fee 201
- ----------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 317
- ----------------------------------------------------------------------
Professional fees 10
- ----------------------------------------------------------------------
Reports to shareholders 64
- ----------------------------------------------------------------------
Trustees' fees and other 13
- ----------------------------------------------------------------------
Total expenses 1,494
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 4,410
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- ----------------------------------------------------------------------
Net realized gain on sales of investments 73
- ----------------------------------------------------------------------
Net realized loss from futures transactions (91)
- ----------------------------------------------------------------------
Net realized loss (18)
- ----------------------------------------------------------------------
Change in net unrealized depreciation on investments (181)
- ----------------------------------------------------------------------
Net loss on investments (199)
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,211
- ----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
MARCH 31, ENDED
1998 SEPTEMBER 30,
(UNAUDITED) 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------------------
Net investment income $ 4,410 10,988
- ----------------------------------------------------------------------------------------------------
Net realized loss (18) (5,257)
- ----------------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation (181) 3,620
- ----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,211 9,351
- ----------------------------------------------------------------------------------------------------
Net equalization charges (83) (370)
- ----------------------------------------------------------------------------------------------------
Distribution from net investment income (4,904) (11,368)
- ----------------------------------------------------------------------------------------------------
Net decrease from capital share transactions (4,416) (30,234)
- ----------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (5,192) (32,621)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
NET ASSETS
- ----------------------------------------------------------------------------------------------------
Beginning of period 171,400 204,021
- ----------------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed
net investment income of
$1,031 and $1,608, respectively) $166,208 171,400
- ----------------------------------------------------------------------------------------------------
</TABLE>
D-3
<PAGE> 246
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Short-Intermediate Government Fund is a
separate series of Kemper Portfolios, 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 a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not covert into another
class. Class I shares (none sold through March 31,
1998) are offered to a limited group of investors,
are not subject to initial or contingent deferred
sales charges and have lower ongoing expenses than
other classes. Differences in class expenses will
result in the payment of different per share income
dividends by class. All shares of the Fund have
equal rights with respect to voting, dividends and
assets, subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
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. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded fixed income
options are valued based upon prices provided by
market makers. Other securities and assets are
valued at fair value as determined in good faith by
the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). 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.
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
March 31, 1998, the Fund had $18,323,000 in
purchase commitments outstanding (11% 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
D-4
<PAGE> 247
NOTES TO FINANCIAL STATEMENTS
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 for the six
months ended March 31, 1998. The accumulated net
realized loss on sales of investments for federal
income tax purposes at March 31, 1998, amounting to
approximately $22,519,000, is available to offset
future taxable gains. If not applied, the loss
carryover expires during the period 2002 through
2006.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES INVESTMENT MANAGER COMBINATION. Effective December
31, 1997, Zurich Insurance Company, the parent of
Zurich Kemper Investments, Inc. (ZKI), acquired a
majority interest in Scudder, Stevens & Clark, Inc.
(Scudder), another major investment manager. As a
result of this transaction, the operations of ZKI
were combined with Scudder to form a new global
investment organization named Scudder Kemper
Investments, Inc. (Scudder Kemper). The transaction
resulted in the termination of the Fund's
investment management agreement with ZKI, however,
a new investment management agreement between the
Fund and Scudder Kemper was approved by the Fund's
Board of Trustees and by the Fund's shareholders.
The new management agreement, which was effective
December 31, 1997, is the same in all material
respects as the previous management agreement,
except that Scudder Kemper is the new investment
adviser to the Fund. In addition, the names of the
Fund's principal underwriter and shareholder
service agent were changed to Kemper Distributors,
Inc. (KDI) and Kemper Service Company (KSvC),
respectively.
MANAGEMENT AGREEMENT. The Fund has a management
agreement with Scudder Kemper, 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 $470,000 for the six months ended
March 31, 1998.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with KDI. Underwriting
commissions paid in connection with the
distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY KDI BY KDI TO FIRMS
--------------- ----------------------
<S> <C> <C>
Six months ended March 31, 1998 $3,000 59,000
</TABLE>
For services under the distribution services
agreement, the Fund pays KDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, KDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, KDI
D-5
<PAGE> 248
NOTES TO FINANCIAL STATEMENTS
receives any contingent deferred sales charges
(CDSC) from redemptions of Class B and Class C
shares. Distribution fees, CDSC and commissions
related to Class B and Class C shares are as
follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES COMMISSIONS AND
AND CDSC DISTRIBUTION FEES
RECEIVED BY KDI PAID BY KDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Six months ended March 31, 1998 $521,000 136,000
</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 ASF PAID BY
THE FUND TO KDI KDI TO FIRMS
--------------- ------------
<S> <C> <C>
Six months ended March 31, 1998 $201,000 201,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
KSvC is the shareholder service agent of the Fund.
