[LOGO] KEMPER FUNDS
Kemper Income Funds
PROSPECTUS January 1, 1999
KEMPER INCOME FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606 (800) 621-1048
This prospectus describes a choice of eight funds managed by Scudder Kemper
Investments, Inc.
Kemper Adjustable Rate U.S. Government Fund
Kemper Short-Intermediate 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
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
About The Funds
- --------------------------------------------------------------------------------
Investment Objective and Principal Strategies
Common to The Funds
Principal Risk Factors Common to The Funds
Kemper Adjustable Rate U.S. Government Fund
Kemper Short-Intermediate 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
Investment Manager
About Your Investment
- -------------------------------------------------------------------------------
Choosing a Share Class
Buying Shares
Selling and Exchanging Shares
Distributions and Taxes
Transaction Information
Financial Highlights
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<PAGE>
ABOUT THE FUNDS
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES COMMON TO THE FUNDS
This prospectus presents a selection of funds which seek to provide income, each
with a distinct investment approach. Investors receive the benefits of
professional management and liquidity through a single investment in shares of a
fund.
These income funds offer you the opportunity to earn current income, paid
monthly. The income funds invest primarily in debt securities. While market
appreciation or depreciation is part of an income fund's return, interest income
is the most important feature of these funds. Investors who are seeking higher
income than a money market fund provides, or who are seeking to balance their
growth investments with income, are typical shareholders in income funds.
PRINCIPAL RISK FACTORS COMMON TO THE FUNDS
There are market and investment risks with any security. The value of an
investment in the funds will fluctuate over time and it is possible to lose
money invested in the funds.
Interest rates. Interest rate risk is the risk that the value of a fund's
investments will go down when interest rates rise. Normally the value of a
fund's investments varies inversely with changes in interest rates so that in
periods of rising interest rates, the value of a fund's portfolio declines.
Maturity. Generally, longer-term securities are more susceptible to changes in
value as a result of interest-rate changes than are shorter-term securities.
Credit risk. Credit risk refers to the risk that an issuer of a bond may default
with respect to the payment of principal and interest. The lower a bond is
rated, the more it is considered to be a speculative or risky investment.
Prepayment risk. Prepayment risk is commonly associated with pooled debt
securities, such as mortgage-backed securities and asset-backed securities, but
may affect other debt securities as well. When the underlying debt obligations
are prepaid ahead of schedule, the return on the security will be lower than
expected. Prepayment rates usually increase when interest rates are falling.
Portfolio strategy. The portfolio management team's skill in choosing
appropriate investments for the funds will determine in large part the funds'
ability to achieve their respective investment objectives.
No government guarantee. The government guarantee of the U.S. Government
securities in which certain funds invest (principally the Government, Mortgage
and Short-Intermediate Government funds) does not guarantee the market value of
the shares of the funds.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of offsetting a fund's real return. This is likely
to have a greater impact on the returns of bond funds and money market funds,
which historically have had more modest returns in comparison to equity funds.
2 About The Funds
<PAGE>
KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper Adjustable Rate U.S. Government Fund seeks high current income consistent
with low volatility of principal. The fund's investment objective may be changed
without a vote of shareholders.
Generally, the fund invests at least 65% of its total assets in adjustable rate
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The fund may invest without limit in Mortgage-Backed
Securities. Mortgage-Backed Securities can have either a fixed rate of interest
or an adjustable rate.
The fund is designed for the investor who seeks a higher yield than a 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.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, maturity, principal prepayment, the
investment manager's skill in managing the fund's portfolio and inflation risk.
You will find a discussion of these risks under "About The Funds" at the front
of this prospectus.
Adjustable 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 their adjustable nature, the value of adjustable rate
mortgages is unlikely to rise during periods of declining interest rates to the
same extent as fixed rate instruments. Interest rate declines may result in
accelerated prepayment, 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.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
Kemper Adjustable Rate U.S. Government Fund 3
<PAGE>
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1988.................... 4.82%
1989.................... 11.64%
1990.................... 7.19%
1991.................... 13.46%
1992.................... 6.06%
1993.................... 4.91%
1994.................... -0.44%
1995.................... 8.51%
1996.................... 4.73%
1997.................... 5.98%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 6.06% (the fourth quarter of 1990), and the fund's lowest
return for a calendar quarter was -2.79% (the first quarter of 1990).
The fund's year-to-date total return as of September 30, 1998 was 2.20%.
Average Annual Total Returns
Salomon Brothers
For periods ended 6-Month T-Bill
December 31, 1997 Class A Class B Class C Index+
- ----------------- ------- ------- ------- ------
One Year 2.27% 2.23% 5.37% 5.43%
Five Years 3.96% -- -- 4.21%
Ten Years 6.24% -- -- --
Since Class Inception** 6.21% 4.07% 4.67% *
- -----------
* Index returns for the life of each class: 5.22% (5/31/94) for Class B and C
shares. The index was not in existence on the Class A shares inception date
or at the ten-year period.
** Inception date for Class A, B and C shares is 9/1/87, 5/31/94 and 5/31/94,
respectively.
+ Salomon Brothers 6-month T-Bill Index is an unmanaged index based on the
average monthly yield of a 6-month Treasury Bill. Rates of Treasury
obligations are fixed at issuance, and payment of principal and interest is
backed by the U.S. Treasury. Market value will generally fluctuate inversely
with interest rates prior to maturity and will equal par at maturity. Index
returns assume reinvestment of dividends and, unlike fund returns, do not
reflect any fees, expenses or sales charges.
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
4 Kemper Adjustable Rate U.S. Government Fund
<PAGE>
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge(Load)
Imposed on Purchases (as % of
offering price) 3.5% None None
Maximum Deferred Sales Charge
(Load)(as % of redemption
proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of
amount redeemed, if applicable) None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.55% 0.55% 0.55%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.81% 0.69% 0.65%
----- ----- -----
Total Annual Fund
Operating Expenses 1.36% 1.99% 1.95%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $484 $602 $298
3 Years $766 $924 $612
5 Years $1,069 $1,273 $1,052
10 Years $1,928 $2,006 $2,275
Kemper Adjustable Rate U.S. Government Fund 5
<PAGE>
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $484 $202 $198
3 Years $766 $624 $612
5 Years $1,069 $1,073 $1,052
10 Years $1,928 $2,006 $2,275
Principal strategies and investments
Adjustable rate securities bear interest at rates that adjust at periodic
intervals in response to changes in market levels of interest rates generally.
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.
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, Asset-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 by a nationally recognized statistical rating service such as Standard
and Poor's Corporation or Moody's Investors Service, Inc., or will be non-rated
but of comparable quality in the opinion of the investment manager.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about investments and strategies is provided in the Statement of
Additional Information. Of course, there can be no guarantee that by following
these strategies, the fund will achieve its objective.
6 Kemper Adjustable U.S. Government Fund
<PAGE>
KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper 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. The fund's investment
objective may be changed without a vote of shareholders. Under normal market
conditions, the fund maintains a dollar-weighted average portfolio maturity of
more than two years but less than five years. 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.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, maturity, principal prepayment, the
investment manager's skill in managing the fund's portfolio and inflation risk.
You will find a discussion of these risks under "About The Funds" at the front
of this prospectus.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. The
information provided in the chart is for Class B shares, and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1990.................... 7.11%
1991.................... 11.12%
1992.................... 5.29%
1993.................... 4.68%
1994.................... 2.58%
1995.................... 10.37%
1996.................... 2.20%
1997.................... 4.82%
Kemper Short-Intermediate Government Fund 7
<PAGE>
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 4.11% (the third quarter of 1991), and the fund's lowest
return for a calendar quarter was -1.23% (the first quarter of 1991).
The fund's year-to-date total return as of September 30, 1998 was 5.40%.
Average Annual Total Returns
Merrill Lynch
For periods ended Market Weighted
December 31, 1997 Class A Class B Class C Index+
- ----------------- ------- ------- ------- ------
One Year 2.08% 1.84% 5.07% 7.57%
Five Years 4.09% 3.80% -- 6.29%
Since Class Inception** 4.48% 5.69% 4.89% *
- -----------
* Index returns for the life of each class: 6.51% (1/31/92), 8.36% (1/31/89),
and 7.59% (5/31/94) for Class A, B and C, respectively.
** Inception date for Class A, B and C shares is 1/10/92, 2/1/89 and 5/31/94,
respectively.
+ The Merrill Lynch Market Weighted Index, an unmanaged index, is comprised of
the universe of 1-5 year Treasuries plus the Merrill Lynch GNMA Index. Index
returns assume reinvestment of dividends and, unlike fund returns, do not
reflect any fees, expenses or sales charges.
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 3.5% None None
Maximum Deferred Sales Charge (Load)
(as a % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
8 Kemper Short-Intermediate Government Fund
<PAGE>
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.55% 0.55% 0.55%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.59% 0.81% 0.54%
----- ----- -----
Total Annual Fund Operating Expenses 1.14% 2.11% 1.84%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $462 $614 $287
3 Years $700 $961 $579
5 Years $956 $1,334 $995
10 Years $1,688 $1,965 $2,159
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $462 $214 $187
3 Years $700 $661 $579
5 Years $956 $1,134 $995
10 Years $1,688 $1,965 $2,159
Principal strategies and investments
The 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.
Generally, the fund invests at least 65% of its total assets in U.S. Government
Securities and repurchase agreements of U.S. Government Securities. There are
two broad categories of U.S. Government-related debt instruments:
o direct obligations of the U.S. Treasury, including agency mortgage-backed
securities.
o securities issued or guaranteed by U.S. Government agencies or Government
sponsored entities.
Kemper Short-Intermediate Government Fund 9
<PAGE>
These instruments differ primarily in interest rates, the length of maturities,
the nature of the government obligation and the dates of issuance. U.S. Treasury
obligations are backed by the "full faith and credit" of the United States. In
the case of U.S. Government agency obligations, some are backed by the full
faith and credit of the United States and others are backed only by the rights
of the issuer to borrow from the U.S. Government. 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 of the type in which
the fund may invest have historically involved little risk of loss of principal
if held to maturity.
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.
The fund may also invest up to 35% of its total assets in fixed income
securities other than U.S. Government Securities. Such other fixed income
securities include:
o corporate debt securities that are rated at the time of purchase within the
four highest grades by a nationally recognized statistical rating service
such as Standard and Poor's Corporation or Moody's Investors Service, Inc.
o commercial paper that is rated at the time of purchase within the two
highest grades by a nationally recognized statistical rating service such as
Standard and Poor's Corporation or Moody's Investors Service, Inc.
o 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
o repurchase agreements with respect to any of the foregoing
o asset-backed securities.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
10 Kemper Short-Intermediate Government Fund
<PAGE>
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about investments and strategies is provided in the Statement of
Additional Information. Of course, there can be no guarantee that by following
these strategies, the fund will achieve its objective.
Kemper Short-Intermediate Government Fund 11
<PAGE>
KEMPER DIVERSIFIED INCOME FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper Diversified Income Fund seeks a high current return. The fund's
investment objective may be changed without a vote of shareholders.
The fund invests primarily in fixed-income securities. These include high yield
fixed-income securities and foreign debt securities. The fund may also invest in
dividend-paying common stocks.
Although the fund may invest in high-yield/high risk debt securities and foreign
debt securities, the investment manager seeks to moderate overall portfolio risk
through diversification. Factors considered include:
o Relative value
o Interest rate outlook
o Yield curve outlook
o Foreign currency outlook.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, credit quality, maturity, principal
prepayment, the investment manager's skill in managing the fund's portfolio and
inflation risk. You will find a discussion of these risks under "About The
Funds" at the front of this prospectus.
High Yield Fixed Income Securities. In addition, the fund may invest in high
yield, fixed income securities. Investments in high yield fixed-income
securities (often referred to as "junk bonds") are more likely to be affected by
negative developments relating to their issuer or industry, and entail
relatively greater risk of loss of income and principal than investments in
higher rated securities. Market prices of high yield securities may fluctuate
more than market prices of higher rated securities.
Foreign Securities. Foreign investments by the fund involve risk and opportunity
considerations not typically associated with investing in U.S. companies. 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. The 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.
Common stocks. To the extent the fund invests in common stocks, stock market
movements will affect the fund's share prices on a daily basis. Declines are
possible both in the overall stock market or in the types of securities held by
the fund.
12 Kemper Diversified Income Fund
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. The
information provided in the chart is for Class A shares, and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1988.................... 17.61%
1989.................... 7.96%
1990....................-12.60%
1991.................... 51.69%
1992.................... 17.80%
1993.................... 20.88%
1994.................... -3.83%
1995.................... 19.67%
1996.................... 8.58%
1997.................... 8.25%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 25.06% (the first quarter of 1991), and the fund's lowest
return for a calendar quarter was -13.54% (the third quarter of 1990).
The fund's year-to-date total return as of September 30, 1998 was -0.94%.
Average Annual Total Returns
Lehman Brothers
For periods ended Gov't/Corporate
December 31, 1997 Class A Class B Class C Bond Index+
- ----------------- ------- ------- ------- -----------
One Year 3.45% 4.18% 7.42% 9.76%
Five Years 9.33% -- -- 7.61%
Ten Years 11.96% -- -- 9.14%
Since Class Inception** 10.42% 8.01% 8.70% *
- -----------
* Index returns for the life of each class: 9.51% (6/30/77) for Class A and
8.56% (5/31/94) for Classes B and C, respectively.
** Inception date for Class A, B and C shares is 6/23/77, 5/31/94 and 5/31/94,
respectively.
+ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment grade
corporate debt securities. Index returns assume reinvestment of dividends
and, unlike fund returns, do not reflect any fees, expenses or sales
charges.
Kemper Diversified Income Fund 13
<PAGE>
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
shared class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 4.5% None None
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends/Distributions None None None
Redemption Fee None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.56% 0.56% 0.56%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.48% 0.70% 0.53%
----- ----- -----
Total Fund Operating Expenses 1.04% 2.01% 1.84%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $551 $604 $287
3 Years $766 $931 $579
5 Years $998 $1,283 $995
10 Years $1,664 $1,856 $2,159
14 Kemper Diversified Income Fund
<PAGE>
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $551 $204 $187
3 Years $766 $631 $579
5 Years $998 $1,083 $995
10 Years $1,664 $1,856 $2,159
Principal strategies and investments
Under normal market conditions, the fund will invest at least 65% of its total
assets in income producing investments. To the extent the fund invests in equity
securities, 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 without limit in high yield, fixed income securities that
are in the lower rating categories and those that are non-rated.
The fund may invest up to 50% of its total assets in foreign debt or equity
securities that are traded principally in securities markets outside the United
States.
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.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about investments and strategies is provided in the Statement of
Additional Information. Of course, there can be no guarantee that by following
these strategies, the fund will achieve its objective.
Additional information about principal risks
High yield securities. High yield, fixed income securities (commonly referred to
as "junk bonds")have widely varying characteristics and quality. These lower
Kemper Diversified Income Fund 15
<PAGE>
rated and non-rated fixed income securities are considered, on balance, to be
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. 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. High
yield, fixed income 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 the
fund's net asset value. In addition, the fund may have difficulty pricing or
disposing of certain junk bonds because they may have a thin trading market.
When investing in high yield, fixed income securities, the fund seeks 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 fund invests, (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, 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.
The fund may have difficulty disposing of certain high yield, fixed income
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the fund anticipates 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 the fund's ability to dispose of particular issues and may
also make it more difficult for the 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.
Foreign investing. Investing in foreign securities, and to a greater extent
emerging markets, involves risks in addition to those associated with investing
in securities in the U.S. To the extent that investments are denominated in
foreign currencies, adverse changes in the values of foreign currencies may have
a significant negative effect on any returns from these investments. Investing
in foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
16 Kemper Diversified Income Fund
<PAGE>
KEMPER U.S. GOVERNMENT SECURITIES FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper U.S. Government Securities Fund seeks high current income, liquidity and
security of principal. The fund's investment objective may be changed without a
vote of shareholders.
The fund invests in a portfolio of U.S. Government Securities, and predominantly
in Government National Mortgage Association ("GNMA") securities. The investment
manager focuses on managing the portfolio's duration and selecting mortgage
securities that are undervalued in comparison with other sectors of the market.
The fund is designed for the investor who seeks a higher yield than a 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.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, maturity, principal prepayment, the
investment manager's skill in managing the fund's portfolio and inflation risk.
You will find a discussion of these risks under "About The Funds" at the front
of this prospectus.
Mortgage-Backed Securities. The potential for appreciation in the event of a
decline in interest rates may be limited or negated by increased principal
prepayments in respect to certain Mortgage-Backed Securities, such as GNMA
Certificates. Prepayments of high interest rate Mortgage-Backed Securities
during times of declining interest rates will tend to lower the return of the
fund and may even result in losses to the fund if some securities were acquired
at a premium.
Moreover, during periods of rising interest rates, prepayments of
Mortgage-Backed Securities may decline, resulting in the extension of the fund's
average portfolio maturity. As a result, the fund's portfolio may experience
greater volatility during periods of rising interest rates than under normal
market conditions.
With respect to U.S. Government Securities supported only by the credit of the
issuing agency or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. Government will provide support to such agencies
and such securities may involve risk of loss of principal and interest. The fund
will not invest in Mortgage-Backed Securities issued by private issuers.
Kemper U.S. Government Securities Fund 17
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. The
information provided in the chart is for Class A shares, and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1988.................... 6.35%
1989.................... 14.00%
1990.................... 9.68%
1991.................... 17.25%
1992.................... 4.61%
1993.................... 6.31%
1994.................... -3.06%
1995.................... 18.37%
1996.................... 2.83%
1997.................... 9.03%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 7.91% (the second quarter of 1989), and the fund's lowest
return for a calendar quarter was -2.45% (the first quarter of 1994).
