<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1999
1933 ACT FILE NO. 333-
1940 ACT FILE NO. 811-5482
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
[X] AMENDMENT NO. 9
KEMPER HIGH INCOME TRUST
EXACT NAME OF REGISTRANT SPECIFIED IN CHARTER
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (NUMBER, STREET, CITY, STATE, ZIP CODE)
(312) 781-1121
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
PHILIP J. COLLORA
SCUDDER KEMPER INVESTMENTS, INC.
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
NAME AND ADDRESS (NUMBER, STREET, STATE, ZIP CODE) OF AGENT FOR SERVICE
COPIES TO:
<TABLE>
<S> <C>
ROBERT W. HELM, ESQ. THOMAS A. HALE, ESQ.
DECHERT PRICE & RHOADS SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1775 EYE STREET, N.W. 333 WEST WACKER DRIVE
SUITE 1100 SUITE 2100
WASHINGTON, D.C. 20006-2401 CHICAGO, ILLINOIS 60606
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Beneficial Interest (par
value $.01 per share).............. 7,981,101 shares $10.00 $79,811,010 $22,188
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933 on the basis
of the average of the high and low sales prices for the Fund's shares
reported on the New York Stock Exchange on February 9, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE> 2
KEMPER HIGH INCOME TRUST
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
<C> <S> <C>
1. Outside Front Cover...................... Front Cover Page
2. Inside Front and Outside Back Cover
Page..................................... Front Cover Page
3. Fee Table and Synopsis................... Prospectus Summary; Fee Table
4. Financial Highlights..................... Financial Highlights
5. Plan of Distribution..................... Front Cover Page; Prospectus Summary; The
Offer; Dividends and Distributions:
Dividend Reinvestment and Cash Purchase
Plan
6. Selling Shareholders..................... Not Applicable
7. Use of Proceeds.......................... Prospectus Summary; Use of Proceeds
8. General Description of the Registrant.... Front Cover Page; Prospectus Summary;
Financial Highlights -- Portfolio
Characteristics and Composition; Trading
and Net Asset Value Information; The
Offer; Description of Shares of
Beneficial Interest; Investment
Objectives and Policies; Other Investment
Policies; Risk Factors and Special
Considerations
9. Management............................... Prospectus Summary; Management of the
Fund; Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar
10. Capital Stock, Long-Term Debt, and Other
Securities............................... Front Cover Page; Description of Shares
of Beneficial Interest; Information
Regarding Senior Securities; Dividends
and Distributions: Dividend Reinvestment
and Cash Purchase Plan; Federal Taxation
11. Defaults and Arrears on Senior
Securities............................... Not Applicable
12. Legal Proceedings........................ Not Applicable
13. Table of Contents of the Statement of
Additional Information................... Table of Contents of Statement of
Additional Information
</TABLE>
PART B
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
- -------- ------- -----------------------------------------------
<C> <S> <C>
14. Cover Page............................... Cover Page
15. Table of Contents........................ Table of Contents
16. General Information and History.......... Not Applicable
17. Investment Objective and Policies........ Additional Information About Investments and
Investment Techniques; Investment Restrictions
18. Management............................... Management
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
- -------- ------- -----------------------------------------------
<C> <S> <C>
19. Control Persons and Principal Holders of
Securities............................... Ownership of Shares; Prospectus: Description of
Beneficial Shares
20. Investment Advisory and Other Services... Management; Prospectus: Management of the Fund;
Prospectus: Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar; Prospects:
Accountants
21. Brokerage Allocation and Other
Practices................................ Portfolio Transactions; Prospectus: Portfolio
Trading
22. Tax Status............................... Taxation
23. Financial Statements..................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[SUBJECT TO COMPLETION DATED , 1999]
KEMPER HIGH INCOME TRUST
SHARES OF BENEFICIAL INTEREST
ISSUABLE UPON EXERCISE OF RIGHTS
TO SUBSCRIBE FOR SUCH SHARES
Kemper High Income Trust (the "Fund") is issuing transferable rights
("Rights") to its shareholders. These Rights will allow you to subscribe for
shares of beneficial interest of the Fund. For every three Rights that you
receive, you may buy one Fund share. You will receive one Right for each Fund
share you own on , 1999 (the "Record Date"). If you receive less
than three Rights, you will be entitled to buy one share. Also, shareholders on
the record date may purchase the shares not acquired by other shareholders in
this Rights offering (the "Offer" or the "Offering"), subject to the limitations
discussed in this prospectus.
The Rights are transferable and will be listed for trading on the New York
Stock Exchange ("NYSE") under the symbol "KHI.RT." The Fund's shares of
beneficial interest are listed, and the shares issued in this Offer will be
listed, on the NYSE under the symbol "KHI." On [ ], 1999, the last
reported net asset value per share of the Fund's shares was $[ . ] and
the last reported sales price of a share on the NYSE was $[ . ].
THE PURCHASE PRICE PER SHARE WILL BE $ (THE "SUBSCRIPTION PRICE").
THIS OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999,
UNLESS THE OFFER IS EXTENDED AS DESCRIBED IN THIS PROSPECTUS (THE "EXPIRATION
DATE").
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Subscription Price.......................................... $ $
Sales Load.................................................. $ $
Proceeds to Fund............................................ $ $
</TABLE>
The Fund is a diversified, closed-end management investment company. The
Fund's primary investment objective is to achieve the highest current income
obtainable consistent with reasonable risk as determined by the Fund's
investment manager (the "Manager"). As a secondary objective, the Fund seeks
capital gains where consistent with its primary investment objective. Scudder
Kemper Investments, Inc. serves as the Manager.
As a matter of fundamental policy, in normal circumstances, the Fund
invests at least 65% of its assets in securities that provide the potential to
result in high income for the Fund which may include investments in high yield,
high risk securities (commonly known as "junk bonds") and securities of foreign
issuers. These securities have special risks including possible difficulty in
selling such securities, an increased likelihood that payments owed to the Fund
will not be made and risks associated with converting one currency to another.
These securities 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. Foreign
investments by the Fund may also involve greater risk than those typically
associated with investing in U.S. companies. SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS" ON PAGE OF THIS PROSPECTUS FOR A MORE COMPREHENSIVE DISCUSSION
OF RISKS. An investment in the Fund is not appropriate for all investors. No
assurance can be given that the Fund will achieve its investment objectives.
Shareholders who do not exercise their Rights should expect that they will,
at the completion of the Offer, own a smaller proportional interest in the Fund
than would otherwise be the case. As a result of the Offer you may experience an
immediate dilution, which could be substantial, of the aggregate net asset value
of your shares. This is because the subscription price per share may be less
than the Fund's net asset value per share on the expiration date, and the number
of shares outstanding after the Offer is likely to increase in a greater
percentage than the increase in the size of the Fund's assets. This dilution
will disproportionately affect you if you do not exercise your Rights in full.
The Fund cannot state precisely the extent of this dilution at this time because
the Fund does not know what the net asset value per share will be when the Offer
expires or what proportion of the Rights will be exercised.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
REVIEWED THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
In connection with this Offering, PaineWebber Incorporated (the "Dealer
Manager") may, but is not obligated to, effect transactions designed to keep the
market price of the Rights and the shares higher than they might otherwise be
without such trading. Such transactions may be effected on the NYSE or
elsewhere. Such stabilizing, if commenced, may be discontinued at any time.
There can be no assurance that such transactions, if effected, will be able to
keep the market price of the Rights and the shares higher than they might
otherwise be without such trading. Prior to the expiration of the Offer, the
Dealer Manager may offer shares of beneficial interest, including shares
acquired through purchasing and exercising the Rights, at prices it sets. The
Dealer Manager may realize profits or losses independent of any fees described
in this prospectus.
This prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read and retain it for future reference. A Statement of Additional Information
dated , 1999 (the "SAI") containing additional information about the
Fund has been filed with the SEC and is incorporated by reference in its
entirety into this prospectus. A copy of the SAI, the table of contents of which
appears on page of this prospectus, may be obtained without charge by
contacting the Fund at .
------------------------
PAINEWEBBER INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this prospectus. It may not contain all of the information that is
important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors.
PURPOSE OF OFFER
The Board of Trustees of the Fund has determined that it would be in the
best interests of the Fund and its existing shareholders to increase the assets
of the Fund so the Fund may be in a better position to take advantage of
investment opportunities and increase the diversification of its portfolio while
achieving other net benefits to the Fund.
In reaching its decision to approve the Offer, the Board of Trustees was
advised by the Manager that the availability of new funds would enable the Fund
to pursue attractive investments without selling portfolio securities. In
addition, the Board of Trustees considered that a rights offering could result
in more liquidity in the Fund's shares, would give shareholders the opportunity
to purchase shares of the Fund at a price below market value and/or net asset
value, and may increase the level of market interest in the Fund. The Board of
Trustees also believes that the transferability of the Rights may attract new
investors, broadening the Fund's shareholder base. In its deliberations, the
Board also considered the possible impact of the Offer on market price
volatility, its dilutive effect and its effect on non-exercising shareholders.
The Board also believes that this Offer may result in a nominal decrease in the
Fund's operating expense ratio. This is because the Fund's fixed costs can be
spread over a larger asset base.
The Board of Trustees also has considered the impact of the Offer on the
Fund's net asset value per share. The Subscription Price for the Offer is
$ . The Subscription Price represents a premium of % to the Fund's
net asset value per share of $ as of , 1999. Assuming that
all Rights are exercised and there is no change in the net asset value per
share, the Offer (after expenses) is not expected to be significantly dilutive.
If, however, the Fund's net asset value per share increases to a level at or
above the Subscription Price, the Offer (after expenses) would result in
dilution to the Fund's net asset value per share that could be substantial.
IMPORTANT TERMS OF THE OFFER
<TABLE>
<S> <C>
Total number of shares offered: [ ]
Number of transferable Rights issued to each
shareholder: One right for each whole share owned on the
Record Date
Subscription ratio: One share for every three Rights
Subscription price: [ ]
</TABLE>
IMPORTANT DATES TO REMEMBER:
<TABLE>
<CAPTION>
EVENT DATE
- ----- -------------------
<S> <C>
Record Date............................................. , 1999
Subscription Period..................................... , 1999
, 1999*
Expiration Date......................................... , 1999*
Subscription Certificates and Payment for Shares Due+... , 1999*
Notice of Guaranteed Delivery Due....................... , 1999*
Payment for Guarantees of Delivery Due.................. , 1999*
Confirmation Mailed to Participants..................... , 1999*
</TABLE>
- ---------------
* Unless the Offer is extended.
** Shares of beneficial interest of the Fund are expected to trade on the NYSE
with due bills attached from , 1999 through , 1999.
Due bills alert potential purchasers of shares to which the
1
<PAGE> 6
bills are attached that the owner of such shares is entitled to receive
Rights once they are issued. You are encouraged to contact your broker, bank
or financial adviser about your ability to participate in the Offer if you
anticipate purchase or sale activity during such period.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for shares or (ii) a Notice of Guaranteed Delivery by
the Expiration Date.
OVER-SUBSCRIPTION PRIVILEGE
Shareholders on the record date who fully exercise all of the Rights issued
to them are entitled to buy shares that were not bought by other shareholders.
If enough shares are available, all shareholder requests to buy shares that were
not bought by other shareholders will be honored in full. If these requests for
shares exceed the shares available, the available shares will be allocated pro
rata among those who over-subscribe based on the number of Rights originally
issued to them by the Fund.
METHOD OF EXERCISING RIGHTS
If you wish to exercise your Rights, you may do so in the following ways:
(1) Complete and sign the Subscription Certificate. Mail it in the envelope
provided or deliver the completed and signed Subscription Certificate with
payment in full to [Investors Fiduciary Trust Company] at the address indicated
on the Subscription Certificate. Your completed and signed Subscription
Certificate and payment must be received by the Expiration Date.
(2) Contact your broker, banker or trust company, which can arrange, on
your behalf, to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a notice of
guaranteed delivery by the close of business on the third business day after the
Expiration Date of the Offer. A fee may be charged for this service. The Notice
of Guaranteed Delivery must be received on or before the Expiration Date of the
Offer.
SALE OF RIGHTS
The Rights are transferable until the Expiration Date of the Offer. The
Rights will be listed for trading on the NYSE. The Fund will use its best
efforts to ensure that an adequate trading market for the Rights will exist.
However, no assurance can be given that a market for the Rights will develop.
Trading in the Rights on the NYSE may be conducted until the close of trading on
the NYSE on the last business day prior to the Expiration Date of the Offer.
OFFERING FEES AND EXPENSES
The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for shares issued pursuant to the Offer. The Dealer Manager
will pay a part of its fees to other broker-dealers that have assisted in
soliciting the exercise of Rights, as described in this prospectus. Other
Offering expenses incurred by the Fund are estimated at $500,000, which includes
up to $100,000 that may be paid to the Dealer Manager as partial reimbursement
for its expenses relating to the Offer.
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to shareholders whose record
addresses are outside the United States. Foreign shareholders will receive
written notice of the Offer, and their Rights will be held or transferred as set
forth in this prospectus.
USE OF PROCEEDS
The estimated net proceeds of the Offer are approximately $ . This
figure is based on the Subscription Price of $ per share and assumes all
shares offered are sold and that Offering
2
<PAGE> 7
expenses estimated at approximately $500,000 are paid. The Manager anticipates
that the Fund will take up to thirty days to invest these proceeds in accordance
with the Fund's investment objectives and policies under current market
conditions. The proceeds of the Offer will be held in U.S. Government securities
and other high-quality, short-term money market instruments until they are
invested. While the proceeds are invested in U.S. Government securities and
other high-quality, short-term money market instruments, the proceeds will not
be invested in securities consistent with the Fund's goal of high current
income.
FURTHER INFORMATION
Please direct all questions or inquiries relating to the Offer to the
Fund's information agent as follows:
[add name and address of information agent]
You may also contact your brokers or nominees for information.
INFORMATION REGARDING THE FUND
The Fund has engaged in business as a diversified, closed-end management
investment company since 1988. The Fund's primary objective is, through a
professionally managed, diversified portfolio of income-producing securities, to
seek to achieve the highest current income obtainable consistent with reasonable
risk, as determined by the Manager. As a secondary objective, the Fund seeks
capital gains where consistent with its primary objective. The Fund seeks to
achieve its objectives by investing its assets in a broad range of
income-producing securities, such as U.S. corporate fixed income securities,
bonds and other obligations of the U.S. Government and foreign governments,
which may be denominated in foreign currencies, and other income-producing
securities. These securities may or may not be rated. Under normal market
conditions, the Fund may invest primarily in lower grade fixed income
securities. The Fund may purchase and sell options on fixed income securities
and on indices based on fixed income securities. The Fund may also engage in
interest rate, foreign currency and other hedging transactions. Information
regarding the Fund's portfolio characteristics and composition as of
, 1999 is set forth on page of this prospectus.
INFORMATION REGARDING THE MANAGER
The Manager, including certain of its predecessors, has served as
investment manager to the Fund since the Fund's inception. The Manager is one of
the largest and most experienced investment management firms in the United
States. The Manager provides investment counsel for many individuals and
institutions, including insurance companies, endowments, industrial corporations
and financial and banking organizations.