Under the agreement, KSvC received shareholder
services fees of $260,000 for the six months ended
March 31, 1998.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1998, the Fund made no direct payments to its
officers and incurred trustees' fees of $9,000 to
independent trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1998, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $301,354
Proceeds from sales 308,567
D-6
<PAGE> 249
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1998 1997
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
Class A 2,466 $ 18,977 2,255 $ 18,889
------------------------------------------------------------------------------
Class B 1,286 9,913 2,120 16,310
------------------------------------------------------------------------------
Class C 64 499 520 4,058
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 183 1,427 255 1,994
------------------------------------------------------------------------------
Class B 276 2,136 815 6,352
------------------------------------------------------------------------------
Class C 15 113 28 219
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (2,106) (16,311) (2,989) (23,165)
------------------------------------------------------------------------------
Class B (2,620) (20,041) (6,668) (52,945)
------------------------------------------------------------------------------
Class C (145) (1,129) (250) (1,946)
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 2,338 18,294 1,985 15,533
------------------------------------------------------------------------------
Class B (2,351) (18,294) (1,994) (15,533)
------------------------------------------------------------------------------
NET DECREASE FROM
CAPITAL SHARE TRANSACTIONS $ (4,416) $(30,234)
------------------------------------------------------------------------------
</TABLE>
D-7
<PAGE> 250
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS A
-------------------------------------------------------------
YEAR ENDED
SEPTEMBER TWO MONTHS YEAR ENDED
SIX MONTHS 30, ENDED JULY 31,
ENDED ----------- SEPTEMBER 30, -----------
MARCH 31, 1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.80 7.89 8.08 8.09 8.11 8.63
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .23 .51 .54 .09 .54 .48
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.01) (.07) (.20) (.01) (.03) (.44)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .22 .44 .34 .08 .51 .04
- ---------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .24 .53 .53 .09 .53 .45
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- .11
- ---------------------------------------------------------------------------------------------------------------
Total dividends .24 .53 .53 .09 .53 .56
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 7.80 7.89 8.08 8.09 8.11
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.93% 5.80 4.25 1.00 6.58 .41
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------
Expenses 1.14% 1.19 1.15 1.05 1.06 1.06
- ---------------------------------------------------------------------------------------------------------------
Net investment income 5.77% 6.61 6.65 6.56 6.65 5.85
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
CLASS B
-------------------------------------------------------------
YEAR ENDED
SEPTEMBER TWO MONTHS YEAR ENDED
SIX MONTHS 30, ENDED JULY 31,
ENDED ----------- SEPTEMBER 30, -----------
MARCH 31, 1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.77 7.85 8.05 8.06 8.08 8.61
- ---------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .18 .46 .46 .08 .47 .40
- ---------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.01) (.07) (.20) (.01) (.03) (.44)
- ---------------------------------------------------------------------------------------------------------------
Total from investment operations .17 .39 .26 .07 .44 (.04)
- ---------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .21 .47 .46 .08 .46 .38
- ---------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- -- .11
- ---------------------------------------------------------------------------------------------------------------
Total dividends .21 .47 .46 .08 .46 .49
- ---------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.73 7.77 7.85 8.05 8.06 8.08
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.24% 5.11 3.28 .87 5.68 (.48)
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------
Expenses 2.08% 2.02 1.97 1.91 1.87 1.93
- ---------------------------------------------------------------------------------------------------------------
Net investment income 4.83% 5.78 5.83 5.70 5.84 4.95
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
D-8
<PAGE> 251
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
CLASS C
-----------------------------------------------------------------------
YEAR MAY 31
SIX MONTHS YEAR ENDED TWO MONTHS ENDED TO
ENDED SEPTEMBER 30, ENDED JULY JULY
MARCH 31, ------------------ SEPTEMBER 30, 31, 31,
1998 1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.78 7.86 8.06 8.06 8.08 8.09
- --------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .20 .47 .47 .09 .47 .07
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.01) (.07) (.20) (.01) (.03) (.01)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .19 .40 .27 .08 .44 .06
- --------------------------------------------------------------------------------------------------------------------
Less distribution from net investment income .22 .48 .47 .08 .46 .07
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.75 7.78 7.86 8.06 8.06 8.08
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.42% 5.24 3.36 1.00 5.73 .77
- --------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------------------------------
Expenses 1.83% 1.86 1.85 1.74 1.78 1.83
- --------------------------------------------------------------------------------------------------------------------
Net investment income 5.08% 5.94 5.95 5.87 5.93 5.54
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS YEAR ENDED TWO MONTHS
ENDED SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
MARCH 31, ------------------ SEPTEMBER 30, ---------------------
1998 1997 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $166,208 171,400 204,021 239,619 246,248 266,640
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 336% 164 180 173 597 916
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Data for
the period ended March 31, 1998 is unaudited.