The fund's year-to-date total return as of September 30, 1998 was 6.31%.
Average Annual Total Returns
For periods ended Salomon Brothers
December 31, 1997 Class A Class B Class C 30 year GNMA Index+
- ----------------- ------- ------- ------- -------------------
One Year 4.09% 5.14% 8.15% 9.39%
Five Years 5.48% -- -- 7.30%
Ten Years 7.85% -- -- 9.51%
Since Class Inception** 8.98% 6.63% 7.20% *
- -----------
* Index returns for the life of each class: 8.81% (5/31/94) for Class A and B
shares. The Index was not in existence on the Class A shares inception date.
** Inception date for Class A, B and C shares is 10/1/79, 5/31/94 and 5/31/94,
respectively.
+ The Salomon Brothers 30-Year GNMA Index is unmanaged, 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. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or
sales charges.
18 Kemper U.S. Government Securities Fund
<PAGE>
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed on
Purchases (as % of offering price) 4.5% None None
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee (as % of amount
redeemed, if applicable) None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Investment Management Fee 0.41% 0.41% 0.41%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.39% 0.55% 0.51%
----- ----- -----
Total Annual Fund Operating Expenses 0.80% 1.71% 1.67%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. This example illustrates the impact of
the above fees and expenses on an account with an initial investment of $10,000,
based on the expenses shown above. It assumes a 5% annual return, the
reinvestment of all dividends and distributions and "annual fund operating
expenses" remaining the same each year. The example is hypothetical: actual fund
expenses and return vary from year to year, and may be higher or lower than
those shown.
Kemper U.S. Government Securities Fund 19
<PAGE>
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $528 $574 $270
3 Years $694 $839 $526
5 Years $874 $1,128 $907
10 Years $1,395 $1,555 $1,976
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $528 $174 $170
3 Years $694 $539 $526
5 Years $874 $928 $907
10 Years $1,395 $1,555 $1,976
Principal strategies and investments
The 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 invests up to 100% in GNMA Certificates of the modified pass-through
type. These GNMA Certificates are debt securities issued by a mortgage banker or
other mortgagee and represent an interest in one or a pool of mortgages insured
by the Federal Housing Administration or guaranteed by the Veterans
Administration. GNMA guarantees the timely payment of monthly installments of
principal and interest on modified pass-through Certificates at the time such
payments are due, whether or not such amounts are collected by the issuer of
these Certificates on the underlying mortgages. Mortgages included in single
family residential mortgage pools backing an issue of GNMA Certificates have a
maximum maturity of 30 years. The registered holders of GNMA Certificates (such
as the fund) receive scheduled payments of principal and interest each month.
The fund may also invest in other U.S. Government Securities. There are two
broad categories of U.S. Government-related debt instruments:
o direct obligations of the U.S. Treasury, including agency mortgage-backed
securities
o securities issued or guaranteed by U.S. Government agencies or Government
sponsored entities.
These instruments differ primarily in interest rates, the length of maturities,
the nature of the government obligation and the dates of issuance. U.S. Treasury
obligations are backed by the "full faith and credit" of the United States. In
the case of U.S. Government agency obligations, some are backed by the full
faith and credit of the United States and others are backed only by the rights
of the issuer to borrow from the U.S. Government. With respect to securities
20 Kemper U.S. Government Securities Fund
<PAGE>
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 of the type in which
the fund may invest have historically involved little risk of loss of principal
if held to maturity.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about investments and strategies is provided in the Statement of
Additional Information. Of course, there can be no guarantee that by following
these strategies, the fund will achieve its objective.
Kemper U.S. Government Securities Fund 21
<PAGE>
KEMPER HIGH YIELD FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper High Yield Fund seeks the highest level of current income obtainable from
a diversified portfolio of fixed income securities which the fund's investment
manager considers consistent with reasonable risk. As a secondary objective, the
fund will seek capital gain where consistent with its primary objective. The
fund's investment objective may be changed without a vote of shareholders.
The fund invests predominantly in high yield, fixed income securities and
foreign securities.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, credit quality, maturity, principal
prepayment, and the investment manager's skill in managing the fund's portfolio
and inflation risk. You will find a discussion of these risks under "About The
Funds" at the front of this prospectus.
High Yield Fixed Income Securities. Investments in high yield fixed-income
securities (often referred to as "junk bonds") are more likely to be affected by
negative developments relating to their issuer or industry, and entail
relatively greater risk of loss of income and principal than investments in
higher rated securities. Market prices of high yield securities may fluctuate
more than market prices of higher rated securities.
Foreign Securities. Foreign investments by the fund involve risk and opportunity
considerations not typically associated with investing in U.S. companies. 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. The 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.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. The
information provided in the chart is for Class A shares, and does not reflect
sales charges, which reduce return.
22 Kemper High Yield Fund
<PAGE>
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1988.................... 14.41%
1989.................... -1.14%
1990....................-12.98%
1991.................... 46.84%
1992.................... 17.08%
1993.................... 20.29%
1994.................... -1.72%
1995.................... 17.46%
1996.................... 13.49%
1997.................... 11.51%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 23.40% (the first quarter of 1991), and the fund's lowest
return for a calendar quarter was -11.77% (the third quarter of 1990).
The fund's year-to-date total return as of September 30, 1998 was -4.18%.
Average Annual Total Returns
Salomon Brothers
For periods ended Long-Term High Yield
December 31, 1997 Class A Class B Class C Bond Index+
- ----------------- ------- ------- ------- -----------
One Year 6.48% 7.50% 10.53% 17.74%
Five Years 10.90% -- -- 13.65%
Ten Years 11.00% -- -- 13.01%
Since Class Inception** 11.76% 10.41% 10.95% *
- -----------
* Index returns for the life of each class: 14.85% (5/31/94) for Class B and C
shares. The Index was not in existence on the Class A inception date.
** Inception date for Class A, B and C shares is 1/26/78, 5/31/94 and 5/31/94,
respectively.
+ The Salomon Brothers Long-Term High Yield Bond Index is on a total return
basis and is comprised of high yield bonds with a par value of $50 million
or higher and a remaining maturity of ten years or longer rated BB+ or lower
by Standard & Poor's Corporation or Ba1 or lower by Moody's Investors
Service, Inc. This index is unmanaged. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or
sales charges.
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus.
Kemper High Yield Fund 23
<PAGE>
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed on
Purchases (as % of offering price) 4.5% None None
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
Redemption Fee None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Investment Management Fee 0.52% 0.52% 0.52%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.37% 0.49% 0.44%
----- ----- -----
Total Annual Fund Operating Expenses 0.89% 1.76% 1.71%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $537 $579 $274
3 Years $721 $854 $539
5 Years $921 $1,154 $928
10 Years $1,497 $1,632 $2,019
24 Kemper High Yield Fund
<PAGE>
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $537 $179 $174
3 Years $721 $554 $539
5 Years $921 $954 $928
10 Years $1,497 $1,632 $2,019
Principal strategies and investments
The primary objective of the fund is to achieve the highest level of current
income obtainable from a diversified portfolio of fixed income securities which
the investment manager considers consistent with reasonable risk. As a secondary
objective, the fund will seek capital gain where consistent with its primary
objective.
The fund anticipates that under normal circumstances 90 to 100% of its assets
will be invested in fixed income securities. The high yield, fixed income
securities in which the fund intends to invest (commonly referred to as "junk
bonds") normally offer a current yield or yield to maturity that is
significantly higher than the yield available from investment-grade securities
(those rated in the four highest categories assigned by a nationally recognized
statistical rating service such as Standard and Poor's Corporation or Moody's
Investors Service, Inc.). 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.
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.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on
Kemper High Yield Fund 25
<PAGE>
futures positions considered speculative by the Commodities Futures Trading
Commission. More information about investments and strategies is provided in the
Statement of Additional Information. Of course, there can be no guarantee that
by following these strategies, the fund will achieve its objective.
Additional information about principal risks
High yield securities. High yield, fixed income securities (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, to be
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. The
market values of these 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. High
yield, fixed income 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 the
fund's net asset value. In addition, the fund may have difficulty pricing or
disposing of certain high yield, fixed income securities because they may have a
thin trading market.
When investing in high yield, fixed income securities, the fund seeks 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 fund invests, (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, 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.
The fund may have difficulty disposing of certain high yield, fixed income
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the fund anticipates 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 the fund's ability to dispose of particular issues and may
also make it more difficult for the 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.
Foreign investing. The fund may invest up to 25% of its total assets in foreign
securities. Investing in foreign securities, and to a greater extent emerging
markets, involves risks in addition to those associated with investing in
26 Kemper High Yield Fund
<PAGE>
securities in the U.S. To the extent that investments are denominated in foreign
currencies, adverse changes in the values of foreign currencies may have a
significant negative effect on any returns from these investments. Investing in
foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
Kemper High Yield Fund 27
<PAGE>
KEMPER HIGH YIELD OPPORTUNITY FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper High Yield Opportunity Fund seeks total return through high current
income and capital appreciation. The fund's investment objective may be changed
without a vote of shareholders.
The fund invests primarily in high yield bonds. It also has the flexibility to
invest in equity securities and foreign debt securities including those from
emerging markets. These investments are made to enhance total return.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, credit quality, maturity, principal
prepayment, the investment manager's skill in managing the fund's portfolio and
inflation risk. You will find a discussion of these risks under "About The
Funds" at the front of this prospectus.
High Yield Fixed Income Securities. Investments in high yield fixed-income
securities (often referred to as "junk bonds") are more likely to be affected by
negative developments relating to their issuer or industry, and entail
relatively greater risk of loss of income and principal than investments in
higher rated securities. Market prices of high yield securities may fluctuate
more than market prices of higher rated securities.
Common Stocks. To the extent the fund invests in equity securities, stock market
movements will affect the fund's share prices on a daily basis. Declines are
possible both in the overall stock market or in the types of securities held by
the fund.
Foreign Securities. Foreign investments by the fund involve risk and opportunity
considerations not typically associated with investing in U.S. companies. 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.
The 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.
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus.
28 Kemper High Yield Opportunity Fund
<PAGE>
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 4.5% None None
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends/Distributions None None None
Redemption Fee None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.65% 0.65% 0.65%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.62% 0.63% 0.63%
----- ----- -----
Total Annual Fund Operating Expenses 1.27% 2.03% 2.03%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $574 $606 $306
3 Years $835 $937 $637
5 Years $1,116 $1,293 $1,093
10 Years $1,915 $1,984 $2,358
Kemper High Yield Opportunity Fund 29
<PAGE>
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $574 $206 $206
3 Years $835 $637 $637
5 Years $1,116 $1,093 $1,093
10 Years $1,915 $1,984 $2,358
Principal strategies and investments
The 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 in which the fund intends to invest
(commonly referred to as "junk bonds") normally offer a current yield or yield
to maturity that is significantly higher than the yield available from
investment grade securities (those rated in the four highest categories assigned
by a nationally recognized statistical rating service such as Standard and
Poor's Corporation or Moody's Investors Service, Inc.). 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
fund may invest up to 20% of its total assets in common stocks, rights or other
equity securities.
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.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The
30 Kemper High Yield Opportunity Fund
<PAGE>
fund is limited to 5% of net assets for initial margin and premium amounts on
futures positions considered speculative by the Commodities Futures Trading
Commission. More information about investments and strategies is provided in the
Statement of Additional Information. Of course, there can be no guarantee that
by following these strategies, the fund will achieve its objective.
Additional information about principal risks
High yield securities. High yield, fixed income securities (commonly referred to
as "junk bonds") have widely varying characteristics and quality. These lower
rated non-rated fixed income securities are considered, on balance, to be
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. The
market values of these 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. High
yield, fixed income 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 the
fund's net asset value. In addition, the fund may have difficulty pricing or
disposing of certain high yield, fixed income securities because they may have a
thin trading market.
When investing in high yield, fixed income securities, the fund seeks 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 fund invests, (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, 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.
The fund may have difficulty disposing of certain high yield, fixed income
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, the fund anticipates 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 the fund's ability to dispose of particular issues and may
also make it more difficult for the 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.
Foreign investing. The fund may invest up to 25% of its total assets in foreign
securities. Investing in foreign securities, and to a greater extent emerging
Kemper High Yield Opportunity Fund 31
<PAGE>
markets, involves risks in addition to those associated with investing in
securities in the U.S. To the extent that investments are denominated in foreign
currencies, adverse changes the values of foreign currencies may have a
significant negative effect on any returns from these investments. Investing in
foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
Investment in emerging securities markets may entail the lack of adequate
custody arrangements for the fund's assets, overly burdensome repatriation and
similar restrictions, the lack of organized and liquid securities markets,
unacceptable political risks or other reasons. Disclosure, regulatory and
accounting standards in may 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 the past, 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.
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 proceedings with respect to
sovereign debt on which a sovereign has defaulted, and fund may be unable to
collect all or any parts of its investment in a particular issue.
32 Kemper High Yield Opportunity Fund
<PAGE>
KEMPER INCOME AND CAPITAL PRESERVATION FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper Income And Capital Preservation Fund seeks as high a level of current
income as is consistent with reasonable risk, preservation of capital and ready
marketability of its portfolio by investing primarily in a diversified portfolio
of investment-grade debt securities. The fund's investment objective may be
changed without a vote of shareholders.
The fund invests predominantly in investment-grade corporate bonds. These may
include foreign securities. In pursuit of its dual objectives, the fund focuses
on:
o Security selection
o Asset allocation changes
o Interest rate sensitivity adjustments.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, credit quality, maturity, principal
prepayment, the investment manager's skill in managing the fund's portfolio and
inflation risk. You will find a discussion of these risks under "About The
Funds" at the front of this prospectus.
Foreign securities. Foreign investments by the fund involve risk and opportunity
considerations not typically associated with investing in U.S. companies. 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.
The 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.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year, and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. The
information provided in the chart is for Class A shares, and does not reflect
sles charges, which reduce return.
Kemper Income and Capital Preservation Fund 33
<PAGE>
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1988.................... 10.43%
1989.................... 8.55%
1990.................... 6.48%
1991.................... 17.91%
1992.................... 7.85%
1993.................... 11.71%
1994.................... -3.38%
1995.................... 21.35%
1996.................... 2.02%
1997.................... 8.62%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 7.41% (the second quarter of 1995), and the fund's lowest
return for a calendar quarter was -3.20% (the first quarter of 1994).
The fund's year-to-date total return as of September 30, 1998 was 7.85%.
Average Annual Total Returns
For periods ended Lehman Brothers
December 31, 1997 Class A Class B Class C Aggregate Bond Index+
- ----------------- ------- ------- ------- ---------------------
One Year 3.71% 4.64% 7.78% 9.65%
Five Years 6.74% -- -- 7.48%
Ten Years 8.44% -- -- 9.18%
Since Class Inception** 9.25% 7.29% 7.86% *
- -----------
* Index returns for the life of each class: 8.84% (5/31/94) for Class B and C
shares. The Index was not in existence on the Class A shares inception date.
** Inception date for Class A, B and C shares is 4/15/74, 5/31/94 and 5/31/94,
respectively.
+ The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of intermediate-term government bonds, investment grade
corporate debt securities and mortgage backed securities. Index returns
assume reinvestment of dividends and, unlike fund returns, do not reflect
any fees, expenses or sales charges.
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus.
34 Kemper Income and Capital Preservation Fund
<PAGE>
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class B
------- ------- -------
Maximum Sales Charge (Load) Imposed on
Purchases (as % of offering price) 4.5% None None
Maximum Deferred Sales Charge (Load)
(as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends/Distributions None None None
Redemption Fee None None None
Exchange Fee None None None
- -----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.53% 0.53% 0.53%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.48% 0.60% 0.58%
----- ----- -----
Total Annual Fund Operating Expenses 1.01% 1.88% 1.86%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $548 $591 $289
3 Years $757 $891 $585
5 Years $983 $1,216 $1,006
10 Years $1,631 $1,765 $2,180
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $548 $191 $189
3 Years $757 $591 $585
5 Years $983 $1,016 $1,006
10 Years $1,631 $1,765 $2,180
Kemper Income and Capital Preservation Fund 35
<PAGE>
Principal strategies and investments
The 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.
Superior security selection with an emphasis on corporate bonds, is a critical
focus. The investment manager seeks to buy and hold the securities of companies
whose balance sheets, cash flows and/or fundamental business prospects are
expected to improve, and conversely to sell securities which cannot meet these
criteria. The fund will also trade securities based on their perceived value.
The fund invests predominantly in corporate debt securities which are rated in
the four highest grades by a nationally recognized statistical rating service
such as Standard and Poor's Corporation or Moody's Investors Service, Inc. and
Mortgage Backed Securities.
The investment manager seeks to determine the appropriate proportions among
corporate bonds, U.S. Government Securities and Mortgage-Backed Securities.
Within the corporate bond holdings of the fund, the investment manager's
strategy focuses on specific industry weightings and overall credit quality.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about investments and strategies is provided in the Statement of
Additional Information. Of course, there can be no guarantee that by following
these strategies, the fund will achieve its objective.
Additional information about principal risks
Foreign investing. The fund may invest up to 25% of its total assets in foreign
securities. Investing in foreign securities, and to a greater extent emerging
markets, involves risks in addition to those associated with investing in
securities in the U.S. To the extent that investments are denominated in foreign
currencies, adverse changes in the values of foreign currencies may have a
significant negative effect on any returns from these investments. Investing in
foreign securities exposes the fund to an increased risk of political and
economic instability.