The Fund pays the Manager a management fee equal on an annual basis to
0.85% of the Fund's average weekly net assets. Because the Manager's fee is
based on the average weekly net assets of the Fund, the Manager will benefit
from an increase in the Fund's assets resulting from the Offer.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes some of the matters that you should consider
before investing in the Fund through this Offer.
Dilution. You may experience an immediate dilution of the aggregate net
asset value of your shares as a result of the Offer. This is because the
Subscription Price per share may be less than the Fund's net asset value per
share on the Expiration Date, and the number of shares outstanding after the
Offer may increase in a greater percentage than the increase in the size of the
Fund's assets. This dilution will disproportionately affect you if you do not
exercise your Rights in full. In addition, if you do not fully exercise your
Rights you should expect that you will, as a result of the Offer, at the
completion of the Offer, own a smaller proportional interest in the Fund than
would otherwise be the case. Although it is not possible to state precisely the
amount of any dilution, because it is not known at this time what the net asset
value per share will be on the Expiration Date or what proportion of the Rights
will be exercised, such dilution could be substantial.
If you do not wish to exercise your Rights, you can still transfer or sell
these Rights as set forth in this prospectus. The cash you receive from
transferring your Rights should serve as partial compensation for any possible
dilution of your interest in the Fund. The Fund cannot give any assurance,
however, that a market for
3
<PAGE> 8
the Rights will develop or that the Rights will have any value. For a more
detailed discussion about dilution, please refer to "Risk Factors and Special
Considerations -- Dilution."
Discount from Net Asset Value. Shares of closed-end funds frequently trade
at a market price that is less than the value of the net assets attributable to
those shares. The Fund's shares have traded in the market above, at and below
net asset value since the commencement of the Fund's operations.
"High-Yield," High Risk Investments. Some of the securities offering the
high current income sought by the Fund will be rated in the lower rating
categories of recognized rating agencies or will be unrated. The rating agencies
generally regard such securities as predominantly speculative with respect to
their capacity to pay interest and repay principal, and riskier than securities
in the higher rating categories. The values of such securities tend to be more
volatile and tend to reflect individual corporate developments to a greater
extent than higher rated securities, which react primarily to fluctuations in
the general level of interest rates. Additionally, such securities are
frequently subordinated to the prior payment of senior indebtedness and have a
higher risk for non-payment of interest or principal than higher grade
securities. In addition, the trading market for high-yield, high risk securities
is generally less liquid than the market for higher rated securities. As of
, 1999, % of the market value of the Fund's total investments
was represented by fixed-income securities regarded by the rating agencies as
below investment grade (that is, rated Ba or lower by Moody's Investors Service,
Inc. ("Moody's") or BB or lower by Standard & Poor's ("S&P")) or unrated
securities of comparable quality.
Risk of Leverage. Leverage creates the opportunity for greater total
returns, but at the same time involves certain risks. If the investment
performance of the proceeds of any leverage fails to cover the interest or
dividends payable on such capital, the value of the Fund's shares may decrease
more quickly than would otherwise be the case and dividends thereon will be
reduced or eliminated. This is the speculative effect of leverage.
At the date of this prospectus, the Fund intends, but is not committed, to
add incremental leverage following the completion of the Offer. Inability to
increase, or delays in increasing, the Fund's leverage could, depending on
market conditions, adversely affect the Fund's earnings, distributions and net
asset value.
Dividends and Distributions. Based on current market condition information
provided by the Manager, the Board of Trustees believes that the Offer will not
result in a change in the Fund's current level of dividends per share for the
foreseeable future. However, there can be no assurance that the Fund will be
able to maintain its current level of dividends per share, and the Board of
Trustees may, in its sole discretion, change the Fund's current dividend policy
or its current level of dividends per share in response to market or other
conditions.
Year 2000. Like other registered investment companies and financial
business organizations worldwide, the Fund could be adversely affected if
computer systems on which the Fund relies, which primarily include those used by
the 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 (Y2K) Issue. Failure to successfully address the
Y2K Issue could result in interruptions to and other material adverse effects on
the Fund's business and operations. The Manager has commenced a review of the
Y2K Issue as it may affect the Fund and is taking steps it believes are
reasonably designed to address the Y2K Issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Y2K Issue will not have any adverse effect on the companies
whose securities are held by the Fund or on global markets or economies
generally.
Euro Conversion. The recent 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 the Fund's portfolio. If
the transition to the euro does not take place as planned, there could be
negative effects, such as severe currency fluctuations and market disruptions.
You should carefully consider your ability to assume the foregoing risks
before making an investment in the Fund. An investment in shares of the Fund is
not appropriate for all investors.
4
<PAGE> 9
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price)(1)... 3.75%
----
Dividend Reinvestment Plan Fees(2).......................... None
----
Annual Expenses (as a percentage of average weekly net
assets attributable to shares of beneficial interest)(3)
Management Fees(4).......................................... 0.85%
----
Interest Expense............................................ [ ]
----
Other Expenses.............................................. [ ]
----
Total Annual Expenses.......................................
====
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming a 5% annual return
throughout the periods.............................. [ ] [ ] [ ] [ ]
</TABLE>
- ---------------
(1) The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for shares issued pursuant to the Offer. The Dealer
Manager will pay to broker-dealers included in the selling group to be
formed and managed by the Dealer Manager solicitation fees equal to 2.50% of
the Subscription Price for each share issued pursuant to the Offer as result
of their sales efforts. The Fund has also agreed to reimburse the Dealer
Manager for its expenses relating to the Offer up to an aggregate of
$ . In addition, the Fund has agreed to pay other Offering fees and
expenses estimated at $500,000. These fees and expenses will be borne by the
Fund and indirectly by all of the Fund's shareholders, including those
shareholders who do not exercise their Rights.
(2) The Fund, its transfer agent and dividend dispensing agent or its delegate
("Agent") impose no fee for participation in the Dividend Reinvestment and
Cash Purchase Plan ("Plan"). However, a $2.50 fee is imposed for withdrawal
from participation in the Plan and Plan participants making voluntary cash
investments will be charged a $.75 service fee for each such investment. In
addition, each participant in the Plan will pay a pro rata share of
brokerage commissions incurred in connection with open-market purchases of
Fund shares under the Plan.
(3) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the Offer, assuming that
all of the Rights are exercised.
(4) The Fund pays the Manager an annualized fee, calculated and paid monthly, in
the amount of 0.85% of the Fund's average weekly net assets.
THE FOREGOING FEE TABLE AND EXAMPLE ARE INTENDED TO ASSIST INVESTORS IN
UNDERSTANDING THE COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY OR INDIRECTLY.
The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value, payment of a 3.75% sales load and an annual
expense ratio of %. The table above and the assumption in the Example of a
5% annual return are required by SEC regulations applicable to all management
investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. In addition, while the Example assumes reinvestment of all dividends
and distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividend and Distributions: Dividend
Reinvestment and Cash Purchase Plan."
5
<PAGE> 10
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share of
beneficial interest of the Fund outstanding throughout each period presented.
The financial highlights for each period presented have been audited by Ernst &
Young LLP, the Fund's independent accountants, whose unqualified report is
included in the Fund's November 30, 1998 Annual Report and is incorporated by
reference in the Statement of Additional Information ("SAI"). The financial
highlights should be read in conjunction with the financial statements and notes
thereto included in the Fund's November 30, 1998 Annual Report, which is
available without charge by calling the Fund at .
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
--------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
year........................... $ 9.20 $ 8.73 $ 8.33 $ 9.45 $ 8.70 $ 8.28
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............ $ .91 $ .91 $ .91 $ .88 $ .99 $ .94
-------- -------- -------- -------- --------
Net realized and unrealized gain
(loss)......................... $ .23 $ .46 $ .39 $ (1.10) $ .71 $ .45
-------- -------- -------- -------- --------
Total from investment
operations..................... $ 1.14 $ 1.37 $ 1.30 $ (.22) $ 1.70 $ 1.39
======== ======== ======== ======== ========
Distribution from net investment
income......................... $ 90 $ .90 $ .90 $ .90 $ .95 $ .97
======== ======== ======== ======== ========
Net asset value, end of year..... $ 9.44 $ 9.20 $ 8.73 $ 8.33 $ 9.45 $ 8.70
======== ======== ======== ======== ========
Market value, end of year........ $ 10.19 $ 10.00 $ 9.50 $ 8.38 $ 9.13 $ 9.13
======== ======== ======== ======== ========
TOTAL RETURN
Based on net asset value......... 12.99% 16.56% 16.30% (2.55)% 20.62% 17.42%
Based on market value............ 11.98% 16.12% 25.81% 1.47% 11.00% 17.50%
RATIOS TO AVERAGE NET ASSETS
Expenses......................... 1.56% 1.59% 1.52% 1.64% 1.82% 2.03%
Net investment income............ 9.84% 10.33% 10.64% 9.91% 11.08% 10.86%
SUPPLEMENTAL DATA
Net assets at end of year (in
thousands)..................... $222,919 $214,649 $200,502 $188,294 $211,194 $190,950
Portfolio turnover rate.......... 79% 74% 85% 83% 98% 47%
Total debt outstanding at end of
year (in thousands)............ $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 17,312
Asset coverage per $1,000 of
debt........................... $ 12,100 $ 11,700 $ 11,000 $ 10,400 $ 11,600 $ 12,000
<CAPTION>
[APRIL 21],
YEAR ENDED NOVEMBER 30 1988* TO
------------------------------ NOVEMBER 30
1991 1990 1989 1988
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
year........................... $ 6.25 $ 8.86 $ 10.84 $ 11.11
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............ $ 1.01 $ 1.22 $ 1.29 $ .82
-------- -------- -------- --------
Net realized and unrealized gain
(loss)......................... $ 2.07 $ (2.63) $ (1.90) $ (.40)
-------- -------- -------- --------
Total from investment
operations..................... $ 3.08 $ (1.41) $ (.61) $ .42
======== ======== ======== ========
Distribution from net investment
income......................... $ .94 $ (1.20) $ (1.30) $ (.69)
======== ======== ======== ========
Net asset value, end of year..... $ 8.28 $ 6.25 $ 8.86 $ 10.84
======== ======== ======== ========
Market value, end of year........ $ 8.63 -- -- --
======== ======== ======== ========
TOTAL RETURN
Based on net asset value......... 52.90% -- -- --
Based on market value............ 65.03% -- -- --
RATIOS TO AVERAGE NET ASSETS
Expenses......................... 2.22% 2.25% 1.93% 1.28%
Net investment income............ 13.78% 16.17% 12.92% 12.30%
SUPPLEMENTAL DATA
Net assets at end of year (in
thousands)..................... $178,145 $131,602 $181,023 $214,477
Portfolio turnover rate.......... 27% 29% 45% 101%
Total debt outstanding at end of
year (in thousands)............ $ 17,312 -- -- --
Asset coverage per $1,000 of
debt........................... $ 11,300 -- -- --
</TABLE>
- ---------------
* Commencement of operations.
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the year. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends.
These figures will differ depending upon the level of any discount from or
premium to net asset value at which the Fund's shares trade during the
year.
6
<PAGE> 11
PORTFOLIO CHARACTERISTICS AND COMPOSITION
The following tables set forth certain information with respect to the
characteristics and the composition of the Fund's investment portfolio as of
, 1999.
<TABLE>
<S> <C>
PORTFOLIO COMPOSITION
High Yield Bonds %
Cash and Equivalents %
Short-Term Treasuries %
Preferred and Common Stock %
</TABLE>
Average Maturity: years
<TABLE>
<S> <C>
LONG-TERM FIXED INCOME SECURITIES
RATINGS
AAA %
AA %
A %
BAA %
BA %
B %
Below B
</TABLE>
CAPITALIZATION AT NOVEMBER 30, 1998
<TABLE>
<CAPTION>
AMOUNT SHARES
TITLE OF CLASS AUTHORIZED OUTSTANDING
- -------------- ---------- -----------
<S> <C> <C>
Shares of Beneficial
Interest Unlimited
</TABLE>
INFORMATION REGARDING SENIOR SECURITIES
The Fund has outstanding a $20,000,000 loan from Bank of America. The loan
is evidenced by a note which bears interest at the London Interbank Offered Rate
plus 0.275% ( % at November 30, 1998) which is payable quarterly. The loan
amount and rate are reset periodically under a credit facility which is
available until June 30, 1999.
TRADING AND NET ASSET VALUE INFORMATION
In the past, the Fund's shares have traded at both a premium and at a
discount in relation to net asset value. Although the Fund's shares recently
have been trading at a premium above net asset value, there can be no assurance
that this premium will continue after the Offer or that the shares will not
again trade at a discount. Shares of closed-end investment companies such as the
Fund frequently trade at a discount from net asset value. See "Risk Factors and
Special Considerations."
The Fund's shares are listed and traded on the NYSE. The average weekly
trading volume of the shares on the NYSE during the year ended December 31, 1998
was shares. The following table shows for the quarters indicated:
(1) the high and low sale price of the shares on the NYSE; (2) the high and low
7
<PAGE> 12
net asset value per share; and (3) the high and low premium or discount to net
asset value at which the Fund's shares were trading.
<TABLE>
<CAPTION>
PREMIUM/(DISCOUNT)
PRICE(1) NET ASSET VALUE(2) TO NET ASSET VALUE(3)
------------------ ------------------ ----------------------
CALENDAR QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ---------------------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
- ---------------
(1) [Source].
(2) [Source].
(3) [Source].
Immediately prior to the Fund's announcement of the Offer on
, 1999 and on [Date of prospectus or nearest business date],
1999, the last reported sale price of a share of the Fund's shares on the NYSE
was $ and $ , respectively. The Fund's net asset value on
March [ ], 1999 and on [Date of prospectus or nearest business date], 1999 was
$ and $ , respectively. See "Net Asset Value" in the SAI.
8
<PAGE> 13
THE FUND
The Fund is a diversified, closed-end management investment company managed
by the Manager. The Fund's primary investment objective is to seek the highest
current income obtainable consistent with reasonable risk, as determined by the
Manager. As a secondary objective, the Fund will seek capital gains where
consistent with its primary objective. The Fund may invest its assets in a broad
range of income-producing securities, such as U.S. corporate fixed income
securities, debt obligations of the U.S. Government and its agencies and
instrumentalities, debt obligations of foreign governments and their agencies
and instrumentalities and other fixed income securities, including fixed income
securities which may be denominated in foreign currencies. Any of the Fund's
portfolio securities may or may not be rated. The Fund has no requirements
regarding whether the income-producing securities it purchases must be rated or,
if such securities are rated, what the minimum or maximum rating on such
securities must be. High yield securities normally offer a current yield or
yield to maturity which is significantly higher than the yield available from
securities rated in the three highest categories as assigned by S&P or Moody's.
The characteristics of the fixed income securities in the Fund's portfolio, such
as the maturity and the type of issuer, will affect yields and yield
differentials, which vary over time. The actual yield realized by an investor is
subject, among other things, to the Fund's expenses and the investor's
transaction costs. The Fund, if market and economic conditions warrant, may
invest all or a portion of its assets in different segments of the fixed income
securities market in order to achieve the Fund's objectives.