D-9
<PAGE> 252
PORTFOLIO OF INVESTMENTS
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS AT SEPTEMBER 30, 1997
(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% 1998 $ 3,000 $ 3,101
SECURITIES - 63.7% 6.875 1999 5,000 5,095
(Cost: $110,054) 6.25 1999 10,000 10,072
8.75 2000 39,820 42,788
8.50 2000 22,000 23,299
7.125 2000 5,000 5,140
6.00 2000 3,000 3,010
6.625 2001 5,330 5,444
6.25 2001 6,000 6,056
Bonds 6.625 2002 5,000 5,120
--------------------------------------------------------------------------------------
109,125
- -----------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL Agency notes 6.01 2000 5,000 5,000
MORTGAGE ASSOCIATION Adjustable rate mortgages 6.446 2027 10,462 10,606
- 17.3% Fixed rate collateralized
(Cost: $29,549) mortgage obligations 6.625 2001 8,930 8,997
Pass-through certificates 7.50 2012 4,950 5,069
--------------------------------------------------------------------------------------
29,672
- -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL Adjustable rate mortgages 5.50 2027 5,000 4,978
MORTGAGE ASSOCIATION Pass-through certificates 7.00 2015 9,411 9,518
- 14.7% 8.00 2027 5,000 5,171
(Cost: $25,127) 9.00 2019 83 89
9.50 2016-2027 5,050 5,456
---------------------------------------------------------------------------------------
25,212
- -----------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN Balloon mortgages 6.50 1999 10,906 10,973
MORTGAGE CORPORATION - 9.3% Adjustable rate mortgages 7.831 2022 4,516 4,680
(Cost: $15,910) Pass-through certificates 11.25 2010 261 286
--------------------------------------------------------------------------------------
15,939
- -----------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - 2.4% Associates Corp. N.A. 6.375 2000 1,000 1,005
(Cost: $4,141) BellSouth Telecommunications,
Inc. 9.19 2003 1,000 1,086
Merrill Lynch & Co. 6.35 2000 1,000 1,003
Rockwell International Corp. 8.375 2001 1,000 1,065
--------------------------------------------------------------------------------------
4,159
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS--107.4%
(Cost: $184,781) 184,107
--------------------------------------------------------------------------------------
LIABILITIES, LESS CASH AND OTHER ASSETS--(7.4%) (12,707)
--------------------------------------------------------------------------------------
NET ASSETS--100% $171,400
--------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $184,781,000 for federal income tax purposes
at September 30, 1997, the gross unrealized appreciation was $523,000, the gross
unrealized depreciation was $1,197,000 and the net unrealized depreciation on
investments was $674,000.
See accompanying Notes to Financial Statements.
D-10
<PAGE> 253
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Kemper Short-Intermediate Government
Fund, a series of Kemper Portfolios, as of September 30, 1997, the related
statements of operations for the year then ended and changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the fiscal periods since 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
September 30, 1997, by correspondence with the custodian. 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
Short-Intermediate Government Fund at September 30, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for the
fiscal periods since 1993, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1997
D-11
<PAGE> 254
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $184,781) $184,107
- ------------------------------------------------------------------------
Cash 998
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 557
- ------------------------------------------------------------------------
Investments sold 186
- ------------------------------------------------------------------------
Interest 1,859
- ------------------------------------------------------------------------
TOTAL ASSETS 187,707
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Fund shares redeemed 433
- ------------------------------------------------------------------------
Investments purchased 15,591
- ------------------------------------------------------------------------
Management fee 78
- ------------------------------------------------------------------------
Distribution services fee 79
- ------------------------------------------------------------------------
Administrative services fee 34
- ------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 70
- ------------------------------------------------------------------------
Trustees' fees and other 22
- ------------------------------------------------------------------------
Total liabilities 16,307
- ------------------------------------------------------------------------
NET ASSETS $171,400
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $193,304
- ------------------------------------------------------------------------
Accumulated net realized loss on investments (22,838)
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (674)
- ------------------------------------------------------------------------
Undistributed net investment income 1,608
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $171,400
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($46,360 / 5,940 shares outstanding) $7.80
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 3.63% of
net asset value or 3.50% of offering price) $8.08
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($119,537 / 15,390 shares outstanding) $7.77
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($5,503 / 707 shares outstanding) $7.78
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
D-12
<PAGE> 255
FINANCIAL STATEMENT
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------
Interest income $14,391
- -------------------------------------------------------------------------------------------
Expenses:
Management fee 1,014
- -------------------------------------------------------------------------------------------
Distribution services fee 1,105
- -------------------------------------------------------------------------------------------
Administrative services fee 445
- -------------------------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 726
- -------------------------------------------------------------------------------------------
Professional fees 37
- -------------------------------------------------------------------------------------------
Reports to shareholders 52
- -------------------------------------------------------------------------------------------
Trustees' fees and other 24
- -------------------------------------------------------------------------------------------
Total expenses 3,403
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,988
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------
Net realized loss on sales of investments (5,283)
- -------------------------------------------------------------------------------------------
Net realized gain from futures transactions 26
- -------------------------------------------------------------------------------------------
Net realized loss (5,257)
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation on investments 3,620
- -------------------------------------------------------------------------------------------
Net loss on investments (1,637)
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,351
- -------------------------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------
Net investment income $ 10,988 13,300
- -------------------------------------------------------------------------------------------
Net realized gain (loss) (5,257) 814
- -------------------------------------------------------------------------------------------
Change in net unrealized appreciation/depreciation 3,620 (6,367)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 9,351 7,747
- -------------------------------------------------------------------------------------------
Net equalization charges (370) (350)
- -------------------------------------------------------------------------------------------
Distribution from net investment income (11,368) (13,083)
- -------------------------------------------------------------------------------------------
Net decrease from capital share transactions (30,234) (29,912)
- -------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (32,621) (35,598)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------
Beginning of year 204,021 239,619
- -------------------------------------------------------------------------------------------
END OF YEAR (including undistributed
net investment income of
$1,608 and $2,353, respectively) $171,400 204,021
- -------------------------------------------------------------------------------------------
</TABLE>
D-13
<PAGE> 256
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF THE
FUND Kemper Short-Intermediate Government Fund is a
separate series of Kemper Portfolios, 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 a contingent deferred sales charge
payable upon certain redemptions within one year of
purchase. Class C shares do not covert into another
class. Class I shares (none sold through September
30, 1997) are offered to a limited group of
investors, are not subject to initial or contingent
deferred sales charges and have lower ongoing
expenses than other classes. Differences in class
expenses will result in the payment of different
per share income dividends by class. All shares of
the Fund have equal rights with respect to voting,
dividends and assets, subject to class specific
preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
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. Financial futures and options are
valued at the settlement price established each day
by the board of trade or exchange on which they are
traded. Over-the-counter traded fixed income
options are valued based upon prices provided by
market makers. Other securities and assets are
valued at fair value as determined in good faith by
the Board of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). 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.