Other risks of investing in foreign securities include limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
36 Kemper Income and Capital Preservation Fund
<PAGE>
KEMPER U.S. MORTGAGE FUND
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Kemper U.S. Mortgage Fund seeks maximum current return from U.S. Government
Securities. The fund's investment objective may be changed without a vote of
shareholders.
The fund invests in a portfolio of U.S. Government Securities,
predominantly in Mortgaged-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
two basic types of Mortgage-Backed Securities in which the fund may invest:
o 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")
o 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
o The fund does not invest in Mortgage-Backed Securities issued by private
issuers.
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 mortgages. FNMA and FHLMC issue Mortgage-Backed Securities
from pools of conventional and federally insured and/or guaranteed residential
mortgages obtained from various entities. Mortgage-Backed Securities issued by
GNMA, FNMA and FHLMC are considered U.S. Government Securities.
Principal risks
The fund's principal risks are associated with investing in fixed income
securities: interest rate movements, maturity, principal prepayment, the
investment manager's skill in managing the fund's portfolio and inflation risk.
You will find a discussion of these risks under "About The Funds" at the front
of this prospectus.
Mortgage-Backed Securities. 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 (i.e. early return of principal) 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
Kemper U.S. Mortgage Fund 37
<PAGE>
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.
Past performance The chart and table below provide some indication of the risks
of investing in the fund by illustrating how the fund has performed from year to
year, and comparing this information to a broad measure of market performance.
Of course, past performance is not necessarily an indication of future
performance. The information provided in the chart is for Class B shares, and
does not reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following information was represented by a bar graph in the original.]
1988.................... 4.50%
1989.................... 11.39%
1990.................... 7.11%
1991.................... 17.02%
1992.................... 4.45%
1993.................... 4.82%
1994.................... -4.13%
1995.................... 16.94%
1996.................... 1.76%
1997.................... 8.01%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 6.73% (the fourth quarter of 1991), and the fund's lowest
return for a calendar quarter was -3.03% (the first quarter of 1992).
The fund's year-to-date total return as of September 30, 1998 was 5.80%.
Average Annual Total Returns
For periods ended Salomon Brothers
December 31, 1997 Class A Class B Class C 30-Year GNMA Index+
- ----------------- ------- ------- ------- -------------------
One Year 4.01% 5.01% 8.15% 9.39%
Five Years 5.15% 5.10% -- 7.30%
Ten Years -- 7.01% -- 9.51%
Since Class Inception** 5.28% 7.13% 7.05% *
- -----------
* Index returns for the life of each class: 7.36% (1/31/92), and 8.81%
(5/31/94) for Class A and C, respectively. The Index was not in existence on
the B shares inception date.
** Inception date for Class A, B and C shares is 1/10/92, 10/26/84 and 5/31/94,
respectively.
38 Kemper U.S. Mortgage Fund
<PAGE>
+ Salomon Brothers 30-Year GNMA Index, an unmanaged index, is based on total
return 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. Index returns assume reinvestment of
dividends and, unlike fund returns, do not reflect any fees, expenses or
sales charges.
Fee and Expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the fund. Each class of shares has a
different set of transaction fees, which will vary based on the length of time
you hold shares in the fund and the amount of your investment. You will find
details about fee discounts and waivers in the Buying shares and Choosing a
share class -- Special features sections of this prospectus. Shareholder fees:
Fees paid directly from your investment.
Shareholder fees: Fees paid directly from your investment.
Class A Class B Class C
------- ------- -------
Maximum Sales Charge (Load) Imposed
on Purchases (as % of offering price) 4.5% None None
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends/Distributions None None None
Redemption Fee None None None
Exchange Fee None None None
- ----------
(1) 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% during the first year and 0.50% during the second year.
Annual fund operating expenses: Expenses that are deducted from fund assets.
Class A Class B Class C
------- ------- -------
Management Fee 0.51% 0.51% 0.51%
Distribution (12b-1) Fees None 0.75% 0.75%
Other Expenses 0.46% 0.65% 0.47%
----- ----- -----
Total Annual Fund Operating Expenses 0.97% 1.91% 1.73%
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Kemper U.S. Mortgage Fund 39
<PAGE>
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $545 $594 $276
3 Years $745 $900 $545
5 Years $962 $1,232 $939
10 Years $1,586 $1,762 $2,040
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $545 $194 $176
3 Years $745 $600 $545
5 Years $962 $1,032 $939
10 Years $1,586 $1,762 $2,040
Principal strategies and investments
The fund seeks maximum current return from a portfolio of U.S. Government
Securities.
Generally, at least 65% of the fund's total assets are invested in
Mortgage-Backed Securities.
U.S. Government Securities of the type in which the fund may invest have
historically involved little risk of loss of principal due to borrower default
if held to maturity, although valuations will change in various markets and, as
a result, the value of fund shares when you redeem may be more or less than the
amount invested.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would affect the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in short-term high-grade debt securities, cash and cash equivalents. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goals during a defensive period.
While not principal investments or strategies of the fund, the fund may utilize
other investments and investment techniques which may impact fund performance,
including options, futures and other strategic transactions. The fund is limited
to 5% of net assets for initial margin and premium amounts on futures positions
considered speculative by the Commodities Futures Trading Commission. More
information about investments and strategies is provided in the Statement of
Additional Information. Of course, there can be no guarantee that by following
these strategies, the fund will achieve its objective.
40 Kemper U.S. Mortgage Fund
<PAGE>
INVESTMENT MANAGER
The funds retain the investment management firm of Scudder Kemper Investments,
Inc., Two International Place, Boston, MA, to manage their daily investment and
business affairs subject to the policies established by the funds' Boards.
Scudder Kemper Investments, Inc. actively manages the funds' investments.
Professional management can be an important advantage for investors who do not
have the time or expertise to invest directly in individual securities. Scudder
Kemper Investments, Inc. is one of the largest and most experienced investment
management organizations worldwide, managing more than $230 billion in assets
globally for mutual fund investors, retirement and pension plans, institutional
and corporate clients, and private family and individual accounts.
Each fund pays Scudder Kemper Investments, Inc. a (graduated) monthly investment
management fee. Fees paid for each fund's most recently completed fiscal year
are shown below:
as a % of average
daily net assets
----------------
Kemper Adjustable Rate U.S. Government Fund 0.55%
Kemper Short-Intermediate Government Fund 0.55%
Kemper Diversified Income Fund 0.56%
Kemper U.S. Government Securities Fund 0.41%
Kemper High Yield Fund 0.52%
Kemper High Yield Opportunity Fund 0.65%
Kemper Income and Capital Preservation Fund 0.53%
Kemper U.S. Mortgage Fund 0.51%
PORTFOLIO MANAGEMENT
The following investment professionals are associated with the funds as
indicated:
Investment Manager 41
<PAGE>
Kemper Adjustable Rate U.S. Government Fund
Kemper Short-Intermediate Government Fund
Kemper U.S. Government Securities Fund
Kemper U.S. Mortgage Fund
Joined the
Name & Title Fund Background
- -------------------------------------------------------------------------------
Richard L. 1996 Joined Scudder Kemper in 1996. He began his
Vandenberg investment career in 1973. Prior to
Lead Portfolio joining Scudder Kemper he was a portfolio
Manager manager for an unaffiliated investment
management firm.
Scott E. Dolan 1998 Joined Scudder Kemper in 1989. He began his
Portfolio Manager investment career in 1993 as a portfolio
manager for an affiliated mutual fund.
John E. Dugenske 1998 Joined Scudder Kemper in 1998. He began his
Portfolio Manager investment career in 1990. Prior to joining
Scudder Kemper he was a portfolio manager
for an unaffiliated investment management
firm.
- -------------------------------------------------------------------------------
Diversified Income Fund
Joined the
Name & Title Fund Background
- -------------------------------------------------------------------------------
Joseph P. 1997 Joined Scudder Kemper in 1976. He began his
Beimford, investment career in 1976, serving as
Lead Portfolio portfolio manager on various affiliated
Manager mutual funds.
Robert S. Cessine 1994 Joined Scudder Kemper in 1993, and is
Portfolio Manager director of investment grade corporate and
sovereign bond research. Before joining
Scudder Kemper in 1993, Mr. Cessine was a
senior corporate bond analyst and chairman
of the bond selection committee of an
unaffiliated investment management company.
Harry E. Resis, Jr. 1992 Joined Scudder Kemper in 1988, serving as a
Portfolio Manager portfolio manager on various affiliated
mutual funds.
Michael A. 1990 Joined Scudder Kemper in 1972, serving as a
McNamara portfolio manager on various affiliated
Portfolio Manager mutual funds.
- -------------------------------------------------------------------------------
42 Investment Manager
<PAGE>
Diversified Income Fund (continued)
Joined the
Name & Title Fund Background
- -------------------------------------------------------------------------------
Richard L. 1996 Joined Scudder Kemper in 1996. He began his
Vandenberg investment career in 1973. Prior to
Portfolio Manager joining Scudder Kemper he was a portfolio
manager for an unaffiliated investment
management firm.
M. Isabel Saltzman 1998 Joined Scudder Kemper in 1990, serving as a
Portfolio Manager portfolio manager on various affiliated
mutual funds.
- -------------------------------------------------------------------------------
High Yield Fund
Joined the
Name & Title Fund Background
- -------------------------------------------------------------------------------
Harry E. Resis, 1992 Joined Scudder Kemper in 1988 as a portfolio
Jr., Co-Lead manager on various affiliated mutual funds.
Portfolio Manager
Michael McNamara, 1990 Joined Scudder Kemper in 1972 serving as a
Co-Lead Portfolio portfolio manager on various affiliated
Manager mutual funds.
- -------------------------------------------------------------------------------
High Yield Opportunity Fund
Joined the
Name & Title Fund Background
- -------------------------------------------------------------------------------
Harry E. Resis, 1992 Joined Scudder Kemper in 1988 serving as a
Jr., Co-Lead portfolio manager on various affiliated
Portfolio Manager mutual funds.
Michael McNamara, 1990 Joined Scudder Kemper in 1972 serving as a
Co-Lead Portfolio portfolio manager on various affiliated
Manager mutual funds.
Daniel J. Doyle 1997 Joined Scudder Kemper in 1986, serving as a
Portfolio Manager fixed income analyst and in 1993, as a
trader.
- -------------------------------------------------------------------------------
Investment Mangager 43
<PAGE>
Income and Capital Preservation Fund
Joined the
Name & Title Fund Background
- -------------------------------------------------------------------------------
Robert S. 1994 Joined Scudder Kemper in 1993, and is
Cessine, director of investment grade corporate and
Lead Portfolio sovereign bond research. Before joining
Manager Scudder Kemper in 1993, Mr. Cessine was a
senior corporate bond analyst and chairman
of the bond selection committee of an
unaffiliated investment management company.
Stephen A. Wohler 1998 Joined Scudder Kemper in 1979, serving as a
Portfolio Manager portfolio manager for various affiliated
mutual funds.
- -------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
funds could be adversely affected if computer systems on which a fund relies,
which primarily includes those used by the investment manager, its affiliates or
other service providers, are unable to correctly process date-related
information on and after January 1, 2000. This risk is commonly called the Year
2000 Issue. Failure to successfully address the Year 2000 Issue could result in
interruptions to and other material adverse effects on the funds' business and
operations, such as problems with calculating net asset value and difficulties
in implementing a fund's purchase and redemption procedures. The investment
manager has commenced a review of the Year 2000 Issue as it may affect the funds
and is taking steps it believes are reasonably designed to address the Year 2000
Issue, although there can be no assurances that these steps will be sufficient.
In addition, there can be no assurances that the Year 2000 Issue will not have
an adverse effect on the issuers whose securities are held by a fund or on
global markets or economies generally.
Euro conversion
The planned introduction of a new European currency, the Euro, may result in
uncertainties for European securities in the markets in which they trade and
with respect to the operation of each Fund. Currently, the Euro is expected to
be introduced on January 1, 1999 by eleven European countries that are members
of the European Economic and Monetary Union (EMU). The introduction of the Euro
will require the redenomination of European debt and equity securities over a
period of time, which may result in various accounting differences and/or tax
treatments that otherwise would not likely occur. Additional questions are
raised by the fact that certain other EMU members, including the United Kingdom,
will not officially be implementing the Euro on January 1, 1999. If the
introduction of the Euro does not take place as planned, there could be negative
effects, such as severe currency fluctuations and market disruptions.
44 Investment Manager
<PAGE>
Scudder Kemper Investments, Inc., the funds' investment manager, is actively
working to address Euro-related issues and understands that other key service
providers are taking similar steps. At this time, however, no one knows
precisely what the degree of impact will be. To the extent that the market
impact or effect on a portfolio holding is negative, it could hurt the
portfolio's performance.
Investment Manager 45
<PAGE>
ABOUT YOUR INVESTMENT
CHOOSING A SHARE CLASS
Each fund provides investors with the option of purchasing shares in the
following ways:
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
When placing purchase orders, investors must specify whether the order is for
Class A, Class B or Class C shares. Each class of shares represents interests in
the same portfolio of investments of a fund.
The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors 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. For more information about these
arrangements, consult your financial representative or the Shareholder Service
Agent. Be aware that financial services firms may receive different compensation
depending upon which class of shares they sell.
Rule 12b-1 plan
Each fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by the
transfer agent to pay for distribution and other services provided to
shareholders of those classes. Because 12b-1 fees are paid out of fund assets on
an ongoing basis, they will, over time, increase the cost of investment and may
cost more than other types of sales charges. Long-term shareholders may pay
46 About Your Investment
<PAGE>
more than the economic equivalent of the maximum initial sales charges permitted
by the National Association of Securities Dealers, although Kemper Distributors,
Inc. believes that it is unlikely, in the case of Class B shares, because of the
automatic conversion feature of those shares.
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 most Kemper
Funds.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors, Inc. 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.
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
most Kemper Funds (computed at the maximum offering price at the time of the
purchase for which the discount is applicable) already owned by the investor.
Class A Shares -- Large Order NAV Purchase Privilege. Class A shares of a fund
may be purchased at net asset value by any purchaser provided that the amount
invested in such fund or other Kemper Mutual Funds 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 above (the
"Large Order NAV Purchase Privilege").
Exchange Privilege -- General. Shareholders of Class A, Class B and Class C
shares may exchange their shares for shares of the corresponding class of Kemper
Mutual Funds. Shares of a Kemper Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
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.
For purposes of determining any contingent deferred sales charge that may be
imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
About Your Investment 47
<PAGE>
BUYING SHARES
You may purchase shares of the funds by contacting the securities dealer or
other financial services firm from whom you received this prospectus.
CLASS A SHARES
Public Offering Price Including Sales Charge
Adjustable Rate and Short-Intermediate Government Funds
Sales Charge
------------
As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value*
- ------------------ -------------- ----------------
Less than $100,000 3.50% 3.63%
$100,000 but less than $250,000 3.00 3.09
$250,000 but less than $500,000 2.50 2.56
$500,000 but less than $1 million 2.00 2.04
$1 million and over .00** .00**
- -----------
* Rounded to the nearest one hundred percent
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
Diversified, Government, High Yield, Income and Capital, Mortgage and
Opportunity Funds
Sales Charge
------------
As a Percentage of As a Percentage of
Amount of Purchase Offering Price Net Asset Value*
- ------------------ -------------- ----------------
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50 3.63
$250,000 but less than $500,000 2.60 2.67
$500,000 but less than $1 million 2.00 2.04
$1 million and over .00** .00**
- ----------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
48 About Your Investment
<PAGE>
NAV Purchases
Class A shares of a fund may be purchased at net asset value by:
o shareholders in connection with the investment or reinvestment of income and
capital gain dividends
o a participant-directed qualified retirement plan or a participant-directed
non-qualified deferred compensation plan or a participant-directed qualified
retirement plan which is not sponsored by a K-12 school district, provided
in each case that such plan has not less than 200 eligible employees
o any purchaser with Kemper Funds investment totals of at least $1,000,000
o unitholders of unit investment trusts sponsored by Ranson & Associates, Inc.
or its predecessors through reinvestment programs described in the
prospectuses of such trusts that have such programs
o 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
or any trust, pension, profit-sharing or other benefit plan for such persons
o persons who purchase shares through bank trust departments that process such
trades through an automated, integrated mutual fund clearing program
provided by a third party clearing firm
o registered representatives and employees of broker-dealers having selling
group agreements with Kemper Distributors or any trust, pension,
profit-sharing or other benefit plan for such persons
o officers, directors, and employees of service agents of the funds
o 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)
o selected employees (including their spouses and dependent children) of banks
and other financial services firms that provide administrative services
related to the funds pursuant to an agreement with Kemper Distributors or
one of its affiliates
o certain professionals who assist in the promotion of Kemper Funds pursuant
to personal services contracts with Kemper Distributors, for themselves or
members of their families
o in connection with the acquisition of the assets of or merger or
consolidation with another investment company
o shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on
September 8, 1995, and have continuously owned shares of KVS (or a Kemper
Fund acquired by exchange of KVS shares) since that date, for themselves or
members of their families or any trust, pension, profit-sharing or other
benefit plan for such persons
About Your Investment 49
<PAGE>
o persons who purchase shares of the fund through Kemper Distributors as part
of an automated billing and wage deduction program administered by
RewardsPlus of America
o through certain investment advisers registered under the Investment Advisers
Act of 1940 and other financial services firms, acting solely as agent for
their clients, that adhere to certain standards established by KDI,
including a requirement that such shares be purchased for the benefit of
their clients participating in an investment advisory program or agency
commission program under which such clients pay a fee to the investment
adviser or other firm for portfolio management or agency brokerage services.