The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Accordingly, open-end investment companies
are subject to periodic in-flows and out-flows that can complicate portfolio
management. Closed-end investment companies do not face the prospect of having
to liquidate portfolio holdings to satisfy redemptions at the option of
shareholders or having to maintain cash positions to meet the possibility of
such redemptions.
The Fund was organized as a business trust under the laws of the
Commonwealth of Massachusetts on May 28, 1987 and has registered with the SEC
under the Investment Company Act of 1940 ("1940 Act"). The Fund's principal
office is located at 222 South Riverside Plaza, Chicago, Illinois 60606. The
Manager is an investment management firm registered with the SEC under the
Investment Advisers Act of 1940, as amended.
THE OFFER
PURPOSE OF THE OFFER
As discussed below, the Board of Trustees of the Fund has determined that
it would be in the best interests of the Fund and its shareholders to make the
Offer. The Board of Trustees considered the proposal for the Offer at several
meetings, [including a meeting at which the non-interested Trustees met with
counsel and without management present to discuss the Offer.] The Board,
including all of the non-interested Trustees, unanimously approved the Offer. In
its deliberations, the Board considered a number of issues and factors,
including, but not limited to, the potential impact of the Offer on current
exercising and non-exercising shareholders; the potential impact of the Offer on
the Fund's net asset value, share price, and trading activity; the potential
dilutive impact of the Offer on Fund income and the ability of the Fund to
maintain current dividend levels; the potential allocation of the Offering
proceeds across different sectors and ratings categories; the revenue impact of
the Offer on the Manager and its affiliates and the appropriateness of the
Manager's compensation in light of the nature, quality, and complexity of the
investment management services provided to the Fund; the value and quality of
the services expected to be provided by the Dealer Manager in light of the
relationship between the Dealer Manager and existing shareholders, the Dealer
Manager's familiarity with the Fund and with the Manager; and the terms of the
Offer compared to the terms of similar offers conducted by other closed-end
funds. The Trustees concluded that increasing the assets of the
9
<PAGE> 14
Fund would be beneficial to the Fund and its shareholders. However, there can be
no assurance that any of the anticipated benefits discussed in this prospectus
will be realized as a result of the Offer.
The Board determined that it would be in the best interests of the Fund and
its existing shareholders to increase the assets of the Fund available for
investment, thereby allowing the Fund to more fully take advantage of available
investment opportunities consistent with the Fund's investment objectives. In
reaching its decision, the Board of Trustees was advised by the Manager that the
availability of new funds would provide the Fund with additional investment
flexibility, as well as an enhanced ability to take advantage of what the
Manager believes to be timely investment opportunities. It was noted that, in
order to take advantage of these opportunities without an infusion of new
capital, the Fund would be required to sell current portfolio positions which
the Fund desired to retain and which could cause the realization of capital
gains by the Fund and its shareholders. The Manager provided its views to the
effect that while the Fund is permitted to, and has, borrowed money for
investment purposes, at this point in time, due to prevailing conditions in the
market, it is not as attractive for the Fund to borrow for investment purposes
as it is to raise additional investment assets through the Offer. With an
increased asset base as a result of the Offer, the Manager believes the Fund
would be able to invest in a larger universe of securities which the Manager
believes would have the benefits described below.
The Trustees considered that the Fund could potentially achieve additional
economies of scale as a result of an increase in total assets, resulting in a
nominal decrease in the Fund's operating expense ratio. In addition, the Board
of Trustees considered that the Offering could ultimately result in a larger
number of shareholders and daily trading volume and therefore could result in an
improvement in the liquidity of the trading market for the Fund's shares on the
NYSE, where the shares are listed and traded. The Board of Trustees also
believes that a larger number of outstanding shares and a larger number of
beneficial owners of shares could increase the level of market interest in the
Fund.
In addition, the Trustees considered that the Offer affords existing
shareholders the opportunity to purchase additional shares of the Fund at a
price that may be below market value and/or net asset value. The Trustees also
considered the expenses of the Offer and its dilutive effect, including the
effect on non-exercising shareholders. They also considered the representation
by the Manager that based upon currently available investment opportunities, the
Manager did not believe that the Offer would impede the Fund's ability to
maintain current dividend levels for the foreseeable future, although there
could be no assurance that that would be the case and, depending upon the actual
yields generated by the securities purchased with the proceeds of the Offer, the
Fund's ability to maintain current dividend levels could indeed be impeded.
The Trustees noted that the Manager will benefit from the Offer because its
fees for investment management services are based on the average weekly net
assets of the Fund. It is not possible to state precisely the amount of
additional compensation the Manager will receive as a result of the Offer
because it is not known how many Rights will be exercised and because the
proceeds of the Offer will be invested in additional portfolio securities that
may fluctuate in value. However, in the event that all the Rights are exercised
in full, based on the Subscription Price of $ , the Manager would
receive additional fees for investment management services of approximately
$ per annum as a result of the increase in assets under management.
In determining that the Offer was in the best interests of the Fund and its
shareholders, the Board of Trustees retained the Dealer Manager to provide the
Fund with financial advisory and marketing services relating to the Offer,
including the structure, timing and terms of the Offer. In addition to the
foregoing, the Board of Trustees considered, among other things, using a
variable pricing versus fixed pricing mechanism, the benefits and drawbacks of
conducting a non-transferable versus a transferable rights offering, the effect
on the Fund if the Offer is undersubscribed and the experience of the Dealer
Manager in conducting rights offerings.
The Fund may, in the future and at its discretion, choose to make
additional rights offerings of its shares from time to time for a number of
shares and on terms which may or may not be similar to this Offer. Any such
future offering will be made in accordance with the 1940 Act.
10
<PAGE> 15
TERMS OF THE OFFER
The Fund is issuing to its shareholders of record ("Record Date
Shareholders"), as of the close of business on the Record Date, transferable
Rights entitling the holders thereof to subscribe for an aggregate of
[ ] shares of beneficial interest in the Fund. Each Record Date
Shareholder is being issued one Right for each whole share of beneficial
interest owned on the Record Date. The Rights entitle the holders thereof to
subscribe for one share for every three Rights held (1-for-3) (the "Primary
Subscription"). Fractional shares will not be issued upon the exercise of
Rights. Record Date Shareholders issued fewer than three Rights are entitled to
subscribe for one share pursuant to the Primary Subscription.
The Rights are transferable among Record Date Shareholders and non-Record
Date Shareholders. Holders of Rights who are not Record Date Shareholders
("Rights Holders") may purchase shares in the Primary Subscription, but are not
entitled to subscribe for shares pursuant to the Over-Subscription Privilege
described below. Record Date Shareholders and Rights Holders purchasing shares
in the Primary Subscription and Record Date Shareholders who purchase shares
pursuant to the Over-Subscription Privilege are hereinafter referred to as
"Exercising Rights Holders."
Rights may be exercised at any time during the subscription period (the
"Subscription Period"), which commences on , 1999 and ends at 5:00
P.M., New York City time, on the Expiration Date. The Rights are evidenced by
Subscription Certificates that will be mailed to Record Date Shareholders,
except as discussed below under "Foreign Restrictions."
Shares not subscribed for in the Primary Subscription will be offered, by
means of the Over-Subscription Privilege, to those Record Date Shareholders who
have exercised all Rights issued to them and who wish to acquire more than the
number of shares they are entitled to purchase pursuant to the exercise of their
Rights (other than those Rights which cannot be exercised because they represent
the right to acquire less than one share). Shares acquired pursuant to the
Over-Subscription Privilege are subject to allotment, as more fully discussed
below under "Over-Subscription Privilege." For purposes of determining the
maximum number of shares a shareholder may acquire pursuant to the Offer,
shareholders whose shares are held of record by Cede & Co. ("Cede"), as nominee
for The Depository Trust Company ("DTC"), or by any other depository or nominee
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf.
The first regular monthly dividend to be paid on shares acquired upon
exercise of Rights will be the first monthly dividend, the Record Date for which
occurs after the issuance of the shares. Assuming the Subscription Period is not
extended, it is expected that the first dividend received by shareholders
acquiring shares in the Offer will be paid on [the last Business Day of
1999]. "Business Day" means a day on which the NYSE is open for
trading and which is not a Saturday or Sunday or a holiday, including New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Christmas Day or
any other day on which banks in New York City are authorized or obligated by law
or executive order to close.
There is no minimum number of Rights which must be exercised in order for
the Offer to close.
OVER-SUBSCRIPTION PRIVILEGE
Shares not subscribed for by Record Date Shareholders or Rights Holders
(the "Excess Shares") will be offered, by means of the Over-Subscription
Privilege, to the Record Date Shareholders who have exercised all exercisable
Rights issued to them (other than those Rights which cannot be exercised because
they represent the Right to acquire less than one share) and who wish to acquire
more than the number of shares for which the Rights issued to them are
exercisable. Record Date Shareholders should indicate, on the Subscription
Certificate which they submit with respect to the exercise of the Rights issued
to them, how many Excess Shares they are willing to acquire pursuant to the
Over-Subscription Privilege. If sufficient Excess Shares remain, all Record Date
Shareholders' over-subscription requests will be honored in full. If Record Date
Shareholder requests for shares pursuant to the Over-Subscription Privilege
exceed the Excess Shares
11
<PAGE> 16
available, the available Excess Shares will be allocated pro rata among Record
Date Shareholders who oversubscribe based on the number of Rights originally
issued to them.
Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent (as defined below), before any
Over-Subscription Privilege may be exercised with respect to any particular
beneficial owner, as to the aggregate number of Rights exercised pursuant to the
Primary Subscription and the number of shares subscribed for pursuant to the
Over-Subscription Privilege by such beneficial owner and that such beneficial
owner's Primary Subscription was exercised in full. Nominee Holder
Over-Subscription Forms and Beneficial Owner Certification Forms will be
distributed to banks, brokers, trustees and other nominee holders of Rights with
the Subscription Certificates.
The Fund will not offer or sell in connection with the Offer any shares
that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.
SUBSCRIPTION PRICE
The Subscription Price for the shares to be issued pursuant to the Offer
will be $ .
The Fund announced the Offer on February , 1999. The net asset value per
share of beneficial interest at the close of business on February , 1999 (the
last trading date on which the Fund publicly reported its net asset value prior
to the announcement) and on , 1999 (the last trading date on which
the Fund publicly reported its net asset value prior to the date of this
prospectus) was $ and $ , respectively, and the last reported
sale price of a share of the Fund's shares of beneficial interest on the NYSE on
those dates was $ and $ , respectively.
EXPIRATION OF THE OFFER
The Offer will expire at 5:00 p.m., New York City time, on the Expiration
Date. The Rights will expire on the Expiration Date and thereafter may not be
exercised. Any extension of the Offer will be followed as promptly as
practicable by an announcement thereof. Such announcement will be issued no
later than 9:00 a.m., New York City time, on the next business day following the
previously scheduled Expiration Date. Without limiting the manner in which the
Fund may choose to make such announcement, the Fund will not, unless otherwise
obligated by law, have any obligation to publish, advertise, or otherwise
communicate any such announcement other than by making a release to the Dow
Jones News Service or such other means of announcement as the Fund deems
appropriate.
SUBSCRIPTION AGENT
The subscription agent is (the "Subscription Agent"). The
Subscription Agent will receive for its administrative, processing, invoicing
and other services as Subscription Agent, a fee estimated to be approximately
$[ ] which includes reimbursement for all out-of-pocket expenses
related to the Offer. [The Subscription Agent is also the Fund's transfer agent,
dividend-paying agent and registrar for the Fund's shares of beneficial
interest.] Questions regarding the Subscription Certificates should be directed
to ( ) [(toll free)]; shareholders may also consult
their brokers or nominees.
Completed Subscription Certificates must be sent together with proper
payment of the Subscription Price for all shares subscribed for in the Primary
Subscription and pursuant to the Over-Subscription Privilege (for Record Date
Shareholders) to by one of the methods described below.
Alternatively, Notice of Guaranteed Delivery may be sent by facsimile to
( ) to be received by the Subscription Agent prior to 5:00 P.M.,
New York City time, on the Expiration Date. Facsimiles should be confirmed by
telephone at ( ) . The Fund will accept only properly completed
and executed Subscription Certificates actually received at any of the addresses
listed below, prior to 5:00 P.M., New York City time, on the Expiration Date or
by the close of business on the third Business Day after the Expiration Date
following timely receipt of a Notice of Guaranteed Delivery. See "Payment for
Shares" below.
12
<PAGE> 17
(1) BY FIRST CLASS MAIL:
[ ]
(2) BY OVERNIGHT COURIER:
[ ]
(3) BY HAND:
[ ]
DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
METHOD FOR EXERCISING RIGHTS
Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Restrictions," will be mailed to Record Date Shareholders
or, if a shareholder's shares of beneficial interest are held by Cede or any
other depository or nominee on their behalf, to Cede or such depository or
nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
shares at the Subscription Price by the Expiration Date. Rights may also be
exercised by contacting your broker, banker or trust company, which can arrange,
on your behalf, to guarantee payment and delivery of a properly completed and
executed Subscription Certificate pursuant to a Notice of Guaranteed Delivery by
the close of business on the third business day after the Expiration Date. A fee
may be charged for this service. Fractional shares will not be issued upon the
exercise of Rights. Record Date Shareholders issued fewer than three Rights are
entitled to subscribe for one share pursuant to the Primary Subscription.
Completed Subscription Certificates must be received by the Subscription Agent
prior to 5:00 P.M., New York City time, on the Expiration Date at one of the
addresses set forth above (unless the guaranteed delivery procedures are
complied with as described below under "Payment for Shares").
Shareholders Who are Record Owners. To exercise their Rights, Record Date
shareholders may choose between either option to exercise their shares set forth
under "Payment for Shares" below. If time is of the essence, option (2) under
"Payment for Shares" below will permit delivery of the Subscription Certificate
and payment after the Expiration Date.
Shareholders Whose Shares are Held By a Nominee. Shareholders whose shares
are held by a nominee such as a bank, broker or trustee must contact that
nominee to exercise their Rights. In that case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods set forth under "Payment for Shares" below.
Nominees. Nominees who hold shares for the account of others should notify
the respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the nominee should complete
the Subscription Certificate and submit it to the Subscription Agent with the
proper payment as described under "Payment for Shares" below.
INFORMATION AGENT
Any questions or requests for assistance concerning the method of
subscribing for shares or for additional copies of this prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:
[ ]
Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated to
be [ ] which includes reimbursement for its out-of-pocket expenses
related to the Offer.