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
September 30, 1997, the Fund had $15,591,000 in
purchase commitments outstanding (9% 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
D-14
<PAGE> 257
NOTES TO FINANCIAL STATEMENTS
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
September 30, 1997, amounting to approximately
$22,500,000, is available to offset future taxable
gains. If not applied, the loss carryover expires
during the period 2002 through 2006.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income monthly and
any net realized capital gains annually, which are
recorded on the ex-dividend date. Dividends are
determined in accordance with income tax principles
which may treat certain transactions differently
from generally accepted accounting principles.
EQUALIZATION ACCOUNTING. A portion of proceeds from
sales and cost of redemptions of Fund shares is
credited or charged to undistributed net investment
income so that income per share available for
distribution is not affected by sales or
redemptions of shares.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
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 $1,014,000 for the
year ended September 30, 1997.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Zurich Kemper Distributors,
Inc. (ZKDI). Underwriting commissions paid in
connection with the distribution of Class A shares
are as follows:
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS ALLOWED
RETAINED BY ZKDI BY ZKDI TO FIRMS
---------------- -----------------------
<S> <C> <C>
Year ended September 30, 1997 $8,000 82,000
</TABLE>
For services under the distribution services
agreement, the Fund pays ZKDI a fee of .75% of
average daily net assets of Class B and Class C
shares. Pursuant to the agreement, ZKDI enters into
related selling group agreements with various firms
at various rates for sales of Class B and Class C
shares. In addition, ZKDI receives any contingent
deferred sales charges (CDSC) from redemptions of
Class B and Class C shares. Distribution fees and
commissions paid in connection with the sale of
Class B and Class C shares and the CDSC received in
connection with the redemption of such shares are
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES
AND CDSC COMMISSIONS AND
RECEIVED BY DISTRIBUTION FEES
ZKDI PAID BY ZKDI TO FIRMS
----------------- ---------------------
<S> <C> <C>
Year ended September 30, 1997 $1,435,000 377,000
</TABLE>
ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an
administrative services agreement with ZKDI. For
providing information and administrative services
to shareholders, the Fund pays ZKDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. ZKDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on
D-15
<PAGE> 258
NOTES TO FINANCIAL STATEMENTS
assets of Fund accounts that the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY ASF PAID BY
THE FUND TO ZKDI ZKDI TO FIRMS
---------------- -------------
<S> <C> <C>
Year ended September 30, 1997 $445,000 450,000
</TABLE>
SHAREHOLDER SERVICES AGREEMENT. Pursuant to a
services agreement with the Fund's transfer agent,
Zurich Kemper Service Company (ZKSvC) is the
shareholder service agent of the Fund. Under the
agreement, ZKSvC received shareholder services fees
of $560,000 for the year ended September 30, 1997.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of ZKI.
For the year ended September 30, 1997, the Fund
made no direct payments to its officers and
incurred trustees' fees of $18,000 to independent
trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the year ended September 30, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
Purchases $288,944
Proceeds from sales 302,357
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
Class A 2,255 $ 18,889 1,028 $ 8,057
------------------------------------------------------------------------------
Class B 2,120 16,310 1,851 14,606
------------------------------------------------------------------------------
Class C 520 4,058 504 4,060
------------------------------------------------------------------------------
SHARES ISSUED IN REINVESTMENT OF DIVIDENDS
------------------------------------------------------------------------------
Class A 255 1,994 215 1,721
------------------------------------------------------------------------------
Class B 815 6,352 985 7,863
------------------------------------------------------------------------------
Class C 28 219 21 171
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (2,989) (23,165) (1,446) (11,497)
------------------------------------------------------------------------------
Class B (6,668) (52,945) (6,528) (51,573)
------------------------------------------------------------------------------
Class C (250) (1,946) (416) (3,320)
------------------------------------------------------------------------------
CONVERSION OF SHARES
------------------------------------------------------------------------------
Class A 1,985 15,533 728 5,828
------------------------------------------------------------------------------
Class B (1,994) (15,533) (731) (5,828)
------------------------------------------------------------------------------
NET DECREASE
FROM CAPITAL
SHARE TRANSACTIONS $(30,234) $(29,912)
------------------------------------------------------------------------------
</TABLE>
D-16
<PAGE> 259
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6 FINANCIAL FUTURES
CONTRACTS The Fund has entered into exchange traded financial
futures contracts in order to help protect itself
from anticipated market conditions and, as such,
bears the risk that arises from entering into these
contracts.