Contingent Deferred Sales Charge
o A contingent deferred sales charge may be imposed upon redemption of Class A
shares purchased under the Large Order NAV Purchase Privilege as follows: 1%
if they are redeemed within one year of purchase and .50% if 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:
o redemptions under a fund's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account
o redemption of shares of a shareholder (including a registered joint owner)
who has died
o 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)
o redemptions by a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan which is not sponsored by a
K-12 school district
o redemptions by employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder
Service Agent
o redemptions of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the commission
applicable to such Large Order NAV Purchase.
50 About Your Investment
<PAGE>
Rule 12b-1 Fee
None
Exchange Privilege
Class A shares may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and Kemper Cash Reserves Fund acquired by
purchase (not including shares acquired by dividend reinvestment) are subject to
the applicable sales charge on exchange.
Class A shares purchased under the Large Order NAV Purchase Privilege may be
exchanged for Class A shares of any Kemper Fund or a Money Market Fund without
paying any contingent deferred sales charge. If the Class A shares received on
exchange are redeemed thereafter, a contingent deferred sales charge may be
imposed.
CLASS B SHARES
Public Offering Price
Net asset value per share without any sales charge at the time of purchase
Contingent Deferred Sales Charge
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. The charge is computed at the following rates applied to
the value of the shares redeemed excluding amounts not subject to the charge.
- --------------------------------------------------------------------------------
Year of Redemption
After Purchase: First Second Third Fourth Fifth Sixth
- --------------------------------------------------------------------------------
Contingent Deferred
Sales Charge: 4% 3% 3% 2% 2% 1%
- --------------------------------------------------------------------------------
The contingent deferred sales charge will be waived:
o 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)
o 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 Code Section 72(t)(2)(A)(iv) prior to
age 59 1/2
o for redemptions made pursuant to a systematic withdrawal plan (see "Special
Features -- Systematic Withdrawal Plan" below)
o 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
About Your Investment 51
<PAGE>
o in the event of the death of the shareholder (including a registered joint
owner).
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:
o 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)
o redemptions in connection with retirement distributions (limited at any one
time to 10% of the total value of plan assets invested in a fund
o redemptions in connection with distributions qualifying under the hardship
provisions of the Code
o redemptions representing returns of excess contributions to such plans.
Rule 12b-1 Fee
0.75%
Conversion Feature
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. 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.
Exchange Privilege
Class B shares of a fund and Class B shares of most Kemper Funds may be
exchanged for each other at their relative net asset values without a contingent
deferred sales charge.
CLASS C SHARES
Public Offering Price
Net asset value per share without any sales charge at the time of purchase
Contingent Deferred Sales Charge
A contingent deferred sales charge of 1% may be imposed upon redemption of Class
C shares 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 in the event of:
o redemptions by a participant-directed qualified retirement plan described in
Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457
52 About Your Investment
<PAGE>
o redemptions by employer sponsored employee benefit plans (or their
participants) using the subaccount record keeping system made available
through the Shareholder Service Agent
o redemption of shares of a shareholder (including a registered joint owner)
who has died
o 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)
o redemptions under a fund's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account
o 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
o redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer
of record has waived the advance of the first year administrative services
and distribution fees applicable to such shares and has agreed to receive
such fees quarterly.
Rule 12b-1 Fee
0.75%
Conversion Feature
None
Exchange Privilege
Class C shares of a fund and Class C shares of most Kemper Funds may be
exchanged for each other at their relative net asset values. Class C shares may
be exchanged without a contingent deferred sales charge.
SELLING AND EXCHANGING SHARES
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
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.
An exchange of shares entails the sale of fund shares and subsequent purchase of
shares of another Kemper Mutual Fund.
About Your Investment 53
<PAGE>
Share certificates
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Service Company, 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.
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.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. 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. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions
The funds declare and distribute monthly dividends from net investment income.
Net investment income consists of all interest income earned on portfolio assets
less all fund expenses. Income dividends are distributed monthly and dividends
of net realized capital gains are distributed annually.
Dividends are calculated in the same manner, at the same time and on the same
day for each class of shares. The level of income dividends varies from one
class to another based on the class' fees and expenses.
Income and capital gains 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 on the reinvestment date, 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 gains dividends in cash and
long-term capital gains dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gains dividends in cash.
Any dividends of a fund that are reinvested will normally be reinvested in
shares of the same class of that same fund. However, by writing to the
Shareholder
54 About Your Investment
<PAGE>
Service Agent, you may choose to have dividends of a fund invested in shares of
the same class of another Kemper fund at the net asset value of that class and
fund. To use this privilege, you must maintain a minimum account value of $1,000
in the fund distributing the dividends. The funds will 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 you request that such policy not be applied to your account.
Distributors are generally taxable, whether received in cash or reinvested.
Exchanges among funds are also taxable events.
Taxes
Dividends representing net investment income and net short-term capital gains,
if any, are taxable to shareholders as ordinary income. Long-term capital gains
distributions, if any, are taxable to individual shareholders at a maximum 20%
capital gains rate regardless of the length of time shareholders have owned
shares. Shareholders of a fund may be subject to state, local and foreign taxes
on fund distributions and dispositions of fund shares. You should consult your
tax advisor regarding the particular tax consequences of an investment in a
fund.
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, is taxable to the shareholder.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable as if paid on December 31 of the calendar year in which they were
declared.
The funds send you detailed tax information about the amount and type of
distributions by January 31of the following year.
TRANSACTION INFORMATION
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the funds as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Market prices, 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 are used to
determine the value of the funds' assets. If market prices are not readily
available for a security or if a security's price is not considered to be market
indicative, that security may be valued by another method that the Board or its
delegate believes accurately reflects fair value. In those circumstances where a
security's price is not considered to be market indicative, the security's
valuation may differ from an available market quotation.
About Your Investment 55
<PAGE>
The net asset value per share of each 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 that class, less all liabilities, 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 annual expenses borne by the Class B and Class
C shares.
To the extent that a fund invests in foreign securities, these securities may be
listed on foreign exchanges that trade on days when the fund does not price its
shares. As a result, the net asset value per share of a fund may change at a
time when shareholders are not able to purchase or redeem their shares.
Processing time
All requests to buy and sell shares that are received in good order by the
funds' transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by Kemper
Distributors prior to the close of its business day will be confirmed at a price
based on the net asset value effective on that day. If an order is accompanied
by a check drawn on a foreign bank, funds must normally be collected before
shares will be purchased.
Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When you place an order to sell shares for which the fund may not
yet have received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), the fund may delay transmittal of the proceeds until it
has determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by a fund of the purchase amount.
The redemption of shares within certain time periods may be subject to
contingent deferred sales charges, as noted above.
Signature guarantees
A signature guarantee is required unless you sell $50,000 or less worth of
shares (prior to the imposition of any contingent deferred sales charge) and the
proceeds are payable to the shareholder of record at the address of record. You
can obtain a guarantee from most brokerage houses and financial institutions,
although not from a notary public. The funds will normally send you the proceeds
within one business day following your request, but may take up to seven
business days (or longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
funds and their transfer agent each reserves the right to reject purchases of
fund shares (including exchanges) for any reason, including when there is
evidence of a pattern of frequent purchases and sales made in response to
56 About Your Investment
<PAGE>
short-term fluctuations in a fund's share price. 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 its shares or a class of its shares to new investors. During the
period of such suspension, persons who are already shareholders normally are
permitted to continue to purchase additional shares and to have dividends
reinvested.
Minimum balances
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.
Because of the high cost of maintaining small accounts, 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.
Third party transactions
If you buy and sell shares of a fund through a member of the National
Association of Securities Dealers, Inc. (other than the funds' distributor,
Kemper Distributors), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.
Redemption-in-kind
The funds reserve the right to honor any request for redemption or repurchase by
making payment in whole or in part in readily marketable securities
("redemptions in kind"). These securities will be chosen by the fund and valued
as they are for purposes of computing the fund's net asset value. A shareholder
may incur transaction expenses in converting these securities to cash.
About Your Investment 57
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the funds' financial
performance for the period reflected below. Certain information reflects
financial results for a single fund share. The total return figures show what an
investor in a fund would have earned (or lost) assuming reinvestment of all
distributions. This information has been audited by Ernst & Young LLP whose
report, along with the funds' financial statements, are included in the funds'
annual reports, which are available upon request by calling the Kemper Funds at
1-800-621-1048.
Kemper Adjustable Rate U.S. Government Fund
Year ended August 31,
CLASS A 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
year $8.31 8.22 8.30 8.33 8.68
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .41 .45 .46 .48 .34
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.11) .09 (.09) (.04) (.29)
- -------------------------------------------------------------------------------
Total from investment
operations .30 .54 .37 .44 .05
- -------------------------------------------------------------------------------
Less distribution from net
investment income .42 .45 .45 .47 .40
- -------------------------------------------------------------------------------
Net asset value, end of year $8.19 8.31 8.22 8.30 8.33
- -------------------------------------------------------------------------------
Total return 3.68% 6.75 4.55 5.52 .59
- -------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.36% 1.25 1.15 1.10 .93
- -------------------------------------------------------------------------------
Net investment income 4.79% 5.50 5.49 5.76 3.96
- -------------------------------------------------------------------------------
May 31
to August
Year ended August 31, 31,
CLASS B 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
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 .36 .39 .40 .43 .07
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.11) .09 (.09) (.04) (.04)
- -------------------------------------------------------------------------------
Total from investment
operations .25 .48 .31 .39 .03
- -------------------------------------------------------------------------------
Less distribution from net
investment income .36 .39 .39 .40 .08
- -------------------------------------------------------------------------------
Net asset value, end of period $8.21 8.32 8.23 8.31 8.32
- -------------------------------------------------------------------------------
Total return (not annualized) 3.06% 5.96 3.79 4.84 .34
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.99% 1.93 1.89 1.85 1.96
- -------------------------------------------------------------------------------
Net investment income 4.16% 4.82 4.75 5.01 3.36
- -------------------------------------------------------------------------------
58 Financial Highlights
<PAGE>
May 31
to August
Year ended August 31, 31,
CLASS C 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
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 .36 .39 .40 .43 .08
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.11) .09 (.09) (.04) (.04)
- -------------------------------------------------------------------------------
Total from investment
operations .25 .48 .31 .39 .04
- -------------------------------------------------------------------------------
Less distribution from net
investment income .36 .39 .39 .40 .08
- -------------------------------------------------------------------------------
Net asset value, end of period $8.22 8.33 8.24 8.32 8.33
- -------------------------------------------------------------------------------
Total return (not annualized) 3.10% 5.98 3.82 4.89 .47
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.95% 1.88 1.89 1.79 1.88
- -------------------------------------------------------------------------------
Net investment income 4.20% 4.87 4.75 5.07 3.52
- --------------------------------------------------------------------------------
Year ended August 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of year (in
thousands) $69,307 81,967 94,477 129,757 202,815
- -------------------------------------------------------------------------------
Portfolio turnover rate 149% 249 272 308 533
- --------------------------------------------------------------------------------
Notes: Scudder Kemper had agreed to absorb certain operating expenses during a
portion of the year ended August 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%, respectively, for the year ended August 31,
1994.
Total return does not reflect the effect of any sales charges.
Financial Highlights 59
<PAGE>
Kemper Short-Intermediate Government Fund
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
CLASS A 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 .42 .51 .54 .09 .54 .48
- -----------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .17 (.07) (.20) (.01) (.03) (.44)
- -----------------------------------------------------------------------------------------
Total from investment
operations .59 .44 .34 .08 .51 .04
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .48 .53 .53 .09 .53 .45
- -----------------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- -- .11
- -----------------------------------------------------------------------------------------
Total dividends .48 .53 .53 .09 .53 .56
- -----------------------------------------------------------------------------------------
Net asset value, end of period $7.91 7.80 7.89 8.08 8.09 8.11
- -----------------------------------------------------------------------------------------
Total return (not annualized) 7.80% 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 5.67% 6.61 6.65 6.56 6.65 5.85
- -----------------------------------------------------------------------------------------
</TABLE>
60 Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
CLASS B 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 .37 .46 .46 .08 .47 .40
- -----------------------------------------------------------------------------------------
Net realized and
unrealized
gain (loss) .13 (.07) (.20) (.01) (.03) (.44)
- -----------------------------------------------------------------------------------------
Total from
investment
operations .50 .39 .26 .07 .44 (.04)
- -----------------------------------------------------------------------------------------
Less dividends:
Distribution
from net
investment
income .40 .47 .46 .08 .46 .38
- -----------------------------------------------------------------------------------------
Distribution
from net
realized gain -- -- -- -- -- .11
- -----------------------------------------------------------------------------------------
Total dividends .40 .47 .46 .08 .46 .49
- -----------------------------------------------------------------------------------------
Net asset value,
end of period $7.87 7.77 7.85 8.05 8.06 8.08
- -----------------------------------------------------------------------------------------
Total return (not
annualized) 6.71% 5.11 3.28 .87 5.68 (.48)
- -----------------------------------------------------------------------------------------
Ratios to average
net assets
(annualized)
Expenses 2.11% 2.02 1.97 1.91 1.87 1.93
- -----------------------------------------------------------------------------------------
Net investment
income 4.70% 5.78 5.83 5.70 5.84 4.95
- -----------------------------------------------------------------------------------------
</TABLE>
Financial Highlights 61
<PAGE>
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
CLASS C 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 8.09 8.09
- -----------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment
income .37 .47 .47 .09 .07 .07
- -----------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) .16 (.07) (.20) (.01) (.01) (.01)
- -----------------------------------------------------------------------------------------
Total from
investment
operations .53 .40 .27 .08 .44 .06
- -----------------------------------------------------------------------------------------
Less distribution
from net
investment
income .42 .48 .47 .08 .46 .07
- -----------------------------------------------------------------------------------------
Net asset value,
end of period $7.89 7.78 7.86 8.06 8.06 8.08
- -----------------------------------------------------------------------------------------
Total return (not
annualized) 7.01% 5.24 3.36 1.00 5.73 .77
- -----------------------------------------------------------------------------------------
Ratios to average
net assets
(annualized)
Expenses 1.84% 1.86 1.85 1.74 1.78 1.83
- -----------------------------------------------------------------------------------------
Net investment
income 4.97% 5.94 5.95 5.87 5.93 5.54
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
1998 1997 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supplemental data
for all classes
Net assets at end
of period
(in thousands) $176,870 171,400 204,021 239,619 246,248 266,640
- --------------------------------------------------------------------------------------------
Portfolio turnover
rate
(annualized) 337% 164 180 173 597 916
- --------------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year ended
September 30, 1998.
62 Financial Highlights
<PAGE>
Kemper Diversified Income Fund
Year ended October 31,
CLASS A 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
year $5.96 5.99 5.98 5.77 6.23
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .44 .46 .46 .55 .52
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency (.35) .01 .12 .16 (.45)
- -------------------------------------------------------------------------------
Total from investment
operations .09 .47 .58 .71 .07
- -------------------------------------------------------------------------------
Less distribution from net
investment income .45 .50 .57 .50 .53
- -------------------------------------------------------------------------------
Net asset value, end of year $5.60 5.96 5.99 5.98 5.77
- -------------------------------------------------------------------------------
Total return 1.28% 8.13 10.27 12.90 1.02
- -------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.04% 1.03 1.03 1.09 1.12
- -------------------------------------------------------------------------------
Net investment income 7.36% 7.68 7.72 9.43 8.81
- -------------------------------------------------------------------------------
May 31
to October
Year ended October 31, 31,
CLASS B 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $5.96 5.99 5.98 5.77 5.94
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .38 .40 .41 .49 .19
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency (.36) .01 .12 .16 (.17)
- -------------------------------------------------------------------------------
Total from investment
operations .02 .41 .53 .65 .02
- -------------------------------------------------------------------------------
Less distribution from net
investment income .39 .44 .52 .44 .19
- -------------------------------------------------------------------------------
Net asset value, end of period $5.59 5.96 5.99 5.98 5.77
- -------------------------------------------------------------------------------
Total return (not annualized) .12% 7.13 9.23 11.87 .35
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 2.01% 1.98 1.96 2.04 1.97
- -------------------------------------------------------------------------------
Net investment income 6.39% 6.73 6.79 8.48 8.01
- -------------------------------------------------------------------------------
Financial Highlights 63
<PAGE>
May 31
to October
Year ended October 31, 31,
CLASS C 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $5.99 6.01 6.00 5.79 5.95
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .39 .42 .41 .50 .20
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments
and foreign currency (.36) .01 .12 .16 (.17)
- -------------------------------------------------------------------------------
Total from investment
operations .03 .43 .53 .66 .03
- -------------------------------------------------------------------------------
Less distribution from net
investment income .40 .45 .52 .45 .19
- -------------------------------------------------------------------------------
Net asset value, end of period $5.62 5.99 6.01 6.00 5.79
- -------------------------------------------------------------------------------
Total return (not annualized) .28% 7.37 9.33 11.95 .55
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.84% 1.85 1.86 1.86 1.96
- -------------------------------------------------------------------------------
Net investment income 6.56% 6.86 6.89 8.68 8.02
- -------------------------------------------------------------------------------
Year ended October 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of year (in
thousands) $850,528 861,543 778,752 754,222 738,014
- -------------------------------------------------------------------------------
Portfolio turnover rate 751% 347 310 286 179
- -------------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year ended
October 31, 1998.