13
<PAGE> 18
PAYMENT FOR SHARES
Shareholders who wish to acquire shares pursuant to the Offer may choose
between the following methods of payment:
(1) An Exercising Rights Holder may send the Subscription Certificate
together with payment for the shares acquired in the Primary Subscription and
any additional shares subscribed for pursuant to the Over-Subscription Privilege
(for Record Date Shareholders) to the Subscription Agent based on the
Subscription Price of [ ] per share. A subscription will be accepted
when payment, together with a properly completed and executed Subscription
Certificate, is received by the Subscription Agent's office at one of the
addresses set forth above no later than 5:00 P.M., New York City time, on the
Expiration Date. The Subscription Agent will deposit all checks and money orders
received by it for the purchase of shares into a segregated interest-bearing
account (the interest from which will accrue to the benefit of the Fund) pending
proration and distribution of shares. A PAYMENT PURSUANT TO THIS METHOD MUST BE
IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE
UNITED STATES, MUST BE PAYABLE TO KEMPER HIGH INCOME TRUST AND MUST ACCOMPANY A
PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT TO ACTUAL
COLLECTION OF CHECKS BY 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO
CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS
OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, an Exercising Rights Holder may acquire shares, and a
subscription will be accepted by the Subscription Agent if, prior to 5:00 P.M.,
New York City time, on the Expiration Date, the Subscription Agent has received
a Notice of Guaranteed Delivery by facsimile or otherwise from a financial
institution that is a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the NYSE Medallion Signature
Program guaranteeing delivery of (i) payment of the Subscription Price of
[ ] for the shares subscribed for in the Primary Subscription and any
additional shares subscribed for pursuant to the Over-Subscription Privilege
(for Record Date Shareholders), and (ii) a properly completed and executed
Subscription Certificate. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless a properly completed and executed Subscription
Certificate and full payment for the shares is received by the Subscription
Agent by the close of business on the third Business Day after the Expiration
Date.
On a date within eight Business Days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each Exercising Rights
Holder (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of shares purchased pursuant to the Primary Subscription and (ii) the number of
shares, if any, acquired pursuant to the Over-Subscription Privilege (for Record
Date Shareholders). All payments by an Exercising Rights Holder must be in U.S.
dollars by money order or check drawn on a bank or branch located in the United
States and payable to KEMPER HIGH INCOME TRUST.
The Subscription Agent will deposit all checks received by it prior to the
final payment date into a segregated interest-bearing account (which interest
will accrue to the benefit of the Fund) pending proration and distribution of
the shares.
WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE (FOR RECORD DATE SHAREHOLDERS) DOES NOT MAKE
PAYMENT OF ANY AMOUNTS DUE BY THE EXPIRATION DATE OR THE DATE GUARANTEED
PAYMENTS ARE DUE UNDER A NOTICE OF GUARANTEED DELIVERY, THE SUBSCRIPTION AGENT
RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE FOLLOWING ACTIONS: (i) FIND OTHER
RECORD DATE SHAREHOLDERS FOR SUCH SUBSCRIBED AND UNPAID FOR SHARES; (ii) APPLY
ANY PAYMENT ACTUALLY RECEIVED BY IT TOWARD THE PURCHASE OF THE GREATEST WHOLE
NUMBER OF SHARES WHICH COULD BE ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE
PRIMARY SUBSCRIPTION AND/OR OVER-SUBSCRIPTION PRIVILEGE; AND/OR
14
<PAGE> 19
(iii) EXERCISE ANY AND ALL OTHER RIGHTS OR REMEDIES TO WHICH IT MAY BE ENTITLED,
INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SET OFF AGAINST PAYMENTS ACTUALLY
RECEIVED BY IT WITH RESPECT TO SUCH SUBSCRIBED SHARES.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO
ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL
CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO
PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion. The Subscription Agent will not be
under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Certificates or incur any liability for
failure to give such notification.
EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the NYSE, subject to notice of issuance. The Fund will use
its best efforts to ensure that an adequate trading market for the Rights will
exist, although no assurance can be given that a market for the Rights will
develop. It is anticipated that the Rights will trade on the NYSE on a
when-issued basis commencing on or about , 1999 until approximately
1999, and on a regular way basis thereafter until and including the
last Business Day prior to the Expiration Date. Exercising Rights Holders are
encouraged to contact their broker, bank or financial advisor for more
information about trading of the Rights.
Sales through Subscription Agent and Dealer Manager. Record Date
Shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through or to the Dealer
Manager. Subscription Certificates representing the Rights to be sold by or to
the Dealer Manager must be received by the Subscription Agent on or before
, 1999 (or if the Offer is extended, until two Business Days prior
to the Expiration Date). Upon the timely receipt by the Subscription Agent of
appropriate instructions to sell Rights, the Subscription Agent will request the
Dealer Manager either to purchase or to use its best efforts to complete the
sale and the Subscription Agent will remit the proceeds of sale, net of
commissions, to the selling Record Date Shareholders. Any commissions on sales
of Rights will be paid by the selling Record Date Shareholders. If the Rights
can be sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Manager on the day such Rights are
sold. The sale price of any Rights sold to the Dealer Manager will be based upon
the then current market price for the Rights, less amounts comparable to the
usual and customary brokerage fees. The Dealer Manager will also attempt to sell
all Rights which remain unclaimed as a result of Subscription Certificates being
returned by the postal authorities to the Subscription Agent as undeliverable as
of the fourth Business Day prior to the Expiration Date. Such sales will be made
net of commissions on behalf of the nonclaiming Record Date Shareholders. The
Subscription Agent will hold the proceeds from those sales for the benefit of
such nonclaiming Record Date Shareholders until such proceeds are either claimed
or escheat. There can be no assurance that the Dealer Manager will purchase or
be able to complete the sale of any such Rights, and neither the Fund nor the
Dealer Manager has guaranteed any minimum sales price for the Rights.
15
<PAGE> 20
Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee and to issue a new
Subscription Certificate to the transferee evidencing such transferred Rights.
In such event, a new Subscription Certificate evidencing the balance of the
Rights, if any, will be issued to the Record Date Shareholder or, if the Record
Date Shareholder so instructs, to an additional transferee. The signature on the
Subscription Certificate must correspond with the name as written upon the face
of the Subscription Certificate in every particular, without alteration or
enlargement, or any change. A signature guarantee must be provided by an
eligible financial institution as defined in Rule 17Ad-15 of the Securities
Exchange Act of 1934, as amended, subject to the standards and procedures
adopted by the Fund.
Record Date Shareholders wishing to transfer all or a portion of their
Rights should allow at least five Business Days prior to the Expiration Date
for: (i) the transfer instructions to be received and processed by the
Subscription Agent; (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained Rights, if any; and (iii) the
Rights evidenced by such new Subscription Certificate to be exercised or sold by
the recipients thereof. Neither the Fund nor the Subscription Agent nor the
Dealer Manager shall have any liability to a transferee or transferor of Rights
if Subscription Certificates are not received in time for exercise or sale prior
to the Expiration Date.
Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred or charged in
connection with the purchase, sale or exercise of Rights will be for the account
of the transferor of the Rights, and none of such commissions, fees or expenses
will be paid by the Fund, the Subscription Agent or the Dealer Manager.
The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-Subscription
Privilege) may be effected through the facilities of The Depository Trust
Company ("DTC"). (Rights exercised through DTC are referred to as "DTC-Exercised
Rights"). Record Date Shareholders of DTC-Exercised Rights may exercise the
Over-Subscription Privilege in respect of such DTC-Exercised Rights by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York City time, on the Expiration Date, a Nominee Holder Over-Subscription
Exercise Form or a substantially similar form satisfactory to the Subscription
Agent, together with payment of the Subscription Price for the number of shares
for which the Over-Subscription Privilege is to be exercised.
DELIVERY OF SHARE CERTIFICATES
Certificates representing shares acquired in the Primary Subscription and
representing shares acquired pursuant to the Over-Subscription Privilege will be
mailed promptly after the expiration of the Offer once full payment for such
shares has been received and cleared. Participants in the Fund's Dividend
Reinvestment and Cash Purchase Plan (the "Plan") will have any shares acquired
in the Primary Subscription and pursuant to the Over-Subscription Privilege
credited to their shareholder dividend reinvestment accounts in the Plan.
Participants in the Plan wishing to exercise Rights for the shares of beneficial
interest held in their accounts in the Plan must exercise such Rights in
accordance with the procedures set forth above. Shareholders whose shares of
beneficial interest are held of record by Cede or by any other depository or
nominee on their behalf or their broker-dealer's behalf will have any shares
acquired in the Primary Subscription credited to the account of Cede or such
other depository or nominee. Shares acquired pursuant to the Over-Subscription
Privilege will be certificated and certificates representing such shares will be
sent directly to Cede or such other depository or nominee. Share certificates
will not be issued for shares credited to Plan accounts.
16
<PAGE> 21
FOREIGN RESTRICTIONS
Subscription Certificates will not be mailed to Record Date Shareholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States). Foreign Record Date Shareholders will receive
written notice of the Offer. The Rights to which such Subscription Certificates
relate will be held by the Subscription Agent for such foreign Record Date
Shareholders' accounts until instructions are received to exercise the Rights.
If no instructions have been received by 5:00 P.M., New York City time, three
business days prior to the Expiration Date, the Rights of those foreign Record
Date Shareholders will be transferred by the Subscription Agent to the Dealer
Manager, who will either purchase the Rights or use its best efforts to sell the
Rights. The net proceeds, if any, from the sale of those Rights by or to the
Dealer Manager will be remitted to foreign Record Date Shareholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER
The following discussion summarizes the principal federal income tax
consequences of the Offer to Record Date Shareholders and exercising
shareholders. It is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), U.S. Treasury regulations, Internal Revenue Service rulings and
policies and judicial decisions in effect on the date of this prospectus. This
discussion does not address all federal income tax aspects of the Offer that may
be relevant to a particular shareholder in light of his or her individual
circumstances or to shareholders subject to special treatment under the Code
(such as insurance companies, financial institutions, tax-exempt entities,
dealers in securities, foreign corporations, and persons who are not citizens or
residents of the United States), and it does not address any state, local or
foreign tax consequences. Accordingly, each shareholder should consult his or
her own tax advisor as to the specific tax consequences of the Offer to him.
Each shareholder should also review the discussion of certain tax considerations
affecting the Fund and its shareholders set forth under "Federal Taxation" below
and under "Taxation" in the SAI.
For federal income tax purposes, neither the receipt nor the exercise of
the Rights by Record Date Shareholders will result in taxable income to those
shareholders, and no loss will be realized if the Rights expire without
exercise.
A Record Date Shareholder's holding period for a share acquired upon
exercise of a Right begins with the date of exercise. A Record Date
Shareholder's basis for determining gain or loss upon the sale of a share
acquired upon the exercise of a Right will be equal to the sum of the
shareholder's basis in the Right, if any, and the Subscription Price. The
shareholder's basis in the Right will be zero unless either (i) the fair market
value of the Right on the date of distribution is 15% or more of the fair market
value on such date of the shares with respect to which the Right was
distributed, or (ii) the shareholder elects, in its federal income tax return
for the taxable year in which the Right is received, to allocate part of the
basis of such shares to the Right. If either of clauses (i) and (ii) is
applicable, then if the Right is exercised, the shareholder will allocate its
basis in the shares with respect to which the Right was distributed between such
shares and the Right in proportion to the fair market values of each on the date
of distribution. A shareholder's gain or loss recognized upon a sale of a share
acquired upon the exercise of a Right will be capital gain or loss (assuming the
share was held as a capital asset at the time of sale) and will be long-term
capital gain or loss if the share was held at the time of sale for more than one
year.
The foregoing is only a summary of the applicable federal income tax laws
presently in effect and does not include any state or local tax consequences of
the Offer. Shareholders should consult their own tax advisors concerning the tax
consequences of this transaction.
NOTICE OF NET ASSET VALUE DECLINE
The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. Accordingly,
the Expiration Date would be extended and the Fund would notify Record Date
Shareholders of any such decline and permit Exercising Rights Holders to cancel
their exercise of Rights.
17
<PAGE> 22
EMPLOYEE BENEFIT PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), profit sharing/retirement plans for
corporations and self-employed individuals and Individual Retirement Accounts
(collectively, "Retirement Plans") should be aware that additional contributions
of cash to the Retirement Plan (other than rollover contributions or
trustee-to-trustee transfers from other Retirement Plans) in order to exercise
Rights would be treated as Retirement Plan contributions and therefore, when
taken together with contributions previously made, may be treated as excess or
nondeductible contributions subject to excise taxes. In the case of Retirement
Plans qualified under Section 401(a) of the Code, additional cash contributions
could cause violations of the maximum contribution limitations of Section 415 of
the Code or other qualification rules. Retirement Plans in which contributions
are so limited should consider whether there is an additional source of funds
available within the Retirement Plan, including the liquidation of assets, with
which to exercise the Rights. Because the rules governing plans are extensive
and complex, Retirement Plans contemplating the exercise of Rights should
consult with their counsel prior to such exercise.
Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Section 511 of the Code. If any portion of an
Individual Retirement Account ("IRA") is used as security for a loan, the
portion so used is treated as a distribution to the IRA depositor.
ERISA contains fiduciary responsibility requirements, and ERISA and the
Code contain prohibited transactions rules that may impact the exercise of
Rights. Due to the complexity of these rules and the penalties for
noncompliance, Retirement Plans should consult with their counsel regarding the
consequences of their exercise of Rights under ERISA and the Code.
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT DATE
- ----- ---------------
<S> <C>
Record Date............................................ , 1999
Subscription Period.................................... , 1999
to*
,
1999
Expiration Date........................................ , 1999*
Subscription Certificates and Payment for Shares
Due+................................................. , 1999*
Notice of Guaranteed Delivery Due...................... , 1999*
[ ,]*
Payment for Guarantees of Delivery Due................. 1999
[ ,]*
Confirmation Mailed to Participants.................... 1999
</TABLE>
- ---------------
* Unless the Offer is extended.
** Shares of beneficial interest of the Fund are expected to trade on the NYSE
with due bills attached from , 1999 through , 1999.
You are encouraged to contact your broker, bank or financial adviser about
your ability to participate in the Offer if you anticipate purchase or sale
activity during such period.
+ A shareholder exercising Rights must deliver either (i) a Subscription
Certificate and payment for shares or (ii) a Notice of Guaranteed Delivery by
the Expiration Date.
USE OF PROCEEDS
If all the Rights are exercised in full at the Subscription Price of
$[ ], the net proceeds of the Offer to the Fund, assuming all [ ]
shares offered hereby are sold, are estimated to be approximately $[ ],
after deducting Offering expenses payable by the Fund, estimated at
approximately $500,000. The Manager anticipates that the Fund will take up to
thirty days from its receipt of the net proceeds of the Offer
18
<PAGE> 23
to invest or otherwise employ such proceeds [, but in no event will any such
investment use take longer than six months.] Pending the use of the proceeds of
the Offer, the proceeds will be held in U.S. Government securities (which term
includes obligations of the United States Government, its agencies or
instrumentalities) and other high-quality, short-term money market instruments.
While the proceeds are invested in U.S. Government securities and other
high-quality, short-term money market instruments, the proceeds will not be
invested in securities consistent with the Fund's objective of high current
income.
INVESTMENT OBJECTIVES AND POLICIES
The Fund seeks, through a professionally managed, diversified portfolio of
income-producing securities, the highest current income obtainable consistent
with reasonable risk as determined by the Manager. As a secondary objective, the
Fund seeks capital gains where consistent with its primary objective. There can
be no assurance that the Fund's objectives will be achieved.