At the time the Fund enters into a futures
contract, it is required to make a margin deposit
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 fluctuates. At September
30, 1997, the market value of assets pledged by the
Fund to cover margin requirements for open futures
positions was $102,000. The Fund also had liquid
securities in its portfolio in excess of the face
amount of the following short futures position open
at September 30, 1997:
<TABLE>
<CAPTION>
FACE EXPIRATION
TYPE AMOUNT MONTH LOSS
----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Note $3,542,000 December '97 $(3,000)
----------------------------------------------------------------------
</TABLE>
D-17
<PAGE> 260
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------
CLASS A
-----------------------------------------------------------------
YEAR ENDED
SEPTEMBER TWO MONTHS YEAR ENDED JULY
30, ENDED 31,
------------ SEPTEMBER 30, ------------------
1997 1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.89 8.08 8.09 8.11 8.63 8.65
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .51 .54 .09 .54 .48 .53
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.07) (.20) (.01) (.03) (.44) (.03)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .34 .08 .51 .04 .50
- ---------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .53 .53 .09 .53 .45 .52
- ---------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends .53 .53 .09 .53 .56 .52
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.80 7.89 8.08 8.09 8.11 8.63
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.80% 4.25 1.00 6.58 .41 6.01
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------
Expenses 1.19% 1.15 1.05 1.06 1.06 1.04
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 6.61% 6.65 6.56 6.65 5.85 6.06
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS B
----------------------------------------------------------------
YEAR ENDED
SEPTEMBER TWO MONTHS YEAR ENDED JULY
30, ENDED 31,
------------ SEPTEMBER 30, ------------------
1997 1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.85 8.05 8.06 8.08 8.61 8.64
- ---------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .46 .46 .08 .47 .40 .45
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.07) (.20) (.01) (.03) (.44) (.02)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .39 .26 .07 .44 (.04) .43
- ---------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .47 .46 .08 .46 .38 .46
- ---------------------------------------------------------------------------------------------------------------------
Distribution from net realized gain -- -- -- -- .11 --
- ---------------------------------------------------------------------------------------------------------------------
Total dividends .47 .46 .08 .46 .49 .46
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.77 7.85 8.05 8.06 8.08 8.61
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.11% 3.28 .87 5.68 (.48) 5.13
- ---------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------------------------------------------------------
Expenses 2.02% 1.97 1.91 1.87 1.93 1.87
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 5.78% 5.83 5.70 5.84 4.95 5.23
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
D-18
<PAGE> 261
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
----------------------------------------------------------
CLASS C
----------------------------------------------------------
YEAR MAY 31
YEAR ENDED TWO MONTHS ENDED TO
SEPTEMBER 30, ENDED JULY JULY
------------------ SEPTEMBER 30, 31, 31,
1997 1996 1995 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.86 8.06 8.06 8.08 8.09
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .47 .47 .09 .47 .07
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized loss (.07) (.20) (.01) (.03) (.01)
- -------------------------------------------------------------------------------------------------------
Total from investment operations .40 .27 .08 .44 .06
- -------------------------------------------------------------------------------------------------------
Less distribution from net investment income .48 .47 .08 .46 .07
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $7.78 7.86 8.06 8.06 8.08
- -------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 5.24% 3.36 1.00 5.73 .77
- -------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- -------------------------------------------------------------------------------------------------------
Expenses 1.86% 1.85 1.74 1.78 1.83
- -------------------------------------------------------------------------------------------------------
Net investment income 5.94% 5.95 5.87 5.93 5.54
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED TWO MONTHS
SEPTEMBER 30, ENDED YEAR ENDED JULY 31,
------------------ SEPTEMBER 30, -------------------------------
1997 1996 1995 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in thousands) $171,400 204,021 239,619 246,248 266,640 283,249
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 164% 180 173 597 916 339
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges.
D-19
<PAGE> 262
EXHIBIT E
PRO FORMA FINANCIAL STATEMENTS
The following tables set forth the unaudited pro forma condensed balance sheet
and unaudited pro forma condensed income statement of the Funds as of and for
the period ending August 31, 1998 and as adjusted to give effect to the
reorganization.
PRO FORMA CONDENSED BALANCE SHEET
AS OF AUGUST 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUIRING FUND ACQUIRED FUND COMBINED FUND
(KEMPER ADJUSTABLE (KEMPER SHORT- (KEMPER ADJUSTABLE
RATE U.S. INTERMEDIATE RATE U.S.
GOVERNMENT FUND) GOVERNMENT FUND) PRO FORMA GOVERNMENT FUND)(1)
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
------------------ ---------------- ----------- -------------------
<S> <C> <C> <C> <C>
Investments, at value.............. $67,109 $168,688 $235,797
Cash and other assets, less
liabilities...................... 2,198 (1,640) 558
------- -------- --------
Net Assets......................... $69,307 $167,048 $236,355
======= ======== ========
CLASS A SHARES
Net Assets......................... $60,856 $ 85,961 $146,817
Shares Outstanding................. 7,431 10,998 (497)(2) 17,932
Net Asset Value per share.......... $ 8.19 $ 7.82 $ 8.19
Maximum Offering Price............. $ 8.49 $ 8.10 $ 8.49
CLASS B SHARES
Net Assets......................... $ 7,108 $ 74,961 $ 82,069
Shares Outstanding................. 865 9,645 (517)(2) 9,993
Net Asset Value per share.......... $ 8.21 $ 7.77 $ 8.21
CLASS C SHARES
Net Assets......................... $ 1,343 $ 6,126 $ 7,469
Shares Outstanding................. 163 786 (41)(2) 908
Net Asset Value per share.......... $ 8.22 $ 7.79 $ 8.22
</TABLE>
- -------------------------
(1) To be renamed Kemper Short-Term U.S. Government Fund subsequent to the
reorganization.
(2) Based on the issuance of 10,501 Class A shares, 9,128 Class B shares and 745
Class C shares of Kemper Adjustable Rate U.S. Government Fund for all shares
of each class of Kemper Short-Intermediate Government Fund.