64 Financial Highlights
<PAGE>
Kemper U.S. Government Securities Fund
Year ended October 31,
CLASS A 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
year $8.81 8.74 8.92 8.35 9.29
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .58 .64 .63 .66 .67
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .07 .06 (.17) .56 (.97)
- -------------------------------------------------------------------------------
Total from investment
operations .65 .70 .46 1.22 (.30)
- -------------------------------------------------------------------------------
Less distribution from net
investment income .60 .63 .64 .65 .64
- -------------------------------------------------------------------------------
Net asset value, end of year $8.86 8.81 8.74 8.92 8.35
- -------------------------------------------------------------------------------
Total return 7.64% 8.41 5.36 15.24 (3.37)
- -------------------------------------------------------------------------------
Ratios to average net assets
Expenses .80% .78 .77 .72 .75
- -------------------------------------------------------------------------------
Net investment income 6.50% 7.34 7.17 7.68 7.58
- -------------------------------------------------------------------------------
May 31
to October
Year ended October 31, 31,
CLASS B 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $8.80 8.73 8.91 8.34 8.67
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .49 .56 .54 .58 .28
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .08 .06 (.17) .56 (.38)
- -------------------------------------------------------------------------------
Total from investment
operations .57 .62 .37 1.14 (.10)
- -------------------------------------------------------------------------------
Less distribution from net
investment income .52 .55 .55 .57 .23
- -------------------------------------------------------------------------------
Net asset value, end of period $8.85 8.80 8.73 8.91 8.34
- -------------------------------------------------------------------------------
Total return (not annualized) 6.67% 7.40 4.36 14.18 (1.15)
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.71% 1.73 1.73 1.69 1.71
- -------------------------------------------------------------------------------
Net investment income 5.59% 6.39 6.21 6.71 7.09
- -------------------------------------------------------------------------------
Financial Highlights 65
<PAGE>
May 31
to October
Year ended October 31, 31,
CLASS C 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $8.82 8.75 8.93 8.35 8.67
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .49 .56 .55 .60 .29
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .08 .06 (.17) .56 (.38)
- -------------------------------------------------------------------------------
Total from investment
operations .57 .62 .38 1.16 (.09)
- -------------------------------------------------------------------------------
Less distribution from net
investment income .52 .55 .56 .58 .23
- -------------------------------------------------------------------------------
Net asset value, end of period $8.87 8.82 8.75 8.93 8.35
- -------------------------------------------------------------------------------
Total return (not annualized) 6.66% 7.42 4.40 14.33 (1.01)
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.67% 1.68 1.70 1.64 1.68
- -------------------------------------------------------------------------------
Net investment income 5.63% 6.44 6.24 6.76 7.12
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended October 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Supplemental data for all classes
Net assets at end of period (in
thousands) $3,442,212 3,642,027 4,163,157 4,738,415 4,941,151
- ---------------------------------------------------------------------------------------
Portfolio turnover rate 150% 261 391 362 1,000
- ---------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year
ended October 31, 1998.
66 Financial Highlights
<PAGE>
Kemper High Yield Fund
Year ended September 30,
CLASS A 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
year $8.50 8.23 8.01 7.74 8.12
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .76 .76 .76 .83 .73
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.81) .31 .23 .20 (.35)
- -------------------------------------------------------------------------------
Total from investment
operations (.05) 1.07 .99 1.03 .38
- -------------------------------------------------------------------------------
Less distributions from net
investment income .77 .80 .77 .76 .76
- -------------------------------------------------------------------------------
Net asset value, end of year $7.68 8.50 8.23 8.01 7.74
- -------------------------------------------------------------------------------
Total return (.95)% 13.69 13.00 14.10 4.64
- -------------------------------------------------------------------------------
Ratios to average net assets
Expenses .89% .88 .88 .90 .86
- -------------------------------------------------------------------------------
Net investment income 9.09% 9.18 9.45 10.74 9.22
- -------------------------------------------------------------------------------
May 31
to
Septober
Year ended October 31, 31,
CLASS B 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $8.49 8.22 8.00 7.73 7.96
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .68 .69 .69 .76 .23
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.80) .31 .23 .20 (.23)
- -------------------------------------------------------------------------------
Total from investment
operations (.12) 1.00 .92 .96 --
- -------------------------------------------------------------------------------
Less distributions from net
investment income .70 .73 .70 .69 .23
- -------------------------------------------------------------------------------
Net asset value, end of period $7.67 8.49 8.22 8.00 7.73
- -------------------------------------------------------------------------------
Total return (not annualized) (1.82)% 12.72 12.02 13.09 --
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.76% 1.76 1.77 1.77 1.80
- -------------------------------------------------------------------------------
Net investment income 8.22% 8.30 8.56 9.87 8.70
- -------------------------------------------------------------------------------
Financial Highlights 67
<PAGE>
May 31
to
Septober
Year ended October 31, 31,
CLASS C 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $8.52 8.24 8.02 7.75 7.96
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .69 .70 .69 .77 .25
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) (.82) .31 .23 .20 (.23)
- -------------------------------------------------------------------------------
Total from investment
operations (.13) 1.01 .92 .97 .02
- -------------------------------------------------------------------------------
Less distributions from net
investment income .70 .73 .70 .70 .23
- -------------------------------------------------------------------------------
Net asset value, end of period $7.69 8.52 8.24 8.02 7.75
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.71% 1.71 1.71 1.71 1.74
- -------------------------------------------------------------------------------
Net investment income 8.27% 8.35 8.62 9.93 8.75
- -------------------------------------------------------------------------------
Year ended September 30,
Supplemental data
for all classes 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Net assets at
end of year
(in thousands) $4,784,262 4,939,302 4,096,939 3,527,954 3,152,029
Portfolio
turnover rate 92% 91 102 99 93
- -------------------------------------------------------------------------------
Total return does not reflect the effect of any sales charges. Per share data
was determined based on average shares outstanding during the year ended
September 30, 1998.
68 Financial Highlights
<PAGE>
Kemper High Yield Opportunity Fund
Year ended September
30, 1998 (a)
Class A Class B Class C
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of year $9.50 9.50 9.50
- -------------------------------------------------------------------------------
Income from investment operations:
Net investment income .70 .63 .62
- -------------------------------------------------------------------------------
Net realized and unrealized loss (.60) (.61) (.60)
- -------------------------------------------------------------------------------
Total from investment operations .10 .02 .02
- -------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .67 .59 .59
- -------------------------------------------------------------------------------
Distribution from net realized gain .04 .04 .04
- -------------------------------------------------------------------------------
Total dividends .71 .63 .63
- -------------------------------------------------------------------------------
Net asset value, end of year $8.89 8.89 8.89
- -------------------------------------------------------------------------------
Total return .59% (.18) (.18)
- -------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.27% 2.03 2.03
- -------------------------------------------------------------------------------
Net investment income 8.31% 7.55 7.55
- -------------------------------------------------------------------------------
Year ended
September 30, 1998 (a)
- -------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of year (in thousands) $26,691
- -------------------------------------------------------------------------------
Portfolio turnover rate 169%
- -------------------------------------------------------------------------------
(a) Commencement of operations on October 1, 1997.
Total return does not reflect the effect of any sales charges. Per share data
was determined based on average shares outstanding during the year ended
September 30, 1998.
Financial Highlights 69
<PAGE>
Kemper Income and Capital Preservation Fund
Year ended October 31,
CLASS A 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
year $8.54 8.46 8.62 7.91 8.97
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .53 .57 .58 .61 .61
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .14 .08 (.15) .72 (1.03)
- -------------------------------------------------------------------------------
Total from investment
operations .67 .65 .43 1.33 (.42)
- -------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .54 .57 .59 .62 .59
- -------------------------------------------------------------------------------
Distribution from net
realized gain -- -- -- -- .05
- -------------------------------------------------------------------------------
Total dividends .54 .57 .59 .62 .64
- -------------------------------------------------------------------------------
Net asset value, end of year $8.67 8.54 8.46 8.62 7.91
- -------------------------------------------------------------------------------
Total return 8.13% 8.00 5.17 17.47 (4.86)
- -------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.01% .97 .96 .90 .94
- -------------------------------------------------------------------------------
Net investment income 6.17% 6.75 6.90 7.31 7.34
- -------------------------------------------------------------------------------
May 31
to October
Year ended October 31, 31,
CLASS B 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $8.51 8.43 8.59 7.90 8.16
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .49 .50 .51 .23
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .14 .08 (.15) .72 (.26)
- -------------------------------------------------------------------------------
Total from investment
operations .60 .57 .35 1.23 (.03)
- -------------------------------------------------------------------------------
Less distribution from net
investment income .47 .49 .51 .54 .23
- -------------------------------------------------------------------------------
Net asset value, end of period $8.64 8.51 8.43 8.59 7.90
- -------------------------------------------------------------------------------
Total return (not annualized) 7.20% 6.99 4.20 16.12 (.45)
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.88% 1.90 1.93 1.81 1.92
- -------------------------------------------------------------------------------
Net investment income 5.30% 5.82 5.93 6.40 6.72
- -------------------------------------------------------------------------------
70 Financial Highlights
<PAGE>
May 31
to October
Year ended October 31, 31,
CLASS C 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of
period $8.53 8.45 8.61 7.90 8.16
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .46 .49 .50 .53 .23
- -------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .14 .08 (.15) .72 (.26)
- -------------------------------------------------------------------------------
Total from investment
operations .60 .57 .35 1.25 (.03)
- -------------------------------------------------------------------------------
Less distribution from net
investment income .47 .49 .51 .54 .23
- -------------------------------------------------------------------------------
Net asset value, end of period $8.66 8.53 8.45 8.61 7.90
- -------------------------------------------------------------------------------
Total return (not annualized) 7.20% 7.03 4.23 16.45 (.44)
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.86% 1.86 1.90 1.78 1.89
- -------------------------------------------------------------------------------
Net investment income 5.32% 5.86 5.96 6.43 6.75
- -------------------------------------------------------------------------------
Year ended September 30,
Supplemental data
for all classes 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Net assets at
end of year
(in thousands) $694,057 613,470 572,998 649,427 510,432
Portfolio
turnover rate 121% 164 74 182 163
- -------------------------------------------------------------------------------
Total return does not reflect the effect of any sales charges.
Financial Highlights 71
<PAGE>
Kemper U.S. Mortgage Fund
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
CLASS A 1998 1997 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of
period $7.01 6.91 7.13 7.06 6.96 7.56
- -----------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .44 .52 .49 .08 .53 .51
- -----------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) .17 .10 (.19) .08 .09 (.59)
- -----------------------------------------------------------------------------------------
Total from investment
operations .61 .62 .30 .16 .62 (.08)
- -----------------------------------------------------------------------------------------
Less distribution from net
investment income .47 .52 .52 .09 .52 .52
- -----------------------------------------------------------------------------------------
Net asset value, end of period $7.15 7.01 6.91 7.13 7.06 6.96
- -----------------------------------------------------------------------------------------
Total return (not annualized) 8.99% 9.26 4.28 2.23 9.48 (1.21)
- -----------------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses .97% .96 .97 .94 .89 .99
- -----------------------------------------------------------------------------------------
Net investment income 6.46% 7.23 6.98 6.87 7.77 7.00
- -----------------------------------------------------------------------------------------
</TABLE>
72 Financial Highlights
<PAGE>
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
CLASS B 1998 1997 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating
performance
Net asset value,
beginning of
period $7.00 6.91 7.12 7.05 6.96 7.56
- -----------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment
income .40 .45 .44 .07 .47 .45
- -----------------------------------------------------------------------------------------
Net realized and
unrealized
gain (loss) .14 .10 (.19) .08 .09 (.59)
- -----------------------------------------------------------------------------------------
Total from
investment
operations .54 .55 .25 .15 .56 (.14)
- -----------------------------------------------------------------------------------------
Less distribution
from net
investment
income .40 .46 .46 .08 .47 .46
- -----------------------------------------------------------------------------------------
Net asset value,
end of period $7.14 7.00 6.91 7.12 7.05 6.96
- -----------------------------------------------------------------------------------------
Total return (not
annualized) 8.00% 8.17 3.54 2.09 8.44 (2.00)
- -----------------------------------------------------------------------------------------
Ratios to average
net assets
(annualized)
Expenses 1.91% 1.83 1.80 1.79 1.75 1.79
- -----------------------------------------------------------------------------------------
Net investment
income 5.52% 6.36 6.15 6.02 6.91 6.27
- -----------------------------------------------------------------------------------------
</TABLE>
Financial Highlights 73
<PAGE>
<TABLE>
<CAPTION>
Two
months
ended Year
September ended May 31 to
Year ended September 30, 30, July 31, July 31,
CLASS C 1998 1997 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating
performance
Net asset value,
beginning of
period $7.00 6.90 7.12 7.05 6.95 6.99
- --------------------------------------------------------------------------------------------
Income from
investment
operations:
Net investment
income .40 .46 .43 .07 .48 .07
- --------------------------------------------------------------------------------------------
Net realized and
unrealized
gain (loss) .16 .10 (.19) .08 .09 (.04)
- --------------------------------------------------------------------------------------------
Total from
investment
operations .56 .56 .24 .15 .57 .03
- --------------------------------------------------------------------------------------------
Less distribution
from net
investment
income .41 .46 .46 .08 .47 .07
- --------------------------------------------------------------------------------------------
Net asset value,
end of period $7.15 7.00 6.90 7.12 7.05 6.95
- --------------------------------------------------------------------------------------------
Total return (not
annualized) 8.30% 8.45 3.47 2.10 8.65 .47
- --------------------------------------------------------------------------------------------
Ratios to average
net assets
(annualized)
Expenses 1.73% 1.71 1.72 1.69 1.71 1.55
- --------------------------------------------------------------------------------------------
Net investment
income 5.70% 6.48 6.23 6.12 6.95 6.46
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Two
months
ended
September Year ended
Year ended September 30, 30, July 31,
1998 1997 1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Supplemental data
for all classes
Net assets at end
of period
(in thousands) $2,184,175 2,497,825 2,960,135 3,493,052 3,528,329 4,158,066
- ----------------------------------------------------------------------------------------------
Portfolio
turnover rate
(annualized) 172% 235 391 249 573 963
- ----------------------------------------------------------------------------------------------
</TABLE>
Note: Total return does not reflect the effect of any sales charges. Per share
data was determined based on average shares outstanding during the year ended
September 30, 1998.
74 Financial Highlights
<PAGE>
Additional information about the funds may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free telephone
number listed below. The Statement of Additional Information contains more
detailed information on fund investments and operations. The Shareholder
Services Guide contains more information about purchases and sales of fund
shares. The semiannual and annual shareholder reports contain a discussion of
the market conditions and the investment strategies that significantly affected
the funds' performance during the last fiscal year, as well as a listing of
portfolio holdings and financial statements. These and other fund documents may
be obtained without charge from the following sources:
- -------------------------------------------------------------------------------
By Phone Call the Kemper Funds at: 1-800-621-1048
- -------------------------------------------------------------------------------
By Mail Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section,
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- -------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330
for more information.)
- -------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
- -------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file numbers:
Kemper Adjustable Rate U.S. Government Fund 811-5195
Kemper Short-Intermediate Government Fund 811-3440
Kemper Diversified Income Fund 811-2743
Kemper U.S. Government Securities Fund 811-2719
Kemper High Yield Fund 811-2786
Kemper High Yield Opportunity Fund 811-2786
Kemper Income and Capital Preservation Fund 811-2305
Kemper U.S. Mortgage Fund 811-3440
[PRINTED WITH SOY INK LOGO] [RECYCLE LOGO] Printed on recycled paper
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
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 January 1, 1999. The prospectus may be obtained without charge from
the Funds by writing to Kemper Distributors, Inc., 222 South Riverside Plaza,
Chicago, IL 60606-5808 or calling 1-800-621-1048.
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS.......................................................2
INCOME AND CAPITAL FUND....................................................4
MORTGAGE FUND..............................................................5
OPPORTUNITY FUND...........................................................5
INVESTMENT POLICIES AND TECHNIQUES............................................7
BROKERAGE COMMISSIONS........................................................21
INVESTMENT MANAGER AND UNDERWRITER...........................................22
PURCHASE, REPURCHASE, AND REDEMPTION OF SHARES...............................32
DIVIDENDS AND TAXES..........................................................45
PERFORMANCE..................................................................49
OFFICERS AND TRUSTEES........................................................61
APPENDIX -- RATINGS OF INVESTMENTS...........................................76
The financial statements appearing in each Fund's 1998 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.
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which cannot
be changed without approval of a majority of its outstanding voting shares. As
defined in the Investment Company Act of 1940, as amended (the "1940 Act") this
means the lesser of the vote of (a) 67% of the 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.
Each Fund has elected to be classified as a diversified series of an open-end
investment company.
Each Fund, with the exception of Short-Intermediate Government Fund, may not, as
a fundamental policy:
1. Make loans except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
2. Borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction, from
time to time.
3. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
4. 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.
5. Engage in the business of underwriting securities, except to the extent
that a Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities. 6. Issue senior securities, except as
permitted under the 1940 Act, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time. 7.
Purchase physical commodities or contracts relating to physical
commodities.
Adjustable Rate Fund
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 its investment restriction 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:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Invest more than 15% of its net assets in illiquid securities.
3. 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.
4. 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.
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. 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.
2
<PAGE>
7. Purchase more than 10% of any class of voting securities of any issuer.
Diversified Fund
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 its investment restriction 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:
1. Invest for the purpose of exercising control or management of another
issuer.