The Fund may invest its assets in a broad range of income-producing
securities, such as U.S. corporate fixed income securities, debt obligations of
the U.S. Government and its agencies and instrumentalities, debt obligations of
foreign governments and their agencies and instrumentalities and other fixed
income securities, including fixed income securities which may be denominated in
foreign currencies, any of which fixed income securities may or may not be
rated. The Fund has no requirements regarding whether the income-producing
securities it purchases must be rated or, if such securities are rated, what the
minimum or maximum rating on such securities must be. High yield securities
normally offer a current yield or yield to maturity which is significantly
higher than the yield available from securities rated in the three highest
categories as assigned by S&P or Moody's. The characteristics of the fixed
income securities in the Fund's portfolio, such as the maturity and the type of
issuer, affects yields and yield differentials, which vary over time. The actual
yield realized by an investor is subject, among other things, to the Fund's
expenses and the investor's transaction costs. The Fund, if market and economic
conditions warrant, may invest all or a portion of its assets in different
segments of the fixed income securities market in order to achieve the Fund's
objectives.
The Manager's judgment as to the "reasonableness" of the risk involved in
any particular investment is a function of: its experience in managing fixed
income investments; its evaluation of general economic and financial conditions
and of a specific issuer's (a) business and management, (b) cash flow, (c)
earnings coverage of interest and dividends, (d) ability to operate under
adverse economic conditions, and (e) fair market value of assets; and its
evaluation of such other considerations as the Manager may deem appropriate.
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.
The Fund normally does not engage in the trading of fixed income securities
for the purpose of realizing short term profits, but it adjusts its portfolio as
considered advisable in view of prevailing or anticipated market conditions and
the Fund's investment objectives. Accordingly, the Fund may sell portfolio
securities in anticipation of a rise in interest rates and purchase fixed income
securities for inclusion in its portfolio in anticipation of a decline in
interest rates. In addition, the Fund may sell portfolio securities denominated
in foreign currencies in anticipation of appreciation of such currencies
relative to the U.S. dollar, and may purchase securities denominated in foreign
currencies in anticipation of an appreciation of such currencies relative to the
U.S. dollar. Frequency of portfolio turnover is not a limiting factor should the
Manager deem it desirable to purchase or sell portfolio securities.
There are market and investment risks associated with an investment in any
fixed income security and the value of an investment in the Fund will fluctuate
over time. In seeking to achieve its investment objectives, the Fund invests in
fixed income securities based on the Manager's analysis without relying on
published ratings, if any, for such securities. The various investment standards
which are used by the Manager in selecting investments are included in the
investment policies of the Fund, discussed below. While seeking to maximize
current return, the Manager closely monitors developments that may affect the
value of the Fund's portfolio securities, as well as potential investments and
broad trends in the economy. The Fund invests in a particular fixed income
security if in the view or the Manager the increased yield on such security is
sufficient to
19
<PAGE> 24
compensate for a reasonable element of assumed risk. Since investments are based
upon the Manager's analysis rather than on the basis of published ratings,
achievement of the Fund's goals will depend more upon the abilities of the
Manager than would otherwise be the case. The characteristics of the rating
categories of S&P and Moody's are described in Appendix A.
Fixed income securities in which the Fund may invest include: domestic or
foreign corporate debt obligations (as well as debt and preferred stock issues,
including securities convertible into equity securities), debt obligations of
the U.S. Government or foreign governments and their agencies and
instrumentalities, fixed income securities denominated in foreign currencies,
collateralized mortgage obligations, municipal bonds and other income-producing
securities which the Manager considers appropriate. Such securities may be rated
or unrated by rating agencies.
The Fund's investment philosophy includes the premise that, over the long
term, a broadly diversified portfolio of high yield, fixed income securities
should, taking into account possible losses, provide a higher rate of return
than that achievable on a portfolio of higher rated securities. The Fund's
objective is to achieve the highest current income obtainable consistent with
reasonable risk through (i) broad diversification, (ii) the Manager's credit
analysis of the issues in which the Fund invests, (iii) purchase of high yield
securities at discounts from par or stated value when practicable and (iv)
monitoring and seeking to anticipate changes and trends in the economy and
financial markets which might affect the prices of portfolio securities.
As a secondary objective, the Fund seeks capital gains where consistent
with its primary investment objective. In some circumstances, temporary
defensive strategies may be implemented to preserve or enhance capital even at
the sacrifice of current yield. Such strategies, which may be used singly or in
any combination, may include, but are not limited to, investments in fixed
income discount securities or investments in money market instruments.
The Fund anticipates that in normal circumstances 90% to 100% of its assets
will be invested in income-producing securities. As a matter of fundamental
policy, at least 65% of the Fund's assets will, in normal circumstances, be
invested in securities which provide the potential to result in high income to
the Fund, but which have speculative characteristics such as lower credit
quality, currency exchange risk, liquidity constraints and/or risk associated
with related options and hedging activities. This fundamental policy may not be
changed without the approval of the holders of a majority of the Fund's shares
(as defined under "Investment Restrictions"). The Fund may invest in common
stocks, rights or other equity securities when consistent with the Fund's
objectives, but will generally hold such equity investments only as a result of
purchases of unit offerings of income-producing securities which include such
securities or in connection with an actual or proposed conversion or exchange of
income-producing securities.
During temporary defensive periods when the Manager deems it appropriate,
the Fund may invest all or a portion of its assets in cash (including foreign
currencies) or money market instruments such as: short term obligations of the
U.S. Government, its agencies or instrumentalities; other short term debt
securities; commercial paper; bank certificates of deposit or bankers'
acceptances of domestic or Canadian charter banks having total assets in excess
of $1 billion; and any of the foregoing investments subject to short term
repurchase agreements (an instrument under which the purchaser acquires
ownership of the underlying obligation and the seller agrees, at the time of
sale, to repurchase the obligation at a mutually agreed upon time and price).
The yield on these securities will as a general matter tend to be lower than the
yield on other securities to be purchased by the Fund.
The Fund may also purchase and sell options on fixed income securities and
on indices based on fixed income securities and may engage in interest rate,
foreign currency and other hedging transactions. See "Other Investment
Practices."
The Fund may invest in fixed income securities purchased in direct
placements. Fixed income securities obtained by means of direct placements are
subject to statutory or contractual restrictions and delays on resale. They are
therefore, often referred to as "restricted securities." Restricted securities
may generally be resold only in a privately negotiated transaction with a
limited number of purchasers or in a public offering registered under the
Securities Act of 1933. Private or public sales of such securities by the Fund
may involve significant
20
<PAGE> 25
delays and expense. Private sales require negotiation with one or more
purchasers and generally produce less favorable prices than the sale of similar
unrestricted securities. Public sales generally involve the time and expense of
the preparation and processing of a registration statement under the Securities
Act of 1933 (and the possible decline in value of the securities during such
period) and may involve the payment of underwriting commissions. The Fund may
have to bear the costs of registration in order to sell such shares publicly.
Direct placements of debt securities have frequently resulted in higher
yields and restrictive covenants providing greater protection for the purchaser.
An issuer is often willing to create more attractive features in its securities
issued privately, because it has averted the expense and delay involved in a
public offering of its securities. Also, adverse conditions in the public
securities markets may at certain times preclude a public offering of an
issuer's securities.
In determining which securities to purchase for the Fund or hold in the
Fund's portfolio, the Manager relies on information from various sources,
including research analysis and appraisals of brokers and dealers; its own views
regarding economic developments and interest rate trends; and the Manager's own
analysis of factors it deems relevant. The Manager has substantial experience in
the management of portfolios consisting of securities similar to those in which
the Fund may invest.
U.S. CORPORATE FIXED INCOME SECURITIES
"U.S. Corporate Fixed Income Securities" in which the Fund may invest
include bonds, debentures, notes, equipment lease certificates, commercial
paper, loan participations and preferred and preference stock of U.S. corporate
issuers and may involve equity features, such as conversion or exchange rights,
warrants or the purchase of common stock in a unit transaction. These securities
will include fixed income debt securities rated below investment grade by
recognized rating services or non-rated securities of comparable quality. See
Appendix A.
Securities rated below investment grade, and non-rated securities of
comparable quality, are subject to greater risk of loss of principal and
interest than higher rated securities and are generally considered to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. They generally are considered to be subject to greater risk
than securities with higher ratings in the event of a deterioration of general
economic conditions.
Included among the U.S. Corporate Fixed Income Securities in which the Fund
may invest are securities issued in connection with corporate restructurings,
such as takeovers or leveraged buyouts, which may pose particular risks but
often provide higher relative rates of return. Securities issued to finance
corporate restructurings may have special credit risks due to the highly
leveraged condition of the issuers. In addition, such issuers may lose
experienced management as a result of the restructuring. Finally, the market
price of such securities may be more volatile to the extent that expected
benefits from the restructuring do not materialize. Also, in the lower quality
segments of the fixed income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do such changes with respect to higher quality segments of the fixed
income securities market, causing greater yield and price volatility.
Lower rated and comparable non-rated securities tend to offer higher yields
than higher rated securities with the same maturities. Since lower rated
securities are considered to be more speculative and generally involve greater
risks of loss of income and principal than higher rated securities, investors
should examine carefully the relative risks associated with the Fund's
investments in securities that carry lower ratings and in comparable non-rated
securities. The Manager will attempt to reduce these risks through
diversification of the U.S. Corporate Fixed Income Securities included in the
Fund's portfolio and by analysis of each issuer and its ability to make timely
payments of income and principal.
[Capital appreciation may result from an improvement in the credit standing
of an issuer whose securities are held in the Fund's portfolio or from a general
lowering of interest rates, or a combination of both.
21
<PAGE> 26
Conversely, capital depreciation may result, for example, from a lowered credit
standing or a general rise in interest rates, or a combination of both.]
U.S. Corporate Fixed Income Securities may also include collateralized
mortgage obligations which are debt obligations issued generally by finance
subsidiaries or trusts that are secured by mortgage-backed certificates,
including, in many cases, GNMA certificates, FHLMC certificates and FNMA
certificates, together with certain funds and other collateral.
Scheduled distributions on the mortgage-backed certificates pledged to
secure the collateralized mortgage obligations, together with certain funds and
other collateral, should be sufficient to make timely payments of interest on
the collateralized mortgage obligations, and to retire the collateralized
mortgage obligations not later than their stated maturity. Since the rate of
payment of principal of the collateralized mortgage obligations will depend on
the rate of payment (including prepayments) of the principal of the underlying
mortgage-backed certificates, the actual maturity of the collateralized mortgage
obligations could occur significantly earlier than their stated maturity. The
collateralized mortgage obligations may be subject to redemption under certain
circumstances. Collateralized mortgage obligations bought at a premium (i.e., a
price in excess of principal amount) may involve additional risk of loss of
principal in the event of unanticipated prepayments of the underlying mortgages
because the premium may not have been fully amortized at the time the obligation
is repaid.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure the collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of the issuer and are not insured or guaranteed by
GNMA, FHLMC, FNMA or any other governmental agency, or by any other person or
entity. The issuers of collateralized mortgage obligations typically have no
significant assets other than those pledged as collateral for the obligations.
The staff of the SEC has determined that certain issuers of collateralized
mortgage obligations are investment companies for purposes of Section 12(d) of
the 1940 Act and the Fund's investments in such issuers are subject to
restrictions on investments in the securities of other investment companies
described under "Investment Restrictions" in the SAI.
The Fund may invest in U.S. Corporate Fixed Income Securities that are
zero-coupon securities. For a description of the market volatility of such
investments and the tax treatment of zero-coupon securities, see "U.S.
Government Securities" above and "Taxation" in the SAI.
U.S. GOVERNMENT SECURITIES
"U.S. Government Securities" include the following.
U.S. Treasury Securities. The Fund may invest in U.S. Treasury securities,
including bills, notes and bonds issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and their dates of issuance.
Obligations Issued or Guaranteed by U.S. Government Agencies and
Instrumentalities. The Fund may invest in obligations issued by agencies of the
U.S. Government or instrumentalities established or sponsored by the U.S.
Government. These obligations, including those that are guaranteed by federal
agencies or instrumentalities, may or may not be backed by the "full faith and
credit" of the United States. Obligations of the Government National Mortgage
Association ("GNMA"), the Farmers Home Administration and the Export-Import Bank
are backed by the full faith and credit of the United States. Securities in
which the Fund may invest that are not backed by the full faith and credit of
the United States include, among others, obligations issued by the Tennessee
Valley Authority, the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") and the United States Postal
Service, each of which has the Right to borrow from the United States Treasury
to meet its obligations, and obligations of the Federal Farm Credit Bank and the
Federal Home Loan Bank, the obligations of which may be satisfied only by the
individual credit of the issuing agency. Investments in FHLMC obligations may
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include collateralized mortgage obligations issued by FHLMC. In the case of
securities not backed by the full faith and credit of the United States, the
Fund must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the U.S. if
the agency or instrumentality does not meet its commitments.
Mortgage-Related Securities Issued by U.S. Government
Instrumentalities. The Fund may invest in mortgage-backed securities issued by
GNMA, FNMA or FHLMC and representing undivided ownership interests in pools of
mortgages. The mortgages backing these securities include conventional 30-year
fixed rate mortgages, 15-year fixed rate mortgages, graduated payment mortgages
and adjustable rate mortgages. The U.S. Government or the issuing agency
guarantees the payment of the interest on and principal of these securities.
However, the guarantees do not extend to the securities' yield or value, which
are likely to vary inversely with fluctuations in interest rates, nor do the
guarantees extend to the yield or value of the Fund's shares. These securities
are in most cases "pass-through" instruments through which the holders receive a
share of all interest and principal payments from the mortgage underlying the
securities, net of certain fees. Because the principal amounts of such
underlying mortgages may generally be prepaid in whole or in part by the
mortgagees at any time without penalty and the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the average
life of a particular issue of pass-through securities. Mortgage-backed
securities are often subject to more rapid repayment than their stated maturity
date would indicate as a result of the pass-through of prepayments of principal
on the underlying mortgage obligations. For example, securities backed by
mortgages with 30-year maturities are customarily treated as prepaying fully in
the twelfth year and securities backed by mortgages with 15-year maturities are
customarily treated as prepaying fully in the seventh year. While the timing of
prepayments of graduated payment mortgages differs somewhat from that of
conventional mortgages, the prepayment experience of graduated mortgages is
basically the same as that of the conventional mortgages of the same maturity
dates over the life of the pool. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected to
accelerate. When the mortgage obligations are prepaid, the Fund reinvests the
prepaid amounts in other income-producing securities, the yields of which
reflect interest rates prevailing at the time. Therefore, the Fund's ability to
maintain a portfolio of high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid
mortgage-backed securities. Moreover, prepayments of mortgages which underlie
securities purchased at a premium could result in capital losses.
The Fund may invest in "zero coupon" Treasury securities, which are U.S.
Treasury bills, notes, and bonds which have been stripped of their unmatured
interest coupons, and receipts or certificates representing interests in such
stripped debt obligations and coupons. A zero coupon security pays no interest
to its holder during its life. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price).
Zero coupon Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly such securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. In order to be consistent with its investment objective of obtaining
current income, the Fund does not anticipate that it will normally hold such
zero coupon securities to maturity. Current federal tax law requires that a
holder (such as the Fund) of a zero coupon security accrue a portion of the
discount at which the security was purchased as income each year even though the
Fund receives no interest payment in cash on the security during the year. For
additional discussion of the tax treatment of "zero coupon" Treasury securities,
see "Taxation" in the SAI.