E-1
<PAGE> 263
PRO FORMA CONDENSED INCOME STATEMENT
FOR THE TWELVE MONTHS ENDED AUGUST 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUIRING FUND ACQUIRED FUND COMBINED FUND
(KEMPER ADJUSTABLE (KEMPER SHORT (KEMPER ADJUSTABLE
RATE U.S. INTERMEDIATE RATE U.S.
GOVERNMENT FUND) GOVERNMENT FUND) PRO FORMA GOVERNMENT FUND)(1)
(ACTUAL) (ACTUAL) ADJUSTMENTS (AS ADJUSTED)
------------------ ---------------- ----------- -------------------
<S> <C> <C> <C> <C>
Interest income................ $4,636 $11,514 $16,150
Expenses
Management, administrative
and distribution services
fees...................... 639 2,090 2,729
All other expenses........... 433 771 (145)(2) 1,059
------ ------- ---- -------
Total Expenses............ 1,072 2,861 (145) 3,788
Net Investment Income.......... 3,564 8,653 145 12,362
------ ------- ---- -------
Net realized loss on sales of
investments and futures
transactions................. (218) (1,677) (1,895)
Change in net unrealized
appreciation (depreciation)
on investments............... (589) 3,162 2,573
------ ------- ---- -------
Net Increase in Net Assets from
Operations................... $2,757 $10,138 145 $13,040
====== ======= ==== =======
</TABLE>
- -------------------------
(1) To be renamed Kemper Short-Term U.S. Government Fund subsequent to the
reorganization.
(2) Reflects estimated reduction in operating expenses due to the combined
Funds' larger net assets and greater economies of scale.
Expenses of the reorganization will be paid by Scudder Kemper Investments, Inc.,
Adviser for the Funds.
E-2
<PAGE> 264
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND AND KEMPER
SHORT-INTERMEDIATE GOVERNMENT FUND
COMBINING PORTFOLIOS OF INVESTMENTS
AS OF AUGUST 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
KEMPER KEMPER
ADJUSTABLE RATE SHORT-INTERMEDIATE COMBINED
U.S. GOVT. FUND GOVERNMENT FUND PRINCIPAL
PRINCIPAL AMOUNT($) PRINCIPAL AMOUNT($) AMOUNT($)
------------------- ------------------- ---------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS -- 90.0%
Government National Mortgage Association -- 44.3% 1,831 1,831
3,153 3,153
1,202 1,202
2,750 20,895 23,645
5,548 5,548
13 13
270 13 283
69 69
9 9
5,454 7,581 13,035
4,289 494 4,783
7,659 40,925 48,584
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities -- 25.8%
17,800 17,800
500 500
3,000 3,000
7,500 7,500
25,200 25,200
- -------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation -- 8.6%
11,909 11,909
4,441 4,441
3,494 3,494
7 7
- -------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association -- 5.2%
1,257 1,257
2,555 2,555
1,167 1,167
1,423 1,423
1,556 1,556
3,774 3,774
- -------------------------------------------------------------------------------------------------------------------
Corporate Obligations -- 6.1%
1,400 3,200 4,600
1,400 3,200 4,600
4,991 4,991
- -------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- 10.0%
4,900 18,700 23,600
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
<CAPTION>
INTEREST
DESCRIPTION RATE(%)
----------- --------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS -- 90.0%
Government National Mortgage Association -- 44.3% Adjustable rate mortgages 6.88
Adjustable rate mortgages 6.875 - 7.00
Adjustable rate mortgages 6.875
Pass-through certificates 6.50
Pass-through certificates 7.00
Pass-through certificates 9.50
Pass-through certificates 9.50 - 11.00
Pass-through certificates 9.00
Pass-through certificates 9.50
Pass-through certificates 7.375 - 9.00
Pass-through certificates 7.00
Pass-through certificates 6.00 - 7.50
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities -- 25.8%
Bonds 11.875
Notes 8.875
Notes 7.50
Notes 6.50
Notes 6.25
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation -- 8.6%
Adjustable rate mortgages 7.492 - 7.856
Adjustable rate mortgages 7.545 - 7.564
Adjustable rate mortgages 7.731
Fixed rate collateralized mortgage obligation 11.00
- ------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association -- 5.2%
Adjustable rate mortgages 9.25
Adjustable rate mortgages 7.124
Adjustable rate mortgages 7.53
Adjustable rate mortgages 7.64
Adjustable rate mortgages 7.585
Pass-through certificates 9.25
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Obligations -- 6.1%
Deutsche Floorplan Receivable Master Trust 5.856
MBNA Master Credit Card Trust 5.826
World Omni Automobile Lease Securitization Trust 6.90
- ------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- 10.0%
Federal National Mortgage Association 5.43
TOTAL INVESTMENTS -- 100%
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
KEMPER KEMPER
ADJUSTABLE RATE SHORT-INTERMEDIATE COMBINED
U.S. GOVT. FUND GOVERNMENT FUND MARKET
MATURITY MARKET VALUE($) MARKET VALUE($) VALUE($)
-------- --------------- ------------------ --------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS -- 90.0%
Government National Mortgage Association -- 44.3% 2021 1,870 1,870
2022 3,213 3,213
2023 1,226 1,226
2013 2,796 21,245 24,041
2015 5,579 5,579
2016 15 15
2018 300 14 314
2019 74 74
2020 10 10
2022 5,708 8,109 13,817
2027 4,364 505 4,869
2028 7,736 41,786 49,522
------ ------- -------
27,213 77,337 104,550
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities -- 25.8%
2003 23,265 23,265
2000 531 531
2002 3,247 3,247
2002 7,889 7,889
2001 25,988 25,988
------ ------- -------
3,778 57,142 60,920
- -----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation -- 8.6%
2022 12,149 12,149
2023 4,517 4,517
2025 3,583 3,583
2014 7 7
------ ------- -------
20,256 0 20,256
- -----------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association -- 5.2%
2018 1,338 1,338
2019 2,609 2,609
2021 1,188 1,188
2023 1,449 1,449
2025 1,574 1,574
2018 4,017 4,017
------ ------- -------
8,158 4,017 12,175
- -----------------------------------------------------------------------------------------------------------------------
Corporate Obligations -- 6.1%
2001 1,401 3,202 4,603
2003 1,403 3,209 4,612
2003 5,081 5,081
------ ------- -------
2,804 11,492 14,296
------ ------- -------
- -----------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- 10.0%
1998 4,900 18,700 23,600
------ ------- -------
TOTAL INVESTMENTS -- 100% 67,109 168,688 235,797
====== ======= =======
</TABLE>
E-3
<PAGE> 265
PART C -- OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Article VIII of the Registrant's Agreement and Declaration of Trust (Exhibit 1
hereto, which is incorporated herein by reference) provides in effect that the
Registrant will indemnify its officers and trustees under certain circumstances.