2. 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.
3. Invest more than 15% of its net assets in illiquid securities.
4. 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.
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 (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.
Government Fund
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 its investment restriction 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 restrictions 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.
2. 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.
3. 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.
High Yield Fund
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:
1. Invest for the purpose of exercising control or management of another
issuer.
3
<PAGE>
2. 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.
3. Invest more than 15% of its net assets in illiquid securities.
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. 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. 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.)
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.
Income and Capital Fund
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:
1. Invest for the purpose of exercising control or management of another
issuer.
2. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
3. Invest more than 15% of its net assets in illiquid securities.
4. 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.
5. 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.
6. 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.
7. 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.
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 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
<PAGE>
Mortgage Fund
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or total assets will not be considered a violation. The Fund
did not borrow money as permitted by investment restriction number 7 in the
latest fiscal year, and it has no present intention of borrowing during the
current year. The Fund has adopted the following non-fundamental restrictions,
which may be changed by the Board of Trustees without shareholder approval. The
Mortgage Fund may not:
1. Purchase securities or make investments other than in accordance with its
investment objective and policies.
2. 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, 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.
3. 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.
4. 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.
5. 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, 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. (Repurchase agreements maturing in more than 7 days are considered
illiquid for purposes of this restriction.)
6. Invest for the purpose of exercising control or management of another
issuer.
7. 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.
8. Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
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.
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. 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.
11. 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, 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.
Opportunity Fund
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:
1. Invest for the purpose of exercising control or management of another
issuer.
2. 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.
5
<PAGE>
3. Invest more than 15% of its net assets in illiquid securities.
4. 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.
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.)
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, 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.
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, 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.
3. 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.
4. Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities in accordance
with its investment objective and policies).
5. Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to one-third of the value of its
total assets (any such borrowings under this section will not be
collateralized). If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its
indebtedness from money borrowed, the Fund will, within three business
days, reduce its indebtedness to the extent necessary. (The Fund will not
borrow for leverage purposes, and while borrowings are outstanding
securities will not be purchased.)
6. Concentrate more than 10% of the Fund's net assets in any one industry,
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.
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, 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.
8. Issue senior securities except as permitted under the 1940 Act.
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.
6
<PAGE>
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:
1. Invest for the purpose of exercising control or management of another
issuer.
2. 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").
3. Invest more than 15% of its net assets in illiquid securities.
Master/feeder fund structure. The Board of Trustees has the discretion to retain
the current distribution arrangement for the Funds while investing in a master
fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT POLICIES AND TECHNIQUES
U.S. Government Securities. 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 "Zero Coupon Government Securities"
below 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 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 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
7
<PAGE>
interest rates, prepayments of Mortgage-Backed Securities may decline, resulting
in the extension of the Fund's average portfolio maturity. As a result, the
Fund's portfolio may experience greater volatility during periods of rising
interest rates than under normal market conditions. With respect to U.S.
Government Securities supported only by the credit of the issuing agency or by
an additional line of credit with the U.S. Treasury, there is no guarantee that
the U.S. Government will provide support to such agencies and such securities
may involve risk of loss of principal and interest.
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 Statement of Additional Information. 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 Statement of Additional Information. 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.
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
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portfolio or pool of securities, the payments on which are used to pay interest
on each class and to retire successive maturities in sequence. These
relationships may in effect "strip" the interest payments from principal
payments of the underlying securities and allow for the separate purchase of
either the interest or the principal payments, sometimes called interest only
(IO) and principal only (PO) securities. Collateralized obligations are designed
to be retired as the underlying securities are repaid. In the event of
prepayment on or call of such securities, the class of collateralized obligation
first to mature generally will be paid down first. Therefore, although in most
cases the issuer of collateralized obligations will not supply additional
collateral in the event of such prepayment, there will be sufficient collateral
to secure collateralized obligations that remain outstanding. It is anticipated
that no more than 10% of a Fund's total assets will be invested in IO and PO
securities. Governmentally-issued and privately-issued IO's and PO's will be
considered illiquid for purposes of a Fund's limitation on illiquid securities,
however, the Board of Trustees of a Fund may adopt guidelines under which
governmentally-issued IO's and PO's may be determined to be liquid.
Zero Coupon Government Securities. Subject to its investment objective and
policies, a Fund may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. 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.
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.
High Yield (High Risk) Bonds. 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, 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.
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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, 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.
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 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
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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.
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. The Short-Intermediate
Government Fund may, subject to its quality standards, invest in U.S.
Dollar-denominated securities of foreign issuers.
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than
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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.
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 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.
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 herein 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
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substantial rates of inflation for many years. Inflation and rapid fluctuations
in inflation rates have had and may continue to have very negative effects on
the economies and securities markets of certain developing markets. Economies in
emerging markets generally are dependent heavily upon international trade and,
accordingly, have been and may continue to be affected adversely by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be affected
adversely by economic conditions in the countries with which they trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets.
Such markets have different settlement and clearance procedures. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Such settlement problems may cause emerging market securities to
be illiquid. The inability of a Fund to make intended securities purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to a Fund due to subsequent declines in
value of the portfolio security or, if a Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Certain
emerging markets may lack clearing facilities equivalent to those in developed
countries. Accordingly, settlements can pose additional risks in such markets
and ultimately can expose a Fund to the risk of losses resulting from a Fund's
inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for a Fund's portfolio securities in such
markets may not be readily available. A Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Fund. Emerging markets may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
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
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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
operate effectively 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.
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.
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.
Regulatory Restrictions. To the extent required to comply with applicable
regulations, when purchasing a futures contract, writing a put option or
entering into a delayed delivery purchase or a forward currency exchange
purchase, a Fund will maintain eligible securities in a segregated account. A
Fund will use cover in connection with selling a futures contract.
A Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only in an attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Fund holds or intends to purchase.
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
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mark. The exercise price of an option may be below, equal to or above the
current market value of the underlying security at the time the option is
written. The buyer of a put who also owns the related security is protected by
ownership of a put option against any decline in that security's price below the
exercise price less the amount paid for the option. The ability to purchase put
options allows a Fund to protect capital gains in an appreciated security it
owns, without being required to actually sell that security. At times a Fund
would like to establish a position in a security upon which call options are
available. By purchasing a call option, a Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market, because a Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received.
Over-the-Counter Options. 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 ("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
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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 herein for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
Options on Securities Indices. A Fund 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
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securities or other assets. All transactions in the futures market are made,
offset or fulfilled through a clearing house associated with the exchange on
which the contracts are traded. A Fund will incur brokerage fees when it
purchases or sells contracts, and will be required to maintain margin deposits.
At the time a Fund enters into a futures contract, it is required to deposit
with its custodian, on behalf of the broker, a specified amount of cash or
eligible securities, called "initial margin." The initial margin required for a
futures contract is set by the exchange on which the contract is traded.
Subsequent payments, called "variation margin," to and from the broker are made
on a daily basis as the market price of the futures contract fluctuates. The
costs incurred in connection with futures transactions could reduce a Fund's
return. Futures contracts entail risks. If the investment manager's judgment
about the general direction of markets or exchange rates is wrong, the overall
performance may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the 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 herein. 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 (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. 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.
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 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. 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-
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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.
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. 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
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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.
If a Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund's entering into a
forward contract for the sale of foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain that might result should the value of such currency increase. A
Fund may have to convert its holdings of foreign currencies into U.S. Dollars
from time to time in order to meet such needs as Fund expenses and redemption
requests. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (the "spread") between the
prices at which they are buying and selling various currencies.
A Fund will not enter into forward contracts or maintain a net exposure in such
contracts 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.
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. 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
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predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor.
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.
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 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 forms 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.
Borrowing Money. 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
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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% 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.
Additional Investment Information. A Fund will not normally engage in the
trading of securities for the purpose of realizing short-term profits, but will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and its investment objective. Accordingly, a Fund
may sell fixed income securities in anticipation of a rise in interest rates and
purchase such securities for inclusion in its portfolio in anticipation of a
decline in interest rates. Frequency of portfolio turnover will not be a
limiting factor should the investment manager deem it desirable to purchase or
sell securities. The portfolio turnover rates for the Funds are listed under
"Financial Highlights." 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.
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.
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. 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.
Trustees' Power to Change Objectives and Policies. Except as specifically stated
to the contrary, the objectives and policies of the Funds may be changed by the
Trustees without a vote of the shareholders.
BROKERAGE COMMISSIONS
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for a Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Advisor seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by a Fund to reported commissions paid by others. The Advisor
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.
21
<PAGE>
The Funds' purchases and sales of fixed income securities are generally placed
by the Advisor with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply research, market and statistical information to a
Fund. The term "research and market statistical information" includes advice as
to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchases or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Advisor is authorized when placing portfolio transactions for a Fund to pay
a brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research, market or statistical information. The Advisor may place orders
with broker/dealers on the basis that the broker/dealer has or has not sold
shares of a Fund. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available elsewhere.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor, the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Advisor, it is the opinion of
the Advisor that such information only supplements the Advisor's own research
effort since the information must still be analyzed, weighed, and reviewed by
the Advisor's staff. Such information may be useful to the Advisor in providing
services to clients other than a Fund, and not all such information is used by
the Advisor in connection with a Fund. Conversely, such information provided to
the Advisor by broker/dealers through whom other clients of the Advisor effect
securities transactions may be useful to the Advisor in providing services to a
Fund.
The Trustees review from time to time whether the recapture for the benefit of a
Fund of some portion of the brokerage commissions or similar fees paid by a Fund
on portfolio transactions is legally permissible and advisable.
The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years (except the Opportunity Fund which commenced operations on
October 1, 1997) and for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided.
<TABLE>
<CAPTION>
Allocated to Firms
Based on Research in
--------------------
Fund Fiscal 1998 Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjustable Rate $0 $4,000 $8,000 $29,000
Diversified $0 $5,155,000 $3,860,000 $2,927,000
Government $0 $769,000 $887,000 $806,000
High Yield $0 $64,235,000 $43,566,000 $46,280,000
Income and Capital $0 $619,000 $2,156,000 $1,624,000
Mortgage $0 $679,000 $570,000 $545,000
Short-Intermediate
Government $17,000 $15,000 $44,000
Opportunity $0 $752,000 N/A N/A
</TABLE>
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York, is each Fund's investment manager. Scudder Kemper is approximately 70%
owned by Zurich Financial Services, a newly formed global insurance and
financial services company. The balance of the Advisor is owned by its officers
and employees. Pursuant to
22
<PAGE>
investment management agreements, Scudder Kemper acts as each Fund's investment
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical and administrative services,
and permits any of its officers or employees to serve without compensation as
trustees or officers of 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 Scudder Kemper), 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 and maintaining all accounting records thereto,
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"), 222 South Riverside Plaza, Chicago, Illinois, 60606, 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.
Scudder Kemper has agreed to reimburse the Government Fund should all operating
expenses of the Fund, including the compensation of Scudder Kemper, 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 Scudder Kemper 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
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by (a) a majority
of the trustees who are not parties to such agreement or interested persons of
any such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. Each Fund's investment
management agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund, and
will terminate automatically upon assignment. If additional Funds become subject
to an investment management agreement, the provisions concerning continuation,
amendment and termination shall be on a Fund by Fund basis. Additional Funds may
be subject to a different agreement.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by
Scudder Kemper. The investment management agreements provide that Scudder Kemper
shall act as each Fund's investment adviser, manage its investments and provide
it with various services and facilities.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former investment manager to each Fund, and
Scudder changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting in December 1998.
The current investment management fee rates are payable monthly, at the annual
rates shown below.
23
<PAGE>
<TABLE>
<CAPTION>
Adjustable Rate,
Income and
Capital,
Mortgage and
Short-
Intermediate Diversified and
Average Daily Net Assets Gov't High Yield Government Opportunity
- ------------------------ ----- ---------- ---------- -----------
<S> <C> <C> <C> <C>
$0 - $250 million 0.55% 0.58% 0.45% 0.65%
$250 million - $1 billion 0.52 0.55 0.43 0.62
$1 billion - $2.5 billion 0.50 0.53 0.41 0.60
$2.5 billion - $5 billion 0.48 0.51 0.40 0.58
$5 billion - $7.5 billion 0.45 0.48 0.38 0.55
$7.5 billion - $10 billion 0.43 0.46 0.36 0.53
$10 billion - $12.5 billion 0.41 0.44 0.34 0.51
Over $12.5 billion 0.40 0.42 0.32 0.49
</TABLE>
The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below. (The Opportunity Fund commenced operations on
October 1, 1997.)
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate $415,000 493,000 627,000
Diversified $4,986,000 4,664,000 4,239,000
Government $14,451,000 15,888,000 18,159,000
High Yield $27,887,000 23,419,000 19,436,000
Income and Capital $3,472,000 3,162,000 3,194,000
Mortgage $11,862,000 13,793,000 16,340,000
Short-Intermediate Government $920,000 1,014,000 1,230,000
Opportunity $102,000 -- --
</TABLE>
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Funds and maintaining all accounting records related thereto. Currently,
SFAC receives no fee for its services to the Funds.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, a wholly owned
subsidiary of Scudder Kemper, 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
1940 Act. 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
24
<PAGE>
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.
Class A Shares. KDI receives no compensation from the Trusts as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase,
Repurchase and Redemption 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. The following information concerns the underwriting
commissions paid in connection with the distribution of each Fund's Class A
shares for the fiscal years noted.
<TABLE>
<CAPTION>
Commissions Commissions KDI Commissions Paid to
Class A Shares Fiscal Year Retained by KDI Paid to All Firms KDI Affiliated Firms
- -------------- ----------- --------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Adjustable Rate 1998 $8,000 91,000 0
1997 $8,000 58,000 0
1996 $11,000 88,000 0
Diversified 1998 $151,000 1,236,000 0
1997 $178,000 1,166,000 0
1996 $129,000 737,000 69,000
Government 1998 $227,000 1,665,000 8,000
1997 $221,000 1,410,000 10,000
1996 $330,000 2,024,000 91,000
High Yield 1998 $1,521,000 12,060,000 174,000
1997 $1,714,000 11,779,000 181,000
1996 $857,000 6,035,000 226,000
Income and Capital 1998 $70,000 578,000 0
1997 $53,000 1,283,000 0
1996 $115,000 914,000 74,000
Mortgage 1998 $35,000 272,000 0
1997 $29,000 201,000 0
1996 $38,000 226,000 11,000
Opportunity 1998 $187000 26,000 0
Short-Intermediate 1998 $6,000 147,000 0
Government 1997 $8,000 82,000 0
1996 $9,000 70,000 1,000
</TABLE>
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 , 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 1940 Act, 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.
25
<PAGE>
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.
For its services under the distribution agreement, KDI receives a fee from each
Fund pursuant to the Rule 12b-1 Plan, payable monthly, at the annual rate of
0.75% 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 "Purchase, Repurchase and Redemption 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%.
For its services under the distribution agreement, KDI receives a fee from each
Fund pursuant to the Rule 12b-1 Plan, payable monthly, at the annual rate of
0.75% 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 0.75% 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 0.75% 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 "Purchase, Repurchase and Redemption of Shares- Contingent Deferred
Sales Charges- Class C Shares".
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 (The Opportunity Fund commenced
operations on October 1, 1997). A portion of the marketing, sales and operating
expenses shown below could be considered overhead expense.
26
<PAGE>
<TABLE>
<CAPTION>
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Distribution Deferred Distribution Paid by
Fees Paid Sales Fees Paid KDI to KDI Advertising Marketing Misc.
Class B Fiscal by Fund Charges by KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year to KDI Paid to KDI Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- ------ ----------- ----- ----- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable 1998 53,000 31,000 78,000 0 10,243 742 20,074 18,228 87,819
Rate 1997 $51,000 31,000 112,000 0 10,000 1,000 25,000 492,000 36,000
1996 $42,000 19,000 56,000 5,000 13,000 1,000 31,000 12,000 26,000
Diversified 1998 2,208,000 502,000 2,939,000 0 359,087 42,027 741,917 131,028 814,441
1997 $2,148,000 419,000 2,911,000 0 368,000 26,000 1,018,000 121,000 640,000
1996 $1,909,000 446,000 1,739,000 54,000 409,000 33,000 871,000 165,000 468,000
Government 1998 677,000 186,000 1,288,000 0 105,653 14,079 226,194 45,628 489,426
1997 $528,000 234,000 665,000 0 116,000 8,000 303,000 43,000 405,000
1996 $475,000 181,000 1,206,000 34,000 336,000 27,000 690,000 135,000 308,000
High Yield 1998 10,804,000 2,203,000 18,022,000 0 2,242,157 191,602 4,538,360 682,073 3,001,886
1997 $ 1,473,000 16,578,000 0 2,127,000 153,000 5,700,000 583,000 1,500,000
8,925,000
1996 $7,450,000 1,324,000 7,288,000 91,000 1,549,000 119,000 3,416,000 638,000 567,000
Income and 1998 705,000 199,000 1,001,000 0 94,710 11,383 200,587 42,317 441,045
Capital 1997 $600,000 211,000 588,000 0 97,000 7,000 254,000 39,000 378,000
1996 $572,000 146,000 1,393,000 89,000 390,000 31,000 804,000 132,000 295,000
Mortgage 1998 3,968,000 734,000 542,000 0 78,207 6,758 153,532 46,272 -955,066
1997 $ 1,362,000 640,000 0 116,000 8,000 300,000 57,000 -0-
6,685,000
1996 $9,328,000 2,147,000 982,000 22,000 325,000 23,000 656,000 119,000 514,000
Opportunity 1998 52,000 6,000 487,000 0 46,797 3,897 89,792 38,890 27,289
Short- 1998 702,000 192,000 258,000 0 34,966 3,047 70,295 27,554 -374,844
Intermediate 1997 $1,071,000 327,000 335,000 0 52,000 4,000 136,000 31,000 -0-
Government 1996 $1,403,000 486,000 378,000 2,000 111,000 9,000 235,000 44,000 -0-
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Distribution Deferred Distribution Paid by
Fees Paid Sales Fees Paid KDI to KDI Advertising Marketing Misc.