Additional Considerations. U.S. Government securities are considered among
the most creditworthy of fixed income investments. The yields available from
U.S. Government securities are generally lower than the yields available from
corporate debt securities. The values of U.S. Government securities (like those
of fixed income securities generally) will change as interest rates fluctuate.
During periods of falling U.S. interest rates, the values of outstanding long
term U.S. Government securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. The
magnitude of these
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fluctuations will generally be greater for securities with longer maturities.
Although changes in the value of U.S. Government securities will not affect
investment income from those securities, they will affect the Fund's net asset
value.
FOREIGN SECURITIES
"Foreign Securities" include debt securities issued or guaranteed as to
payment of principal and interest by foreign corporations, governments,
quasi-governmental entities, governmental agencies, supranational entities and
other governmental entities and are denominated in the currencies of such
countries or in U.S. dollars (including debt securities of an issuer in any such
country denominated in the currency of another such country).
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of "quasi-governmental entities" are
issued by entities owned by either a national, state or equivalent government or
are obligations of a political unit that are not backed by the national
government's full faith and credit and general taxing powers.
Additional Considerations. Investment in the Fund's shares requires
consideration of certain factors that arise from the Fund's investment in
Foreign Securities.
Currency Fluctuations. The Fund will invest in debt securities denominated
in foreign currencies. A change in the value of any such currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. Such changes will also affect
the Fund's yield, income and distributions to shareholders. In addition,
although the Fund will receive income in such currencies, the Fund will be
required to compute and distribute its income in U.S. dollars. Therefore, if the
exchange rate for any such currency depreciates after the Fund's income has been
accrued and translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make such distributions. Similarly, if a
foreign currency exchange rate depreciates between the time the Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount of such
currency at the time they were incurred. Under the Code, changes in an exchange
rate which occur between the time the Fund accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount that is higher or lower than the Fund's original U.S. dollar
cost may result in foreign exchange gains or losses, which will increase or
decrease distributable net investment income. The Fund will invest only in
foreign currency denominated debt securities that are freely convertible into
U.S. dollars without legal restriction at the time of investment.
Foreign Withholding Taxes. The Fund's interest income from Foreign
Securities issued in local markets may, in some cases, be subject to applicable
withholding taxes imposed by governments in such markets. Because the Fund,
under current market conditions, is unlikely to have more than 50% of its total
assets invested in securities of foreign governments or corporations, the Fund
probably will not be entitled to "pass-through" to shareholders the amount of
foreign taxes paid by the Fund. See "Taxation" in the SAI.
Other Risks and Costs of Foreign Investment. Certain foreign countries are
not as stable politically as the United States. In addition, there may be less
government supervision and regulation of foreign securities exchanges, brokers
and listed companies than exists in the United States. Restrictions and controls
on investment in the securities markets of some countries may have an adverse
effect on the availability and costs to the Fund of investments in those
countries. In addition, the possibility of expropriations, confiscatory
taxation, currency blockage, political, economic or social instability or
diplomatic developments could affect assets of the Fund that are invested in
Foreign Securities.
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There may also be less publicly available information about foreign issuers
than is contained in reports and reflected in ratings published for U.S.
issuers. Some foreign securities may be less liquid and more volatile than U.S.
securities. Transaction costs on foreign securities exchanges may be higher than
in the United States, and foreign securities settlements may, in some instances,
be subject to delays and related administrative uncertainties.
In addition, custodial, valuation, communication and other administrative
costs relating to foreign securities are generally higher than corresponding
costs relating to domestic securities.
The investment objectives and policies described above are fundamental
objectives and policies and may not be changed without shareholder approval. See
"Investment Restrictions" in the SAI.
BORROWING AND OTHER SENIOR SECURITIES
The Fund may borrow to purchase portfolio securities (i.e., leverage its
portfolio). To the extent that the Fund engages in any such borrowings, the 1940
Act requires the Fund to maintain "asset coverage" of not less than 300% of its
"senior securities representing indebtedness," as those terms are defined and
used in the 1940 Act. In addition, the Fund may not make any cash distributions
to shareholders if, after the distribution, there would be less than 300% asset
coverage of a senior security representing indebtedness for borrowings
(excluding for this purpose certain evidences of indebtedness made by a bank or
other entity and privately arranged and not intended to be publicly
distributed). The Fund is also permitted to issue preferred shares on conditions
outlined in the 1940 Act, including that there be "asset coverage" of not less
than 200% with respect to any such shares
Any investment gains made available as a result of the Fund's borrowing, in
excess of interest paid on such borrowings, will cause the net income per share
and the net asset value per share of the Fund to be greater than would otherwise
be the case. On the other hand, if the investment performance of the additional
fixed income securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to the Fund, then the net income per share
and net asset value per share of the Fund will be less than would otherwise be
the case.
OTHER INVESTMENT PRACTICES
In connection with the investment objectives and policies described above,
the Fund may: purchase and sell options on fixed income securities and on
indices based on fixed income securities; engage in interest rate, foreign
currency, and other hedging transactions; lend its portfolio securities;
purchase and sell fixed income securities on a "when issued" or "forward
delivery" basis; and enter into repurchase agreements. These investment
practices, which are described below and in the SAI, entail risks and may be
changed without shareholder approval.
SECURITIES OPTIONS TRANSACTIONS
The Fund may deal in options on any fixed income securities which the Fund
may purchase for its portfolio, which may be listed for trading on a national
securities exchange or traded over-the-counter. In general, the Fund may write
(sell) options on up to 25% of its net assets. The Fund may, without regard to
any limitation, write (sell) options on the U.S. Government securities in its
portfolio and may purchase put and call options. The SEC requires that
obligations of investment companies such as the Fund, in connection with option
sale positions, comply with certain segregation or cover requirements which are
more fully described in the SAI. There is no limitation on the amount of the
Fund's assets which can be used to comply with such segregation or cover
requirements.
A call option gives the purchaser the Right to buy, and the writer the
obligation to sell, the underlying, security at the agreed upon exercise (or
"strike") price during 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 strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the Right under the
option contract.
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The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of fixed income securities in the
Fund's portfolio (e.g., by the purchase of a put option) and to protect against
an increase in the cost of fixed income securities that the Fund may seek to
purchase in the future (e.g., by the purchase of a call option). In the event
the Fund purchases put and call options, paying premiums therefor, and price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, to the extent underlying securities
correlate in value to the Fund's portfolio securities, losses of the premiums
paid may be offset by an increase in the value of the Fund's portfolio
securities (in the case of a purchase of put options) or by a decrease in the
cost of acquisition of securities by the Fund (in the case of a purchase of call
options).
The Fund may also sell put and call options as a means of increasing the
yield on the Fund's portfolio and also as a means of providing limited
protection against decreases in the market value of the Fund's portfolio. When
the Fund sells an option, if the underlying securities do not increase (in the
case of a call option) or decrease (in the case of a put option) to a price
level that would make the exercise of the option profitable to the holder of the
option, the option will generally expire without being exercised and the Fund
will realize as a profit the premium paid for such option. When a call option of
which the Fund is the writer is exercised, the option holder purchases the
underlying security at the strike price and the Fund does not participate in any
increase in the price of such securities above the strike price. When a put
option of which the Fund is the writer is exercised, the Fund will be required
to purchase the underlying securities at the strike price, which may be in
excess of the market value of such securities.
Over-the-counter options ("OTC options") differ from exchange-traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of Expiration Dates and exercise prices than for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is normally
done by reference to information from a market maker, which information is
carefully monitored by the Manager and verified in appropriate cases.
It will generally be the Fund's policy, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering into
a "closing purchase transaction," if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of cancelling the Fund's position
as a seller. The premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying security at
the time of each transaction. To the extent options sold by the Fund are
exercised and the Fund either delivers portfolio securities to the holder of a
call option or liquidates securities in its portfolio as a source of funds to
purchase securities put to the Fund, the Fund's portfolio turnover rate may
increase, resulting in a possible increase in short term capital gains and a
possible decrease in long term capital gains.
During the option period, the Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise in value, and the Fund, as a 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 could result in
the security being "called away" at the strike price of the option which may be
substantially below the fair market value of such security. For the secured put
writer, substantial depreciation in the value of the underlying security would
result in the security being "put to" the writer at the strike price of the
option, which may be substantially in excess of the fair market value of such
security. If a covered call option or a secured put option expires unexercised,
the writer realizes a gain, and the buyer a loss, in the amount of the premium.
As part of its options transactions, the Fund may also use index options,
subject to the limitation that the Fund may write (sell) options on up to 25% of
its net assets and may purchase put and call options without regard to any
limitation. Indices on which the Fund may purchase and sell options include
indices on the types of fixed income securities which the Fund may purchase for
its portfolio (to the extent an active market in any
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<PAGE> 31
such index exists) and equity-based indices to the extent the Fund may invest in
equity securities consistent with the Fund's investment objectives and to the
extent that the Manager determines that there exists an acceptable level of
correlation between the price movements of such an equity index and price
movements of fixed income securities held in or to be acquired for the Fund's
portfolio. Through the writing or purchase of index options, the 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 securities
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 strike price of the option.
If no active secondary market exists for any index with respect to which the
Fund purchases or sells options, such options will be treated as illiquid
securities for purposes of the Fund's investment restrictions.
Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of an index and,
therefore, the Fund bears the risk of a loss on an index option which is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
CURRENCY, INTEREST RATE AND OTHER HEDGING TRANSACTIONS
In order to protect the dollar equivalent value of its portfolio securities
against declines resulting from currency value fluctuations and changes in
interest rate or other market changes, the Fund may enter into various hedging
transactions such as forward foreign currency contracts, financial instrument
and currency futures contracts and related options contracts.
The Fund may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the fixed income
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts on such financial instruments (e.g., futures contracts on
U.S. Treasury bonds and notes and on GNMA securities) and interest rate-related
indices (to the extent an active market in any such indices exists), put and
call options on such futures contracts and on such financial instruments. The
Fund expects to enter into these transactions to "lock in" a return or spread on
a particular investment or portion of its portfolio and to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date.
The Fund may also enter into various foreign currency transactions,
including forward foreign currency contracts, foreign currency or currency index
futures contracts and put and call options on such contracts or on currencies. A
forward foreign currency contract involves an obligation to purchase or sell a
specific currency for a set price at a future date. Forward foreign currency
contracts are established in the interbank market and are conducted directly
between currency traders (usually large commercial banks or other financial
institutions) on behalf of their customers. Futures contracts are similar to
forward contracts except that they are traded on an organized exchange and the
obligations thereunder may be offset by taking an equal but opposite position to
the original contract, with profit or loss determined by the relative prices
between the opening and offsetting positions. The Fund expects to enter into
these foreign currency contracts only in two circumstances: to "lock in" the
U.S. dollar equivalent price of a security the Fund is buying or selling that is
denominated in a non-U.S. currency; or to protect against an anticipated
substantial decline of the currency of a particular country against the U.S.
dollar.
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The Fund will not engage in the foregoing transactions for speculative
purposes, but only as a means to hedge risks associated with management of the
Fund's portfolio. Typically, investment in these contracts requires the Fund to
deposit with the applicable exchange or other specified financial intermediary
as a good faith deposit for its obligations an amount of cash or specified debt
securities which initially is 1%-5% of the face amount of the contract and which
thereafter fluctuates on a periodic basis as the value of the contract
fluctuates.
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such investment companies
must either segregate cash or liquid portfolio securities in the amount of their
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or asset coverage requirements. There is no limitation as to the percentage of
the Fund's assets which may be invested in such transactions.
The Fund will typically enter into a futures contract or related option
only if it constitutes a bona fide hedging position under applicable
regulations. Otherwise the Fund will limit its investments in futures contracts
and related options so that, immediately after such investment, the sum of the
amount of its initial margin deposits on open futures contracts and its premiums
on open options contracts will not exceed 5% of the Fund's total assets at
current value.
All of the foregoing transactions present certain risks. In particular, the
variable degree of correlation between price movements of futures contracts and
dollar equivalent price movements in the currency or security being hedged
creates the possibility that losses on the hedge may be greater than gains in
the value of the Fund's securities. In addition, these instruments may not be
liquid in all circumstances and are generally closed out by entering into
offsetting transactions rather than by disposing of the obligations. As a
result, in volatile markets, the Fund may not be able to close out a transaction
without incurring losses. Although the use of these contracts should tend to
reduce the risk of loss due to a decline in the value of the hedged currency or
security, at the same time, their use could tend to limit any potential gain
which might result from an increase in the value of the hedged currency or
security. Finally, the daily deposit requirements in futures contracts create an
ongoing greater potential financial risk than do option purchase transactions,
where the exposure is limited to the cost of the premium for the option.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the Manager to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
If the Manager's expectations are not met, the Fund would be in a worse position
than if a hedging strategy had not been pursued. For example, if the Fund has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of securities in its portfolio and the price of such
securities increases instead, the Fund will lose part or all of the benefit of
the increased value of its securities because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has
insufficient cash to meet daily variation margin requirements, it may have to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Fund may have to sell securities at a time when it is disadvantageous to do
so.
In addition to engaging in transactions utilizing options on futures
contracts, the Fund may purchase put and call options on securities and on
currencies and, as developed from time to time, on interest or currency indices
and other instruments. Purchasing options may increase investment flexibility
and improve total return, but also risks loss of the option premium if an asset
the Fund has the option to buy declines in value or if an asset the Fund has the
option to sell increases in value.
New options and futures contracts and various combinations thereof continue
to be developed and the Fund may invest in any such options and contracts as may
be developed to the extent consistent with its investment objectives and
regulatory requirements applicable to investment companies.
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OTHER INVESTMENT CHARACTERISTICS OF FIXED INCOME SECURITIES
When and if available, fixed income securities may be purchased at a
discount from face value. However, the Fund does not intend to hold such
securities to maturity for the purpose of achieving potential capital gains,
unless current yields on the securities remain attractive. The market value of
fixed income securities generally fluctuates inversely with changes in interest
rates; as market interest rates increase, the market value of fixed income
securities tends to decrease so that the yields to maturity on such securities
tend to equal the stated interest rates on newly issued fixed income securities
with comparable maturities. To the extent fixed income securities are purchased
at a price less than the face (principal) value thereof, the yield to the Fund
will exceed the stated coupon rate on such securities and will provide the Fund
with a return comparable to newly issued fixed income obligations of like
maturity. In addition, discounted securities may provide a greater opportunity
for capital gains in the event that interest rates decline than securities
trading at par or at a premium over par. Consequently, the ability of the Fund
to purchase fixed income securities at less than their face value provides an
increased supply of income-producing securities available for purchase, provides
a potential for capital gains and does not necessarily increase the risks to the
Fund's portfolio.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
DILUTION
If you do not exercise all of your Rights during the Subscription Period,
you should expect that, when the Offering is over, you will own relatively less
of the Fund than if you had exercised all of your Rights. The Fund cannot tell
you precisely how much less of the Fund you would own because the Fund does not
know how many of the Fund's shareholders will exercise their Rights and how many
of their Rights they will exercise.