However, in accordance with Section 17(h) and 17(i) of the Investment Company
Act of 1940 and its own terms, said Article of the Agreement and Declaration of
Trust does not protect any person against any liability to the Registrant or its
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding Corp.
("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens & Clark,
Inc. ("Scudder") and the representatives of the beneficial owners of the capital
stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich will become the
majority stockholder in Scudder with an approximately 70% interest, and ZKI will
become a wholly-owned subsidiary of, or be combined with,
Scudder-("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify each
Fund and the Independent Trustees for and against any liability and expenses
based upon any misstatements or omissions by Scudder to the Independent Trustees
in connection with their consideration of the Transaction.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1(a) Amended and Restated Agreement and Declaration of Trust.(1)
1(b) Amended and Restated Written Instrument Establishing and
Designating Separate Classes of Shares.(3)
2. Bylaws.(1)
3. Not applicable.
4. Form of Agreement and Plan of Reorganization.
5. Text of Share Certificates.(1)
6. Investment Management Agreement.***
7. Form of Underwriting and Distribution Services Agreement.***
8. Not applicable.
9(a) Custody Agreement.(1)
9(b) Agency Agreement.(1)
9(c) Supplement to Agency Agreement.(4)
</TABLE>
C-1
<PAGE> 266
<TABLE>
<S> <C>
9(d) Administrative Services Agreement.(4)
10(a) Form of Amended and Restated 12b-1 Plan (Class B and Class C
Shares).***
10(b) Multi-Distribution System Plan.(3)
11. Opinion of Vedder, Price, Kaufman & Kammholz.***
12. Form of Tax Opinion of Vedder, Price, Kaufman & Kammholz (
Illinois) relating to the Reorganization.***
13. Not applicable.
14. Consent of Independent Public Accountants.***
15. Not applicable.
16. Powers of Attorney.**(3)
17. Form of proxy cards.**
</TABLE>
- -------------------------
* Filed herewith as Exhibit A to the Registration Statement of Additional
Information contained herein.
** Filed herewith
*** To be filed by Amendment.
(1) Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A filed on November 30, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A filed on October 26, 1988.
(3) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed on December 20, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A filed on December 30, 1997.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public re-offering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
C-2
<PAGE> 267
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940 THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THIS CITY OF CHICAGO AND STATE OF ILLINOIS, ON THE 16TH DAY OF OCTOBER, 1998.
KEMPER ADJUSTABLE RATE
U.S. GOVERNMENT FUND
By /s/ MARK S. CASADY
------------------------------------
Mark S. Casady, President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT ON FORM N-14 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK S. CASADY President (Principal Executive October 16, 1998
- ------------------------------------------ Officer)
Mark S. Casady*
TRUSTEES:
/s/ DANIEL PIERCE Chairman and Trustee
- ------------------------------------------
Daniel Pierce*
/s/ DAVID W. BELIN Trustee
- ------------------------------------------
David W. Belin*
/s/ LEWIS A. BURNHAM Trustee
- ------------------------------------------
Lewis A. Burnham*
/s/ DONALD L. DUNAWAY Trustee
- ------------------------------------------
Donald L. Dunaway*
/s/ ROBERT B. HOFFMAN Trustee
- ------------------------------------------
Robert B. Hoffman*
/s/ DONALD R. JONES Trustee
- ------------------------------------------
Donald R. Jones*
/s/ SHIRLEY D. PETERSON Trustee
- ------------------------------------------
Shirley D. Peterson*
/s/ WILLIAM P. SOMMERS Trustee
- ------------------------------------------
William P. Sommers*
/s/ EDMOND D. VILLANI Trustee
- ------------------------------------------
Edmond D. Villani*
/s/ JOHN R. HEBBLE Treasurer (Principal Financial and October 16, 1998
- ------------------------------------------ Accounting Officer)
John R. Hebble
By: /s/ PHILIP J. COLLORA October 16, 1998
-------------------------------------
Philip J. Collora
Attorney-in-fact
</TABLE>
- -------------------------
* Original powers of attorney authorizing, among others, Philip J. Collora to
execute this Registration Statement on Form N-14 for each of the Trustees of
the Registrant have been executed and are filed or incorporated by reference
as Exhibits to this Registration Statement.