Class C Fiscal by Fund Charges by KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year to KDI Paid to KDI Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- ------ ----------- ----- ----- ---------- -------- -------- -------- --------
Adjustable 1998 10,000 1,000 14,000 0 5,131 373 9,366 14,033 19,184
Rate 1997 $9,000 0 8,000 0 4,000 0 11,000 61,000 12,000
1996 $9,000 0 9,000 0 9,000 1,000 20,000 8,000 8,000
Diversified 1998 175,000 16,000 225,000 0 66,838 8,554 146,568 32,759 14,435
1997 $83,000 5,000 106,000 0 49,000 4,000 136,000 24,000 29,000
1996 $33,000 0 52,000 0 34,000 3,000 54,000 14,000 12,000
27
<PAGE>
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Distribution Deferred Distribution Paid by
Fees Paid Sales Fees Paid KDI to KDI Advertising Marketing Misc.
Class C Fiscal by Fund Charges by KDI to Affiliated and Prospectus and Sales Operating Interest
Shares Year to KDI Paid to KDI Firms Firms Literature Printing Expenses Expenses Expenses
- ------ ---- ------ ----------- ----- ----- ---------- -------- -------- -------- --------
Government 1998 105,000 2,000 149,000 0 26,880 4,121 59,658 19,821 11,029
1997 $62,000 1,000 72,000 0 16,000 1,000 44,000 8,000 30,000
1996 $51,000 1,000 60,000 0 57,000 5,000 113,000 8,000 19,000
High Yield 1998 1,298,000 83,000 1,432,000 0 491,828 41,776 1,002,114 163,164 384,393
1997 $657,000 58,000 944,000 0 411,000 29,000 1,111,000 128,000 210,000
1996 $245,000 3,000 370,000 0 316,000 23,000 559,000 90,000 79,000
Income and 1998 93,000 2,000 114,000 0 27,577 3,411 58,411 19,627 9,491
Capital
1997 $ 53,000 2,000 60,000 0 23,000 2,000 60,000 16,000 24,000
1996 $31,000 1,000 42,000 0 40,000 3,000 86,000 2,000 12,000
Mortgage 1998 24,000 - 26,000 0 5,808 443 11,282 12,512 11,791
1997 $16,000 1,000 21,000 0 7,000 0 19,000 5,000 8,000
1996 $12,000 0 15,000 0 8,000 1,000 17,000 1,000 5,000
Opportunity 1998 9,000 1,000 19,000 0 7,173 595 15,074 13,590 1,048
Short- 1998 40,000 5,000 38,000 0 5,706 508 12,857 13,066 36,187
Intermediate 1997 $ 34,000 3,000 42,000 0 18,000 1,000 50,000 16,000 28,000
Government 1996 $25,000 1,000 29,000 0 36,000 3,000 76,000 12,000 17,000
</TABLE>
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 0.25%
of average daily net assets of each class 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 0.15% (0.25% 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 0.25% 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 0.25% 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 0.25% (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. Firms to which service fees may be paid include
affiliates of KDI.
28
<PAGE>
The following information concerns the administrative services fee paid by each
Fund to KDI for fiscal years ended 1998, 1997 and 1996(except the Opportunity
Fund which commenced operations on October 1, 1997).
<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------
Total Service Fees Service Fees Paid by KDI
Fund Fiscal Year Class A Class B Class C Paid by KDI to Firms to KDI Affiliated Firms
- ---- ----------- ------- ------- ------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate 1998 $141,000 17,000 3,000 165,000 0
1997 $169,000 17,000 3,000 188,000 0
1996 $213,000 14,000 3,000 231,000 5,000
Diversified 1998 $1,244,000 719,000 58,000 2,074,000 7,000
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
Government 1998 $6,413,000 222,000 35,000 6,718,000 0
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
High Yield 1998 $8,011,000 3,506,000 428,000 12,147,000 54,000
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
Income and 1998 $1,147,000 229,000 30,000 1,434,000 0
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
Mortgage 1998 $4,254,000 1,256,000 8,000 5,521,000 53,000
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
Opportunity 1998 $14,000 17,000 3,000 57,000 0
Short- 1998 $158,000 226,000 12,000 399,000 0
Intermediate
Government 1997 $88,000 345,000 12,000 450,000 0
1996 $80,000 453,000 8,000 546,000 11,000
</TABLE>
29
<PAGE>
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
Scudder Kemper 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, 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 Scudder Kemper, serves as
"Shareholder Service Agent" of each Fund, and as such, performs all of IFTC's
duties as transfer agent and dividend paying agent. IFTC receives as transfer
agent, and pays to KSvC as follows: prior to January 1, 1999, 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 and effective January 1, 1999, annual
account fees of $14.00 ($23.00 for retirement accounts) plus account set up
charges, annual fees associated with the contingent deferred sales charges
(Class B shares only), an asset based fee of 0.02% and out-of-pocket expense
reimbursement.. IFTC's fee is reduced by certain earnings credits in favor of
the Fund. The following shows for each Fund's 1998 fiscal year the shareholder
service fees IFTC remitted to KSvC.
Fund Fees to KSvC
- ---- ------------
Adjustable Rate $234,000
Diversified $1,944,000
Government $3,275,000
High Yield $5,963,000
Income and Capital $1,051,000
Mortgage $3,302,000
Opportunity Fund $19,000
Short-Intermediate Government $515,000
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.
30
<PAGE>
PURCHASE, REPURCHASE, AND REDEMPTION OF SHARES
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. Class I shares are
offered at net asset value without an initial sales charge and are not subject
to a contingent deferred sales charge or a Rule 12b-1 distribution fee. When
placing purchase orders, investors must specify whether the order is for Class
A, Class B, Class C or Class I 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. 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 4.5% None Initial sales charge waived or
of the public offering price (3.5% for reduced for certain purchases
the Adjustable Rate and Short
Intermediate Government Funds)
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares six
charge of 4% of redemption proceeds; years after issuance
declines to zero after six years
Class C Contingent deferred sales charge of 1% 0.75% No conversion feature
of redemption proceeds for redemptions
made during first year after purchase
Class I None None
</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).
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.
31
<PAGE>
Adjustable Rate and Short-Intermediate Government Funds
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage As a Percentage of as a Percentage of
Amount of Purchase of Offering Price Net Asset 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 0.00** 0.00** ***
</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
------------
Allowed to Dealers
As a Percentage As a Percentage of as a Percentage of
Amount of Purchase of Offering Price Net Asset 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 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 "Purchase, Repurchase and Redemption of Shares -- Contingent
Deferred Sales Charge -- Large Order NAV Purchase Privilege."
32
<PAGE>
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, 0.50% on the next $45 million and 0.25% 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. No compensation will be paid pursuant to
this paragraph with respect to plans within the KemStar(TM) program. 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-transferable 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 0.25%
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.
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 Series, Inc. ("KVS") on September 8, 1995, and have
continuously owned shares of KVS(or a Kemper Fund acquired by exchange of KVS
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
acting solely as agent for their clients, 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 or
agency commission program under which such clients pay a fee to the investment
adviser or other firm for portfolio management or agency brokerage 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
33
<PAGE>
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 0.50% 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 redemption of
Class B shares. See "Purchase, Repurchase and Redemption 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. 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 "Purchase, Repurchase and Redemption of Shares -- Contingent Deferred Sales
Charge -- Class C Shares." KDI currently advances to firms the first year
distribution fee at a rate of 0.75% 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 0.75%
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."
Purchase of Class I Shares. Class I shares are offered at net asset value
without an initial sales charge and are not subject to a contingent deferred
sales charge or a Rule 12b-1 distribution fee. Also, there is no administration
services fee charged to Class I shares. As a result of the relatively lower
expenses for Class I shares, the level of income dividends per share (as a
percentage of net asset value) and, therefore, the overall investment value,
will typically be higher for Class I shares than for Class A, Class B, or Class
C shares.
34
<PAGE>
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Scudder
Kemper Investments, Inc. ("Scudder Kemper") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Scudder Kemper and its investment advisory affiliates that invest at least $1
million in a Fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee based
advisory services that invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a Fund; and (6) investment
companies managed by Scudder Kemper that invest primarily in other investment
companies. Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the Funds, and, in the
case of category 4 above, selected dealers authorized by KDI. Share certificates
are not available for Class I shares.
General. 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. 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 are provided because of anticipated economies in
sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange ("Exchange") is closed
other than customary weekend and holiday closings or during any period in which
trading on the Exchange is restricted, (b) during any period when an emergency
exists as a result of which (i) disposal of a Fund's investments is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund to
determine the value of its net assets, or (c) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of a
Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in the Fund's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date.
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 as 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.
35
<PAGE>
REPURCHASE AND REDEMPTION 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, Repurchase and Redemption of
Shares -- Initial Sales Charge Alternative -- Class A Shares"), the redemption
of Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below), and the
redemption of Class C shares within the first year following purchase may be
subject to a contingent deferred sales charge (see "Contingent Deferred Sales
Charge -- Class C Shares" below).
Because of the high cost of maintaining small accounts, the Funds 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 guardian and custodial account
holders, provided the trustee, executor guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. 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
36
<PAGE>
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 Scudder Kemper 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 0.50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent or its affiliates;
(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.
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<PAGE>
Contingent Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------- ------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
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:
Contingent Deferred Sales Charge
--------------------------------
<TABLE>
<CAPTION>
Shares Purchases on or
Shares Purchases after February 1, 1991
Year of Redemption on or after and Before Shares Purchased Before
After Purchase March 1, 1993 March 1, 1993 February 1, 1991
- -------------- ------------- ------------- ----------------
<S> <C> <C> <C>
First 4% 3% 5%
Second 3% 3% 4%
Third 3% 2% 3%
Fourth 2% 2% 2%
Fifth 2% 1% 2%
Sixth 1% 1% 1%
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
- -- Systematic Withdrawal Plan" below) and (d) for redemptions made pursuant to
any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; and (e)
for redemptions to satisfy required minimum distributions after age 70 1/2 from
an IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
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
38
<PAGE>
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 (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, and (f) 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.
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, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. 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, Repurchase and Redemption of Shares
- -- Initial Sales Charge Alternative -- Class A Shares") or Class B shares or
Class C shares and incurs a contingent deferred sales charge may reinvest up to
the full amount redeemed at net asset value at the time of the reinvestment in
Class A shares, Class B shares or Class C shares, as the case may be, of a Fund
or of other Kemper Mutual Funds. The amount of any contingent deferred sales
charge also will be reinvested. These reinvested shares will retain their
original cost and purchase date for purposes of the contingent deferred sales
charge. Also, a holder of Class B shares who has redeemed shares may reinvest up
to the full amount redeemed, less any applicable contingent deferred sales
charge that may have been imposed upon the redemption of such shares, at net
asset value in Class A shares of a Fund or of the other Kemper Mutual Funds
listed under "Special Features -- Class A Shares -- Combined Purchases."
Purchases through the reinvestment privilege are subject to the minimum
investment requirements applicable to the shares being purchased and may only be
made for Kemper Mutual Funds available for sale in the shareholder's state of
residence as listed under "Special Features -- Exchange Privilege." The
reinvestment privilege can be used only once as to any specific shares and
reinvestment must be effected within six months of the redemption. If a loss is
realized on the redemption of a Funds' shares, the reinvestment in the same Fund
may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
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 Adjustable Rate U.S. Government Fund, Kemper Aggressive
Growth Fund, Kemper Asian Growth Fund, Kemper Blue Chip Fund, Kemper California
Tax-Free Income Fund, Kemper Cash Reserves Fund, Kemper Contrarian Fund, Kemper
Diversified Income Fund, Kemper Emerging Markets Growth Fund, Kemper Emerging
Markets Income Fund, Kemper Europe Fund, Kemper Florida Tax-Free Income Fund,
Kemper Global Blue Chip Fund, Kemper Global Income Fund, Kemper Growth Fund,
Kemper High Yield Fund, Kemper High Yield Opportunity, Kemper Horizon 10+
Portfolio, Kemper Horizon 20+ Portfolio, Kemper Horizon 5 Portfolio, Kemper
Income And Capital Preservation Fund,
39
<PAGE>
Kemper Intermediate Municipal Bond, Kemper International Fund, Kemper
International Growth and Income Fund, Kemper Large Company Growth Fund
(currently available only to employees of Scudder Kemper Investments, Inc.; not
available in all states), Kemper Latin America Fund, Kemper Municipal Bond Fund,
Kemper New York Tax-Free Income Fund, Kemper Ohio Tax-Free Income Fund, Kemper
Quantitative Equity Fund, Kemper Research Fund (currently available only to
employees of Scudder Kemper Investments, Inc.; not available in all states),
Kemper Retirement Fund -- Series I, Kemper Retirement Fund -- Series II, Kemper
Retirement Fund -- Series III, Kemper Retirement Fund -- Series IV, Kemper
Retirement Fund -- Series V, Kemper Retirement Fund -- Series VI, Kemper
Retirement Fund -- Series VII, Kemper Short-Intermediate Government Fund, Kemper
Small Cap Value Fund, Kemper Small Cap Value+Growth Fund (currently available
only to employees of Scudder Kemper Investments, Inc.; not available in all
states), Kemper Small Capitalization Equity Fund, Kemper Small Cap Relative
Value Fund, Kemper Technology Fund, Kemper Total Return Fund, Kemper U.S.
Government Securities Fund, Kemper U.S. Growth and Income Fund, Kemper U.S.
Mortgage Fund, Kemper Value+Growth Fund, Kemper Worldwide 2004 Fund,
Kemper-Dreman High Return Equity Fund, Kemper-Dreman Financial Services Fund
("Kemper 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 or its affiliates may include: (a) Money Market
Funds as "Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual
Fund, and (c) the value of any other plan investments, such as guaranteed
investment contracts and employer stock, maintained on such subaccount record
keeping system.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the maximum offering price) of all shares
of such Kemper Mutual Funds held of record as of the initial purchase date under
the Letter as an "accumulation credit" toward the completion of the Letter, but
no price adjustment will be made on such shares. Only investments in Class A
shares of a Fund are included for this privilege.
Class A Shares -- Cumulative Discount. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund being purchased, the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
Class A Shares -- Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
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
40
<PAGE>
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 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 "Purchase,
Repurchase and Redemption 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.
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<PAGE>
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 "Purchase, Repurchase and Redemption 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.
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.
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<PAGE>
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.
ADDITIONAL TRANSACTION INFORMATION
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and KDI may pay them a transaction fee up to
the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of a Fund sold by the firm under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
Kemper Service Company ("KSvC"), (iii) the registered representative placing the
trade is a member of ProStar, a group of persons designated by KSvC in
acknowledgment 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, to firms that sell shares of the Funds. 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."
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
43
<PAGE>
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 Statement of Additional
Information 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 Statement of Additional Information 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 Statement
of Additional Information.
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 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. 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 Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributedA 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
44
<PAGE>
straddle rules of the Code would require deferral of certain losses realized on
positions of a straddle to the extent that the Fund had unrealized gains in
offsetting positions at year end.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the currency gain or loss may be treated as ordinary
income or loss. If such transactions result in greater net ordinary income, the
dividends paid by the Fund will be increased; if the result of such transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.
At August 31, 1998 the Adjustable Rate Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $9,652,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1999 through 2006. In addition, from
November 1, 1997 through August 31, 1998, the Fund incurred approximately
$125,000 of net realized losses. As permitted by tax regulations, the Fund
intends to elect to defer these losses and treat them as arising in the fiscal
year ending August 31, 1990. The Fund does not intend to distribute realized
capital gains until the capital loss carryover is exhausted.
At October 31, 1998, the Diversified Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $54,943,000, 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.
At October 31, 1998, the Government Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $606,764,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 2002 through 2004. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At October 31, 1998, the Income and Capital Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $7,984,000, 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, 1998, the High Yield Fund had an accumulated net realized
capital loss for federal income tax purposes of approximately $45,015,000, which
is available to offset future taxable capital gains. If not applied, the
carryover expires during the period 1999 through 2004. The Fund does not intend
to distribute realized capital gains until the capital loss carryover is
exhausted.
At September 30, 1998, the Mortgage Fund had an accumulated net realized capital
loss for federal income tax purposes of approximately $612,745,000, which is
available to offset future taxable capital gains. If not applied, the carryover
expires during the period 2000 through 2005. The Fund does not intend to
distribute realized capital gains until the capital loss carryover is exhausted.
At September 30, 1998, the Short-Intermediate Government Fund had an accumulated
net realized capital loss for federal income tax purposes of approximately
$22,570,000, which is available to offset future taxable capital gains. If not
applied, the carryover expires during the period 2002 through 2005. 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
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<PAGE>
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 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"." 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. 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 12 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 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
46
<PAGE>
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
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 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
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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.
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 each class. 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 Scudder Kemper may also advertise performance information
before and after the effect of the fee waiver or expense absorption.
Performance results for Funds receiving a waiver of fees or absorption of
expenses 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.
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 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.