An immediate dilution of the aggregate net asset value of the shares may be
experienced as a result of the Offer because the Subscription Price per Share
may be less than the Fund's net asset value per share on the Expiration Date,
and the number of shares outstanding after the Offer is likely to increase in a
greater percentage than the increase in the size of the Fund's assets. Such
dilution will disproportionately affect shareholders who do not exercise their
rights in full. Although it is not possible to state precisely the amount of any
such decrease in net asset value, because it is not known at this time what the
net asset value per share will be at the Expiration Date or what proportion of
the Shares will be subscribed, such dilution could be substantial. For example,
assuming all the Shares are sold at the Subscription Price of and the
net asset value per share at the expiration date was , the Fund's net
asset value per share would be reduced by approximately per share or
%. The distribution to shareholders of transferable Rights which themselves
may have a realizable value will afford nonparticipating shareholders the
potential of receiving a cash payment upon the sale of such Rights, receipt of
which may be viewed as partial compensation for any possible dilution. The Fund
cannot give any assurance that a market for the Rights will develop or as to the
value, if any, that the Rights will have.
The fact that the Rights are transferable may reduce the effects of any
dilution as a result of the Offer. You can transfer or sell your Rights. The
cash received from the sale of Rights is partial compensation for any possible
dilution. The Fund cannot give any assurance that a market for the Rights will
develop or as to the value, if any, that the Rights will have.
HIGH YIELD INVESTMENTS; VALUATION
Investments in fixed income securities offering the high current income
sought by the Fund, while generally providing greater income than investments in
higher rated securities, usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such securities). Accordingly, an
investment in shares of the Fund should not be your only investment and may not
be appropriate for you at all if you are not able to bear the greater risk of
loss inherent in seeking higher income. The Fund will seek to reduce risk by
investing its assets in a number of issuers, performing credit analyses of
potential investments and monitoring current developments and trends in both the
economy and financial markets. The Fund's use of options on securities,
securities indices, foreign currencies, futures contracts, options on futures
contracts, forward contracts and other hedging strategies will result in the
loss of principal under certain market conditions and will involve certain other
risks. See the SAI.
High yield securities may be regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and the
ability of the Fund to achieve its investment objectives may, to the extent of
its investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in high yield security prices because the advent of a recession could
lessen the ability of a highly leveraged company to make principal and interest
payments on its debt securities. If the issuer of high yield securities
defaults, the Fund may incur additional expenses to seek
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recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The value of shares of the Fund will vary with increases or decreases in
the aggregate value of the Fund's portfolio securities as well as with other
market factors such as the relative demand for, and supply of, such shares in
the market, the Fund's investment performance, the Fund's dividends and yield
and investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. The net asset value of the Fund
will change as the general levels of interest rates fluctuate. When interest
rates decline, the value of portfolio securities can be expected to rise.
Conversely, when interest rates rise, the value of portfolio securities can be
expected to decline. Moreover, the value of fixed income securities that the
Fund purchases might fluctuate more than the value of higher rated fixed income
securities. Lower-rated fixed income securities generally tend to reflect short
term corporate and market developments to a greater extent than higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Generally, values for longer maturity issues will fluctuate more
than values for shorter maturity issues.
HEDGING
If the Fund is engaged in hedging transactions and the expectation of the
Manager as to changes in interest rates or its evaluation of the normal yield
relationship between two securities proves to be incorrect, the Fund's income,
net asset value and potential capital gains may be decreased or its potential
capital losses may be increased. The Fund's use of options on securities and
securities indices, futures contracts, options on futures contracts, and other
hedging strategies will result in the loss of principal under certain market
conditions and will involve certain other risks. See the Statement of Additional
Information.
RISK OF LEVERAGE
The Fund's use of leverage creates special risks not associated with
unleveraged funds having similar investment objectives and policies. These risks
include a higher volatility of the net asset value of the Fund's shares and
potentially more volatility in the market value of the shares. If the investment
performance of the assets purchased with the proceeds of any leverage fails to
cover the interest and dividends on such leverage, the value of the shares may
decrease more quickly than would otherwise be the case, and dividends thereon
will be reduced or eliminated. This is the speculative effect of leverage.
As an owner of Fund shares, you will bear any decline in the net asset
value of the Fund's investments. As a result, the effect of leverage in a
declining market would result in a greater decrease in net asset value to
holders of Fund's shares than if the Fund were not leveraged. This would likely
be reflected in a greater decline in the market price for the Fund's shares. In
an extreme case, if the Fund's current investment income were not sufficient to
meet dividend and interest payments due in respect of any leverage, it could be
necessary for the Fund to liquidate certain of its investments, thereby reducing
the net asset value attributable to the Fund's shares. In addition, a decline in
the net asset value of the Fund's investments may affect the ability of the Fund
to make dividend payments on its shares and such failure to pay dividends or
make distributions may result in the Fund ceasing to qualify as a regulated
investment company under the Internal Revenue Code.
The 1940 Act generally imposes a 300% "asset coverage" test for "senior
securities representing indebtedness" and a 200% "asset coverage" test for
"senior securities representing stock." The 1940 Act generally restricts
distributions to shareholders while any senior security representing
indebtedness is outstanding and restricts distributions to the shareholders
while any senior security representing stock is outstanding, unless such
coverage requirements are satisfied. Furthermore, the 1940 Act generally limits
registered closed-end investment companies, such as the Fund, from issuing more
than one class of senior
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securities representing indebtedness and more than one class of senior
securities representing stock, subject to various exceptions.
DIVIDENDS AND DISTRIBUTIONS
Although changes in the value of the Fund's portfolio securities after the
purchase of such securities are reflected in the net asset value of the shares
of the Fund, such changes will not affect the income the Fund receives from such
securities. The dividends paid by the Fund will increase or decrease in relation
to the income received by the Fund from its investment. In any case, before
being distributed to you, the Fund's dividends will be reduced by the amount of
its expenses.
FOREIGN SECURITIES
Investing in foreign securities involves considerations and possible risks
not typically associated with investing in domestic securities. The value of
foreign securities is affected by changes in currency rates or exchange control
regulations, changes in governmental administration or economic or monetary
policy (in this country or abroad) and changed circumstances in dealing between
nations. Costs may be incurred in connection with conversions between various
currencies. Moreover, there may be less publicly available information about
foreign issuers than about domestic issuers, and foreign issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of domestic issuers. Securities of some foreign
issuers are less liquid and more volatile than securities of comparable domestic
issuers and foreign brokerage commissions are generally higher than in the
United States. Foreign securities markets may also be less liquid, more volatile
and less subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other factors not present
in the United States, including expropriation, confiscatory taxation, potential
difficulties in enforcing contractual obligations and possible extended
settlement periods.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a limiting factor when the
Fund deems it desirable to purchase or sell securities. A 100% annual turnover
rate would occur, for example, if all the securities in the portfolio were
replaced in a period of one year. A higher turnover rate necessarily involves
greater expenses to the Fund. The Fund will engage in portfolio trading if it
believes that a transaction will help in achieving its investment objectives.
DISCOUNT FROM NET ASSET VALUE
Shares of closed-end funds frequently trade at a market price which is less
than the value of the net assets owned by the Fund. The possibility that shares
of the Fund will trade at a discount from net asset value is a separate risk
from the risk that the Fund's net asset value will decrease. It should be noted,
however, that in some cases, shares of closed-end funds may trade at a premium
to net asset value. The Fund's shares have traded in the market above, at and
below net asset value since the commencement of the Fund's operations. The Fund
cannot predict whether its shares will trade at, below or above net asset value.
If, at any time, shares of the Fund are trading at a substantial discount
from net asset value, the Fund may take action to reduce or eliminate the
discount from net asset value at which the shares are trading. Such actions
could include, among other things, purchasing shares of the Fund in open market
transactions or pursuant to a cash tender offer, or recommending to the holders
of Fund shares that the Fund convert to an open-end investment company.
Conversion to an open-end investment company would make the shares of the Fund
redeemable upon demand by shareholders at prices based upon the then current net
asset value. See "Conversion to Open-End Status."
YEAR 2000
Like other registered investment companies and financial business
organizations worldwide, the Fund could be adversely affected if computer
systems on which the Fund relies, which primarily include those used
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<PAGE> 37
by the 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 (Y2K) Issue. Failure to successfully
address the Y2K Issue could result in interruptions to and other material
adverse effects on the Fund's business and operations. The Manager has commenced
a review of the Y2K Issue as it may affect the Fund and is taking steps it
believes are reasonably designed to address the Y2K Issue, although there can be
no assurances that these steps will be sufficient. In addition, there can be no
assurances that the Y2K Issue will not have any adverse effect on the companies
whose securities are held by the Fund or on global markets or economies
generally.
EURO CONVERSION
The recent 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 the Fund's portfolio. The euro was introduced
on January 1, 1999 by eleven European countries that are members of the European
Economic and Monetary Union (EMU). The transition to everyday usage of the euro,
including circulation of euro bills and coins, will occur during the period from
January 1, 1999 through December 31, 2001. 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 European Union (EU) members, including the
United Kingdom, did not officially implement the euro on January 1, 1999. If the
remainder of the transition to the euro does not take place as planned, there
could be negative effects, such as severe currency fluctuations and market
disruptions.
The 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. It is
possible that the transition could hurt the portfolio's performance.
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MANAGEMENT OF THE FUND
MANAGER
Scudder Kemper Investments, Inc. is the Fund's Manager. The principal
address of the Manager is 345 Park Avenue, New York, NY 10154-0010. The Manager,
a subsidiary of Zurich Financial Services, is one of the largest and most
experienced investment counsel firms in the United States. Zurich Financial
Services is a financial services holding company incorporated in Switzerland and
owned 57% by Zurich Allied AG and 43% by Allied Zurich p.l.c. The Manager has
served as investment manager to the Fund since December 31, 1997, when the
Manager replaced Kemper Financial Services, Inc. which had served as the Fund's
investment manager since the inception of the Fund. As of [August 31, 1998], the
Manager had more than $[241.1 billion] in assets under management.
Michael A. McNamara and Harry E. Resis, Jr. serve as Managing Directors and
Co-Portfolio Managers of the Fund and are responsible for the day-to-day
management of the Fund's portfolio. Mr. McNamara has been with what is now the
Manager since 1972. Mr. McNamara graduated with a B.S. in Business
Administration from the University of Missouri and earned an MBA from Loyola
University. Mr. Resis joined the Manager in 1988. He received a B.A. in Finance
from Michigan State University.
INVESTMENT MANAGEMENT AGREEMENT
The management agreement provides that the Manager acts as investment
adviser, manages the Fund's investments, administers the Fund's business
affairs, furnishes offices, necessary facilities and equipment, provides
clerical, bookkeeping and administrative services, provides shareholder and
information services and permits any of its officers or employees to serve
without compensation as Trustees or officers of the Fund if duly elected to such
positions. Under the management agreement, the Fund agrees to assume and pay the
charges and expenses of its operations including, by way of example, the
compensation of the Trustees other than those affiliated with the Manager,
charges and expenses of independent auditors, of legal counsel, of any transfer
or dividend disbursing agent, of any registrar of the Fund and of the custodian
(including fees for safekeeping of securities), costs of calculating net asset
value, all costs of acquiring and disposing of portfolio securities, interest,
if any, on obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any similar organization,
reports and notices to shareholders, other like miscellaneous expenses and all
taxes and fees to federal, state or other governmental agencies.
For the services and facilities furnished, the Fund pays an investment
management fee, payable monthly, at the annual rate of 0.85% of the Fund's
average weekly net assets. For the fiscal year ended November 30, 1998, the Fund
paid investment management fees of $ .
The management agreement provides that the Manager shall not be liable for
any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which the management agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Manager in the performance of its obligations and duties or by
reason of its reckless disregard of its obligations and duties under the
management agreement.
The management agreement may be terminated without penalty upon sixty (60)
days' written notice by either party, or by a majority vote of the outstanding
shares of the Fund or series thereof, and automatically terminates in the event
of its assignment.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Manager,
is responsible for determining the net asset value for the Fund and maintaining
all accounting records related thereto. Currently, SFAC receives no fee for its
services to the Fund; however, subject to Board approval, at some time in the
future, SFAC may seek payment for its services under this agreement.
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PORTFOLIO TRADING
The Manager also furnishes investment advice to other clients, including
other clients of Zurich Financial Services. At times, investment decisions may
be made to purchase or sell the same investment security for the Fund and for
one or more of the other clients advised by the Manager. When two or more of
such clients are simultaneously engaged in the purchase or sale of the same
security, the transactions are allocated as to amount and price in a manner
considered equitable to each so that each receives to the extent practicable the
average price of such transactions.
National securities exchanges have established limitations governing the
maximum number of options in each class which may be written by a single
investor or group of investors acting in concert. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose certain other sanctions. These position limits may restrict the number of
options the Fund will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities
or prices of securities and options or futures contracts available to the Fund.
On the other hand, the ability of the Fund to participate in volume transactions
may produce better executions for the Fund in some cases. The Board of Trustees
of the Fund believes that the benefits of the Manager's organization outweigh
any limitations that may arise from simultaneous transactions.
To the maximum extent feasible, the Manager places orders for portfolio
transactions through Scudder Investor Services, Inc. ("SIS"), Two International
Place, Boston, Massachusetts 02110, which in turn places orders on behalf of the
Fund with issuers, underwriters or other brokers and dealers. SIS is a
corporation registered as a broker/dealer, and a subsidiary of the Manager. SIS
does not receive any commissions, fees or other remuneration from the Funds for
this service. In selecting brokers and dealers with which to place portfolio
transactions for the Fund, the Manager may consider sales of shares of the Fund
and of other Scudder Kemper funds. When it can be done consistently with the
policy of obtaining the most favorable net results, the Manager may place such
orders with brokers and dealers who supply research, market and statistical
information to the Fund or to the Manager. The Manager is authorized when
placing portfolio transactions for the Fund to pay a brokerage commission (to
the extent applicable) in excess of that which another broker might charge for
executing the same transaction, on account of the receipt of research, market or
statistical information. Allocation of portfolio transactions is supervised by
the Manager.
NET ASSET VALUE
The Fund determines the net asset value of its shares at least once a week
as of the close of business on the last day on which the NYSE is open, and on
such other days as may be required by the Dividend Reinvestment and Cash
Purchase Plan (the "Plan") in connection with the payment of the dividends and
distributions in shares of the Fund pursuant to such Plan. See "Dividends and
Distributions: Dividend Reinvestment and Cash Purchase Plan." Net asset value
per share is determined by dividing the value of all assets of the Fund
(including accrued interest and dividends), less all liabilities (including
accrued expenses), by the total number of shares outstanding. The net asset
value per share will be made available for publication weekly. Currently, The
Wall Street Journal and Barron's publish net asset values for closed-end
investment companies each week.
Securities for which market quotations are readily available are valued at
market value, which is currently determined using the last reported sale price
or, if no sales are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price, except that certain U.S.
Government securities are stated at the mean between the last reported bid and
asked prices. All other securities and assets are valued at their fair value
following procedures approved by the Trustees.
In certain cases, reliable market quotations may not be considered to be
readily available for long term corporate bonds and notes, certain preferred
stocks, tax-exempt securities, or certain foreign securities. These investments
are stated at fair value on the basis of valuations furnished by pricing
services approved by the
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Trustees, which include market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders.
Because foreign securities are quoted in foreign currencies which will be
translated into U.S. dollars, fluctuations in the value of such currencies in
relation to the U.S. dollar will affect the net asset value of Fund shares even
though there has not been any change in the values of such securities.