C-3
<PAGE> 268
EXHIBIT INDEX
<TABLE>
<C> <S>
1(a) Amended and Restated Agreement and Declaration of Trust.(1)
1(b) Amended and Restated Written Instrument Establishing and
Designating Separate Classes of Shares.(3)
2. Bylaws.(1)
3. Not applicable.
4. Form of Agreement and Plan of Reorganization.*
5. Text of Share Certificates.(1)
6. Investment Management Agreement.***
7. Form of Underwriting and Distribution Services Agreement.***
8. Not applicable.
9(a) Custody Agreement.(1)
9(b) Agency Agreement.(1)
9(c) Supplement to Agency Agreement.(4)
9(d) Administrative Services Agreement.(4)
10(a) Form of Amended and Restated 12b-1 Plan (Class B and Class C
Shares).***
10(b) Multi-Distribution System Plan.(3)
11. Opinion of Vedder, Price, Kaufman & Kammholz.***
12. Form of Tax Opinion of Vedder, Price, Kaufman & Kammholz
(Illinois) relating to the Reorganization.***
13. Not applicable.
14. Consent of Independent Public Accountants.***
15. Not applicable.
16. Powers of Attorney.**(3)
17. Form of proxy cards.**
</TABLE>
- -------------------------
* Filed herewith as Exhibit A to the Registration Statement of Additional
Information contained herein.
** Filed herewith
*** To be filed by Amendment.
(1) Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A filed on November 30, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A filed on October 26, 1988.
(3) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A filed on December 20, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A filed on December 30, 1997.
<PAGE> 1
EXHIBIT 16
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may act
without the joinder of the others, as such person's attorney-in-fact to sign and
file on such person's behalf individually and in the capacity stated below such
registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission or
any other regulatory authority as may be desirable or necessary in connection
with the public offering of shares of Kemper Adjustable Rate U.S. Government
Fund.
Signature Title Date
/s/ Daniel Pierce Chairman and Trustee 7/15/98
- -----------------
Daniel Pierce
<PAGE> 2
POWER OF ATTORNEY
The person whose signature appears below hereby appoints Kathryn L. Quirk,
Caroline Pearson, and Philip J. Collora and each of them, any of whom may act
without the joinder of the others, as such person's attorney-in-fact to sign
and file on such person's behalf individually and in the capacity stated below
such registration statements, amendments, post-effective amendments, exhibits,
applications and other documents with the Securities and Exchange Commission or
any other regulatory authority as may be desirable or necessary in connection
with the public offering of shares of Kemper Adjustable Rate U.S. Government
Fund.
Signature Title Date
/s/ Edmond D. Villani Trustee 7/15/98
- ---------------------
Edmond D. Villani
<PAGE> 1
EXHIBIT 17
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF YOUR FUND
Special Meeting of Shareholders--December 16, 1998
The undersigned hereby appoints Bruce H. Goldfarb, Kathryn L. Quirk, Thomas
F. McDonough and Daniel Pierce and each of them , the proxies or the undersigned
with the power of substitution to each of them, to vote all shares of the Fund
which the undersigned is entitled to vote at the Special Meeting of Shareholders
of the Fund to be held at the offices of Scudder Kemper Investments, Inc., Two
International Place, Boston, Massachusetts 02110, on Wednesday, December 16,
1998 at _______ eastern time, and at any adjournments thereof.
Unless otherwise specified in the squares provided, the undersigned's vote
will be cast FOR each numbered item listed below.
The Board members of your Fund, including those who are not affiliated
with the Fund or Scudder Kemper Investments, Inc., recommend that you vote FOR
each item.
1. To approve the new investment Management Agreement between the Fund and
Scudder Kemper investments, Inc. (Both Funds);
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To approve an Agreement and Plan of Reorganization (Short-Intermediate Fund
only);
3. To approve a new investment objective and the modification or elimination
of certain policies and the elimination of the shareholder approval
requirement as to certain other matters (Adjustable Rate Fund only)
[ ] FOR ALL EXCEPT AS MARKED BELOW [ ] AGAINST ALL [ ] ABSTAIN ALL
<TABLE>
<S> <C>
3.1 New Investment Objectives and Policies 3.8 Investment in real estate
3.2 Investment Policies 3.9 Purchase of commodities
3.3 Diversification 3.10 Lending
3.4 Borrowing 3.11 Margin purchases and short sales
3.5 Senior securities 3.12 Pledging of assets
3.6 Concentration 3.13 Purchases of voting securities
3.7 Underwriting of securities 3.14 Purchases of options and warrants
</TABLE>
<PAGE> 2
The proxies are authorized to vote in their discretion on any other business
which may properly come before the meeting and any adjournments thereof:
Please sign exactly as your name or
names appear. When signing as attorney,
executor, administrator, trustee or
guardian, please give your full title
as such.
_______________________________________
(Signature of Shareholder)
_______________________________________
(Signature of joint owner, if any)
Dated______, 1998
PLEASE SIGN AND RETURN PROMPTLY IN ENCLOSED ENVELOPE,
NO POSTAGE IS REQUIRED.