<TABLE>
<CAPTION>
Fund (Period Ended) Class A Shares Class B Shares Class C Shares
- ------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Adjustable Rate (8/31/98) 4.25% 3.75% 3.78%
Diversified (10/31/98) 7.26% 6.60% 6.73%
Government (10/31/98) 5.69% 5.04% 5.06%
High Yield (9/30/98) 9.91% 9.49% 9.51%
Income and Capital (10/31/98) 4.45% 3.79% 3.79%
Mortgage (9/30/98) 5.54% 4.86% 5.03%
Opportunity Fund (9/30/98) 9.65% 9.33% 9.33%
Short-Intermediate Government (9/30/98) 4.48% 3.70% 3.94%
</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:
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YIELD = 2 [(a-b +1/cd)^6 - 1]
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, Class C
and Class I 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. 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. 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.
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
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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.
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 about each Fund's performance also appears in its Annual Report to
Shareholders, which is available without charge from the applicable Fund.
The yield or price volatility of a Fund (particularly the Adjustable Rate Fund)
may be compared to various securities, such as U.S. Government Securities, or
indexes, such as the COFI referred to above or the constant Maturity Treasury
Index ("CMT") published by the Federal Reserve Board. A Fund may include in its
sales literature and shareholder reports a quotation of the current
"distribution rate" for the Fund. Distribution rate is simply a measure of the
level of dividends distributed for a specified period. It differs from yield,
which is a measure of the income actually earned by the Fund's investments, and
from total return, which is a measure of the income actually earned by, plus the
effect of any realized and unrealized appreciation or depreciation of, such
investments during the period. Distribution rate is, therefore, not intended to
be a complete measure of performance. Distribution rate may sometimes be greater
than yield since, for instance, it may include gains from the sale of options or
other short-term and possibly long-term gains (which may be non-recurring) and
may not include the effect of amortization of bond premiums.
Comparative information with respect to certain indices may be included. Please
note the differences and similarities between the investments which a Fund may
purchase and the investments measured by the applicable indices. The Consumer
Price Index is generally considered to be a measure of inflation. The Lehman
Brothers Adjustable Rate Index generally represents the performance of
adjustable rate mortgages during various market conditions. The Lehman Brothers
Aggregate Bond Index generally represents the performance of intermediate and
long-term government bonds and investment grade corporate debt securities and
mortgage-backed securities during various market conditions. The Lehman Brothers
Government/Corporate Bond Index generally represents the performance of
intermediate and long-term government and investment grade corporate debt
securities during various market conditions. The Merrill Lynch Market Weighted
Index generally represents the performance of short- and intermediate-term
Treasury and GNMA securities during various market conditions. The Salomon
Brothers High Grade Corporate Bond Index generally represents the performance of
high grade long-term corporate bonds during various market conditions. The
Salomon Brothers Long-Term High Yield Index generally represents the performance
of high yield 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.
50
<PAGE>
ADJUSTABLE RATE FUND -- AUGUST 31, 1998
- ---------------------------------------
AVERAGE
ANNUAL TOTAL RETURN Fund Class Fund Fund
TABLE A Shares Class B Class C
Shares Shares
Life of Fund(+) 6.01%
Life of Fund(++) 3.82% 4.28%
Five Years 3.47% N/A N/A
One Year 0.07% 0.10% 3.10%
(+) Since September 1, 1987 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
DIVERSIFIED FUND -- OCTOBER 31, 1998
- ------------------------------------
Fund Fund Fund
AVERAGE ANNUAL TOTAL Class A Class B Class C
RETURN TABLE Shares Shares Shares
Life of Fund(+) 9.95%
Life of Fund(++) 6.05% 6.58%
Ten Years 10.10% N/A N/A
Five Years 5.65% N/A N/A
One Year -3.26% -2.69% 0.28%
(+) Since June 23, 1977 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
(+++) The Fund's current objective became effective February 1, 1989.
GOVERNMENT FUND -- OCTOBER 31, 1998
- -----------------------------------
AVERAGE
ANNUAL TOTAL RETURN Fund Fund Class Fund
TABLE Class A B Shares Class C
Shares Shares
Life of Fund(+) 8.92%
Life of Fund(++) 6.65% 7.09%
Ten Years 7.74% N/A N/A
Five Years 5.51% N/A N/A
One Year 2.74% 3.67% 6.66%
(+) 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.
51
<PAGE>
HIGH YIELD FUND -- SEPTEMBER 30, 1998
- -------------------------------------
AVERAGE
ANNUAL TOTAL RETURN Fund Class Fund Class Fund Class
TABLE A Shares B Shares C Shares
Life of Fund(+) 11.17%
Life of Fund (++) 7.76% 8.21%
Ten Years 9.49% N/A N/A
Five Years 7.74% N/A N/A
One Year -5.04% -4.53% -1.89%
(+) Since January 26, 1978 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
INCOME AND CAPITAL FUND -- OCTOBER 31, 1998
- -------------------------------------------
AVERAGE ANNUAL TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
Shares Shares Shares
Life of Fund(+) 9.21%
Life of Fund(++) 7.23% 7.67%
Ten Years 8.03% N/A N/A
Five Years 5.57% N/A N/A
One Year 3.29% 4.20% 7.20%
(+) Since April 15, 1974 for Class A Shares.
(++) Since May 31, 1994 for Class B and Class C Shares.
MORTGAGE FUND -- SEPTEMBER 30, 1998
- -----------------------------------
AVERAGE ANNUAL TOTAL Fund Fund Fund
RETURN TABLE Class A Class B Class C
Shares Shares Shares
Life of Fund(+) 5.67%
Life of Fund(++) 7.17%
Life of Fund(+++) 7.25%
Ten Years N/A 7.17% N/A
Five Years 5.36% 5.27% N/A
One Year 4.09% 5.00% 8.30%
(+) Since January 10, 1992 for Class A Shares.
(++) Since October 26, 1984 for Class B Shares.
(+++) Since May 31, 1994 for Class C Shares.
52
<PAGE>
SHORT-INTERMEDIATE GOVERNMENT FUND -- SEPTEMBER 30, 1998
- --------------------------------------------------------
AVERAGE
ANNUAL TOTAL RETURN Fund Fund Fund
TABLE Class A Class B Class C
Shares Shares Shares
Life of Fund(+) 4.89%
Life of Fund(++) 5.81%
Life of Fund(+++) 5.33%
Five Years 4.18% 3.86% N/A
One Year 4.07% 3.71% 7.01%
+ Since January 10, 1992.
++ Since February 1, 1989.
+++ Since May 31, 1994.
OPPORTUNITY FUND -- SEPTEMBER 30, 1998
- --------------------------------------
AVERAGE
ANNUAL TOTAL RETURN Fund Fund Fund
TABLE Class A Class B Class C
Shares Shares Shares
Life of Fund(+) -3.96% -3.93% -1.11%
(+) Since 10/01/97.
There may be quarterly periods following the periods reflected in the
performance bar chart in the fund's prospectus which may be higher or lower than
those included in the bar chart.
53
<PAGE>
54
<PAGE>
55
<PAGE>
56
<PAGE>
57
<PAGE>
58
<PAGE>
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.
59
<PAGE>
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.
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI, are listed
below. All persons named as officers and trustees also serve in similar
capacities for other funds advised by the Adviser. :
DAVID W. BELIN (6/20/28), Trustee, 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, 16410 Avila Boulevard, Tampa, Florida;
Retired; formerly, Partner, Business Resources Group; formerly, Executive Vice
President, Anchor Glass Container Corporation.
DONALD L. DUNAWAY (3/8/37), Trustee, 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A.O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee, 800 North Lindbergh Boulevard, St. Louis,
Missouri; Vice Chairman and Chief Financial Officer, Monsanto Company
(agricultural, pharmaceutical and nutritional/food products); formerly, Vice
President, Head of International Operations, FMC Corporation (manufacturer of
machinery and chemicals).
DONALD R. JONES (1/17/30), Trustee, 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
THOMAS W. LITTAUER (4/26/55), Trustee and Vice President*, Two International
Place, Boston, Massachusetts; Managing Director, Adviser; formerly, Head of
Broker Dealer Division of an unaffiliated investment management firm during
1997; prior thereto, President of Client Management Services of an unaffiliated
investment management firm from 1991 to 1996.
SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General, U.S. Department of Justice; Director, Bethlehem Steel Corp.
DANIEL PIERCE (3/18/34), Chairman and Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.
WILLIAM P. SOMMERS (7/22/33), Trustee, 333 Ravenswood Avenue, Menlo Park,
California; President and Chief Executive Officer, SRI International (research
and development); formerly, 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.
60
<PAGE>
MARK S. CASADY (9/21/60), President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; formerly, Institutional Sales Manager
of an unaffiliated mutual fund distributor.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary,
Adviser.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
ROBERT C. PECK, JR. (10/1/46), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to June 1997.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63), Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
ELIZABETH C. WERTH (10/1/47), Assistant Secretary*, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Adviser and KDI.
Adjustable Rate Fund:
RICHARD L. VANDENBERG (11/16/49), Vice President* (4), 222 South Riverside
Plaza, Chicago, Illinois; Managing Director, Adviser; formerly, Executive Vice
President and Senior 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; Managing Director, Adviser
ROBERT S. CESSINE (1/5/50), Vice President* (3), 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, Vice President,
Wellington Management Company.
MICHAEL A. McNAMARA (12/28/44), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser
HARRY E. RESIS, JR. (11/24/45), Vice President* (6), 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser; formerly, First Vice President,
PaineWebber Incorporated.
RICHARD L. VANDENBERG, see above*
High Yield Fund :
MICHAEL A. McNAMARA, see above.*
HARRY E. RESIS, JR., see above.*
Income and Capital Preservation Fund:
ROBERT S. CESSINE, see above.*
61
<PAGE>
Mortgage and Short-Intermediate Government Funds (Kemper Portfolios):
FRANK J. RACHWALSKI, JR. (3/26/45), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Adviser
RICHARD L. VANDENBERG, see above,*
* Interested persons as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from a Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during
each Fund's 1998 fiscal year except that the information in the last column is
for calendar year 1997.
<TABLE>
<CAPTION>
Aggregate Compensation From
---------------------------
Total
Compensation
High Income & Kemper Funds
Adjustable Diversified Government Yield Capital Kemper Paid to
Name of Trustee Rate Fund Fund Fund Series Fund Portfolios+ Trustees**
- --------------- --------- ---- ---- ------ ---- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Belin* $1,600 $3,400 $6,000 $5,800 $3,000 $8,000 $113,000
Lewis A. Burnham $1,300 $3,800 $6,700 $6,900 $3,400 $10,100 $117,800
Donald L. Dunaway* $2,100 $4,100 $7,300 $7,400 $3,700 $10,000 $125,900
Robert B. Hoffman $1,800 $3,700 $6,400 $6,600 $3,100 $8,900 $109,400
Donald R. Jones $1,900 $4,000 $6,900 $7,100 $3,500 $9,500 $114,200
Shirley D. Peterson $1,700 $3,400 $6,000 $6,100 $3,000 $8,200 $114,000
William P. Sommers $1,700 $3,400 $6,000 $6,100 $3,000 $8,200 $109,400
</TABLE>
+ Includes Kemper Cash Reserves Fund, Mortgage Fund and Short-Intermediate
Government Fund.
* Includes deferred fees. 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 , (including interest thereon) payable from the Funds are $19,500,
$62,400, $118,300, $88,600, $46,100 and $110,400 for Mr. Belin and $12,500,
$24,200, $54,400, $43,600, $21,600 and $66,400 for Mr. Dunaway for the
Adjustable Rate Fund, Diversified Fund, Government Fund, High Yield Fund,
Income and Capital Fund and Kemper Portfolios+, respectively.
** Includes compensation for service on the boards of 25 Kemper funds with 41
fund portfolios. Each trustee currently serves as a trustee of 26 Kemper
Funds with 48 fund portfolios.
As of November 30, 1998, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund. 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:
62
<PAGE>
Kemper Adjustable Rate U.S. Government Fund
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
Prudential Securities A 8.69
Standard Savings Bank
228 W. Garvey Ave
Monterey Park, CA 91754
National Financial Svcs Corp., B 14.22
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 10.86
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
MLPF&S for the Sole Benefit of ITS B 12.35
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Everen Clearing Corp B 8.63
Attn: Chris Scotto
111 E Kilbourn Ave
Milwaukee, WI 53202
Junior Junction Inc C 5.22
1220 York St
Utica, NY 13502
MLPF&S for the Sole Benefit of ITS C 13.51
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Pacific Piston Ring Co Inc C 10.70
10410 Futhven Ln
Los Angeles, CA 90077
Leenah Al Qattan & Bohdan Radejko JTWROS C 24.22
5 Upper Phillimore Gardens
London W8 United Kingdom
</TABLE>
63
<PAGE>
Kemper U.S. Government Securities Fund
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp., B 7.27
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 5.50
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
MLPF&S for the Sole Benefit of ITS B 6.11
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Donaldson Lufkin Jenrette C 10.26
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
MLPF&S for the Sole Benefit of ITS C 18.78
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
</TABLE>
Kemper High Yield Fund
----------------------
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. B 6.56
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 5.73
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
Everen Clearing Corp Cust B 6.68
Attn Chris Scotto
111 E Kilbourn Avenue
Milwaukee, WI 53202
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. C 7.55
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette C 5.88
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
MLPF&S for the Sole Benefit of ITS C 8.47
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Everen Clearing Corp Cust C 10.06
Attn Chris Scotto
111 E Kilbourn Avenue
Milwaukee, WI 53202
Scudder/Kemper Investments Inc I 5.33
Money Purchase Plan #61486
Attn Peter Drexler
345 Park Ave
New York, NY 10154
Scudder/Kemper Investments Inc I 45.64
Profit Sharing Plan #61486
Attn Peter Drexler
345 Park Ave
New York, NY 10154
Capinco I 8.62
C/O Firstar Trust Co
P.O. Box 1787
Milwaukee, WI 53201
Patterson & Co I 6.46
1525 W Wt Harris Blvd # 1151
Charlotte, NC 28262
</TABLE>
65
<PAGE>
Kemper Diversified Income Fund
------------------------------
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. B 9.90
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 7.59
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
Merrill Lynch B 5.16
165 Broadway
New York, NY 10006
National Financial Svcs Corp. C 14.03
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette C 7.31
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
MLPF&S for the Sole Benefit of ITS C 21.25
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
</TABLE>
66
<PAGE>
Kemper High Yield Opportunity Fund
----------------------------------
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. A 14.31
200 Liberty Street
New York, NY 10281
Edward J. Pipkin Jr A 6.70
5 Graham Ct
Rye, NY 10580
Wheat First Securities Inc A 6.01
707 East Main St
Richmond, VA 23219
Donaldson Lufkin Jenrette B 24.93
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
National Financial Svcs Corp. C 8.63
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette C 7.20
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
Prudential Securities Inc. C 7.94
One New York Plaza
New York, NY 10004-1901
BHC Securities, Inc C 5.98
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
</TABLE>
67
<PAGE>
Kemper Income & Capital Preservation Fund
-----------------------------------------
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
MLPF&S for the Sole Benefit of ITS A 27.13
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
National Financial Svcs Corp. B 6.97
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 5.68
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
MLPF&S for the Sole Benefit of ITS B 7.19
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
National Financial Svcs Corp. C 5.49
200 Liberty Street
New York, NY 10281
MLPF&S for the Sole Benefit of ITS C 30.75
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Lindsay Concrete Prod Inc C 6.12
P.O. Box 578
Canal Fulton, OH 44614
Scudder/Kemper Investments Inc I 5.24
Money Purchase Plan #61486
Attn Peter Drexler
345 Park Ave
New York, NY 10154
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
Scudder/Kemper Investments Inc I 57.92
Profit Sharing Plan #61486
Attn Peter Drexler
345 Park Ave
New York, NY 10154
ZKI Inc. I 8.40
Lasalle National Bank TTEE
222 S. Riverside Plaza 24th Flr
Chicago, IL 60606
</TABLE>
69
<PAGE>
Kemper U.S. Mortgage Fund
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. B 5.08
200 Liberty Street
New York, NY 10281
MLPF&S for the Sole Benefit of ITS B 6.06
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Painewebber C 16.90
1000 Harbor Blvd., 8flr
Weehawken, NJ 07087
MLPF&S for the Sole Benefit of ITS C 30.91
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Morongo Band of Mission Indians C 18.13
Community Service Reserve
11581 Potrero Road
Banning, CA 92220
</TABLE>
70
<PAGE>
Kemper Short-Intermediate Government Fund
-----------------------------------------
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. A 7.09
200 Liberty Street
New York, NY 10281
National Financial Svcs Corp. B 5.94
200 Liberty Street
New York, NY 10281
MLPF&S for the Sole Benefit of ITS B 6.92
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
National Financial Svcs Corp. C 22.46
200 Liberty Street
New York, NY 10281
MLPF&S for the Sole Benefit of ITS C 12.60
Customers
Attn Fund Administration
4800 Deer Lake Dr East 2nd Fl
Jacksonville, FL 32246
Everen Clearing Corp Cust C 6.61
Attn Chris Scotto
111 E Kilbourn Avenue
Milwaukee, WI 53202
</TABLE>
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
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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 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 Fund is a diversified, registered
open-end investment company.
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 Scudder Kemper and its affiliates; and (b) the
following investment advisory clients of Scudder Kemper 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.
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 1940 Act ("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.
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
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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 effected 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 Scudder Kemper 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.
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APPENDIX -- 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.
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.
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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.
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