If any securities held by the Fund are restricted as to resale, the Manager
determines their fair value following procedures approved by the Trustees. The
Trustees periodically review such procedures. The fair value of such securities
is generally determined as the amount which the Fund could reasonably expect to
realize from an orderly disposition of such securities over a reasonable period
of time. The valuation procedures applied in any specific instance are likely to
vary from case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical data relating
to the investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by the Fund
in connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities and any available
analysts' reports regarding the issuer.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the NYSE. Occasionally, events will
affect the values of such securities, but the changes in value will not be
reflected in the computation of the Fund's net asset value because the events
occur between the times at which the values of the foreign securities are
determined and the close of the NYSE. In these cases, an adjustment would be
made. All investments and assets are expressed in U.S. dollars based upon
current exchange rates.
The Trustees annually review the appropriateness of the time of day at
which the net asset value is computed.
Shares of closed-end investment companies frequently trade at a discount
from net asset value, but in some cases trade at a premium. Because the market
price of the Fund's shares will be determined by factors including trading
volume of such shares, general market and economic conditions and other factors
beyond the control of the Fund, the Fund cannot predict whether its shares will
trade at, below or above net asset value.
DIVIDENDS AND DISTRIBUTIONS: DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
The Fund distributes monthly to shareholders substantially all of its net
investment income. Net short-term capital gains, if any, may be distributed
monthly and net long-term capital gains, if any, are distributed at least
annually. See "Federal Taxation."
DIVIDEND INVESTMENT ACCOUNT
The Fund's transfer agent and dividend disbursing agent or its delegate
(the "Agent") will establish a Dividend Investment Account (the "Account") for
each shareholder participating in the Plan. The Agent will credit to the Account
of each participant funds it receives from the following sources: (a) cash
dividends and capital gains distributions paid on shares of beneficial interest
(the "shares") of the Fund registered in the participant's name on the books of
the Fund; (b) cash dividends and capital gains distributions paid on shares
registered in the name of the Agent but credited to the participant's Account;
and (c) voluntary cash contributions as described below. Sources described in
clauses (a) and (b) of the preceding sentence are hereinafter called
"Distributions."
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INVESTMENT OF DISTRIBUTION FUNDS HELD IN EACH ACCOUNT
If on the Record Date for a Distribution (the "Distribution Record Date"),
shares are trading at a discount from net asset value per share (according to
the evaluation most recently made on shares of the Fund), funds credited to a
participant's Account will be used to purchase shares (each such purchase being
a "Purchase"). Commencing five days prior to the Payment Date and ending at the
close of business on the Payment Date, United Missouri Bank, n.a. ("UMB") will
attempt to acquire shares in the open market. "Payment Date" as used herein
shall mean the last business day of the month in which such Record Date occurs.
In the event that UMB is unable to acquire sufficient shares to satisfy the
Distribution by the close of business on the Payment Date, the Fund will issue
to UMB shares valued at net asset value per share (according to the most recent
evaluation of shares of the Fund) in the aggregate amount of the remaining value
of the Distribution. If, on the Record Date, shares are trading at a premium
over net asset value per share, the Fund will issue on the Payment Date shares
valued at net asset value per share on the Record Date to the Agent in the
aggregate amount of the funds credited to the participants' accounts. All cash
contributions to a participant's Account made as described in "Voluntary Cash
Contributions" below will be invested in shares purchased in the open market.
VOLUNTARY CASH CONTRIBUTIONS
A participant may from time to time make voluntary cash contributions to
his Account by sending the Agent a check or money order, payable to the Agent,
in a minimum amount of $100 with appropriate accompanying instructions. No more
than $500 may be contributed per month. The Agent will inform UMB of the total
funds available for the purchase of shares and UMB will use the funds to
purchase additional shares for the participant's account on the earlier of: (a)
when it next purchases shares as a result of a Distribution or (b) on or shortly
after the first day of each month and in no event more than thirty days after
such date except when temporary curtailment or suspension of purchases is
necessary to comply with applicable provisions of Federal securities laws. Cash
contributions received more than fifteen calendar days or less than five
calendar days prior to a Payment Date will be returned uninvested. Interest will
not be paid on any uninvested cash contributions. Participants making voluntary
cash investments will be charged a $.75 service fee for each such investment and
will be responsible for their pro rata brokerage commissions.
ADJUSTMENT OF PURCHASE PRICE
The Fund will increase the price at which shares may be issued under the
Plan to 95% of the fair market value of the shares on the Distribution Record
Date if the net asset value per share of the shares on the Distribution Record
Date is less than 95% of the fair market value of the shares on the Distribution
Record Date.
DETERMINATION OF PURCHASE PRICE
The cost of shares and fractional shares acquired for each participant's
Account in connection with a Purchase shall be determined by the average cost
per share, including brokerage commissions as described below, of the shares
acquired by UMB in connection with that Purchase. As soon as practicable after
the Agent has received or UMB has purchased shares, shareholders will receive a
confirmation showing the average cost and number of shares acquired. The Agent
may mingle the cash in a participant's account with similar funds of other
participants of the Fund for whom UMB acts as agent under the Plan.
BROKERAGE CHARGES
There will be no brokerage charges with respect to shares issued directly
by the Fund as a result of Distributions. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to UMB's open
market purchases in connection with the reinvestment of Distributions as well as
from voluntary cash contributions. With respect to purchases from voluntary cash
contributions, UMB will charge a pro rata share of the brokerage commissions.
Brokerage charges for purchasing small amounts of shares for individual Accounts
through the Plan can be expected to be less than the usual brokerage charges for
such
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transactions, as UMB will be purchasing shares for all participants in blocks
and prorating the lower commission thus attainable.
SERVICE CHARGES
There are no service charges imposed by the Agent or UMB upon shareholders
who participate in the Plan, other than the service charges specified above
under "Voluntary Cash Contributions" or below under "Withdrawal from Plan."
However, the Fund reserves the right to amend the Plan in the future to include
a service charge.
TRANSFER OF SHARES HELD BY THE AGENT
The Agent will maintain the participant's Account, hold the additional
shares acquired through the Plan in safekeeping and furnish the participant with
written confirmation of all transactions in the Account. Shares in the account
are transferable upon proper written instructions to the Agent. Upon request to
the Agent, a certificate for any or all full shares in a participant's Account
will be sent to the participant.
SHARES NOT HELD IN SHAREHOLDER'S NAME
Beneficial owners of shares which are held in the name of a broker or
nominee will not be automatically included in the Plan and will receive all
distributions in cash. Such shareholders should contact the broker or nominee in
whose name their shares are held to determine whether and how they may
participate in the Plan.
AMENDMENTS
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan,
including provisions with respect to any Distribution paid subsequent to notice
thereof sent to participants in the Plan at least ninety days before such
Distribution Record Date.
WITHDRAWAL FROM PLAN
Shareholders may withdraw from the Plan at any time by giving the Agent a
written notice. If the proceeds are $25,000 or less and the proceeds are to be
payable to the shareholder of record and mailed to the address of record, a
signature guarantee normally will not be required for notices by individual
account owners (including joint account owners); otherwise a signature guarantee
will be required. In addition, if the certificate is to be sent to anyone other
than the registered owner(s) at the address of record, a signature guarantee
will be required on the notice. A notice of withdrawal will be effective for the
next Distribution following receipt of the notice by the Agent provided the
notice is received by the Agent at least ten days prior to the Distribution
Record Date. When a participant withdraws from the Plan, or when the Plan is
terminated in accordance with the "Amendments" paragraph, above, the participant
will receive a certificate for full shares in the Account, plus a check for any
fractional shares, based on market price; or if a Participant so desires, the
Agent will notify UMB to sell his shares in the Plan and send the proceeds to
the participant, less brokerage commissions and a $2.50 service fee.
TAX IMPLICATIONS
Shareholders will receive tax information annually for their personal
records and to help them prepare their Federal income tax returns. If shares are
purchased at a discount, the amount of the discount is considered taxable income
and is added to the cost basis of the purchased shares.
FEDERAL TAXATION
The following information is meant as a general summary for U.S. taxpayers.
Please see the SAI for additional information. You should rely on your own tax
adviser for advice about the particular federal, state and local tax
consequences to you of investing in the Fund.
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Although the Fund intends to operate so that it will not have to pay
federal income or excise tax, if it does have to pay tax, this would adversely
affect the investment performance of the Fund.
The Fund will distribute substantially all of its income and gains to its
shareholders every year, and shareholders will be taxed on distributions they
receive, regardless of whether they are paid in cash or are reinvested in shares
of the Fund. If the Fund declares a dividend in October, November or December
but pays it in January, you may be taxed on the dividend as if you received it
in the previous year.
The Fund will send you a tax report each year, before February 1st. The
report will tell you which dividends and redemptions must be treated as taxable
ordinary income, which, if any, are tax-exempt income, and which, if any, are
short-term or long-term capital gain. If the Fund designates a dividend as a
capital gain distribution, you will be liable for tax on that dividend at the
long-term capital gains tax rate, no matter how long you have held your Fund
shares.
If you hold your Fund shares in a tax-deferred retirement account, such as
an IRA, you generally will not have to pay tax on dividends until they are
distributed from the account. These accounts are subject to complex tax rules,
and you should consult your tax adviser about investment through a tax-deferred
account.
You will generally have a capital gain or loss if you sell your Fund
shares. The amount of the gain or loss and the rate of tax will depend primarily
upon how much you paid for the shares, how much you sell them for, and how long
you hold them.
Like all investment companies, the Fund may be required to withhold U.S.
federal income tax at the rate of 31% of all taxable distributions payable to
you if you fail to provide the Fund with your correct taxpayer identification
number or to make required certifications, or if you have been notified by the
IRS that you are subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against your U.S. federal
income tax liability.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Trustees of the Fund have authority to issue an unlimited number of
shares of beneficial interest, $.01 par value. The shares outstanding are, and
those offered hereby when issued will be, fully paid and nonassessable by the
Fund. The Fund's shares have no preemptive, conversion, exchange or redemption
rights. Each share has one vote, with fractional shares voting proportionately.
Shares are freely transferable, and holders thereof are entitled to dividends as
declared by the Trustees. If the Fund were liquidated, shareholders would
receive the net assets of the Fund. Under the rules of the NYSE applicable to
listed companies, the Fund will be required to hold an annual meeting of
shareholders in each year. If the Fund is converted to an open-end investment
company or, if for any other reason the Fund's shares are no longer listed on
the NYSE (or any other national securities exchange the rules of which require
annual meetings of shareholders), the Fund does not intend to hold annual
meetings of shareholders.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement obligation, or instrument entered into or executed by the Fund or
the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any shareholder
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The likelihood of such circumstances is remote.
The Fund has no present intention of offering additional shares, other than
under this Offering and under the Plan. See "Dividends and Distributions:
Dividend Reinvestment and Cash Purchase Plan." Other offerings of Fund shares,
if made, will require approval of the Trustees. Any additional offering will be
subject to the requirements of the 1940 Act that shares may not be sold at a
price below the then current net asset
39
<PAGE> 44
value, exclusive of underwriting discounts and commissions, except in connection
with an offering to existing shareholders or with the consent of the holders of
a majority of the Fund's outstanding shares. In addition, the Fund expects that
it would commence a continuous offering of its shares in the event it converted
to an open-end investment company. See "Conversion to Open-End Status."
The Agreement and Declaration of Trust further provides that obligations of
the Fund are not binding upon Trustees individually but only upon the property
of the Fund and that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Agreement and Declaration of Trust
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF SHARES
Shares of closed-end management investment companies frequently trade at a
discount from net asset value but in some cases trade at a premium. In
recognition of the possibility that the Fund's shares might similarly trade at a
discount, the Fund's Board of Trustees has determined that it would be in the
interest of shareholders for the Fund to take action to attempt to reduce or
eliminate a market value discount from net asset value. To that end, the
Trustees presently contemplate that the Fund could from time-to-time take action
either to repurchase its shares in the open market or to tender for its own
shares at net asset value. The Board of Trustees, in consultation with the
Manager, reviews on a quarterly basis the possibility of open market repurchases
and/or tender offers for Fund shares. There are no assurances that the Board of
Trustees will, in fact, decide to undertake either of these actions or, if
undertaken, that such actions will result in the Fund's shares trading at a
price which is equal to or approximates their net asset value. In addition, the
Board of Trustees will not necessarily announce when it has given consideration
to these matters. See "Repurchase of Shares" in the SAI for further information.
CONVERSION TO OPEN-END STATUS
Each year, if shares of the Fund have traded on the NYSE at an average
discount from net asset value of more than 10%, determined on the basis of the
discount as of the end of the last trading day in each week during the period of
12 calendar weeks preceding the beginning of such year, the Fund will submit to
its shareholders at the next succeeding annual meeting of shareholders a
proposal to convert the Fund from a closed-end to an open-end investment
company. Such a conversion would require the approval of the holders of a
majority of the Fund's shares (which means the lesser of (i) more than 50% of
the outstanding shares of the Fund or (ii) 67% or more of the outstanding shares
of the Fund present at a meeting at which holders of more than 50% of its
outstanding shares are represented in person or by proxy). Shareholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of redemption. If the Fund is converted to an open-end
management investment company, it could be required to liquidate portfolio
securities to meet requests for redemption, and its shares would no longer be
listed on the NYSE. The Trustees may at any time propose conversion of the Fund
to an open-end management investment company depending upon their judgment as to
the availability of such action in light of circumstances then prevailing.
The Fund cannot predict whether any repurchase of shares made while the
Fund is a closed-end investment company (as described under "Repurchase of
Shares" above) would increase or decrease the discount from net asset value. To
the extent that any such repurchase decreased the discount from net asset value
to below 10% during the measurement period described above, the Fund would not
be required to submit to shareholders a proposal to convert the Fund to an
open-end investment company at the next annual meeting of shareholders.
40
<PAGE> 45
CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
Investors Fiduciary Trust Company ("IFTC"), whose principal place of business is
127 West 10th Street, Kansas City, Missouri 64105. With respect to the Fund's
investments in foreign securities, the custodian employs foreign subcustodians
approved by the Board of Trustees in accordance with applicable regulations
after consideration of, among other things, the qualifications of proposed
foreign subcustodians and the legal constraints under which foreign
subcustodians operate. IFTC also serves as transfer agent, registrar and
dividend disbursing agent for the Fund's shares. Pursuant to a services
agreement with IFTC, Kemper Service Company ("KSVC"), an affiliate of the
Manager, serves as Shareholder Service Agent for the Fund and, as such, performs
all of IFTC's duties as transfer agent and dividend-paying agent.
LEGAL MATTERS
Vedder, Price, Kaufman & Kammholz, Chicago, Illinois, serves as counsel to
the Fund and to the non-interested Trustees. Dechert Price & Rhoads, Washington,
DC, which is serving as special counsel to the Fund with respect to the Offer,
will pass on the legality of the shares offered hereby. Certain legal matters
will be passed on for the Dealer Manager by Skadden, Arps, Slate, Meagher & Flom
(Illinois), Chicago, Illinois.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
shareholders, including a list of the portfolio investments held by the Fund.
ACCOUNTANTS
The data in the "Financial Highlights" section of this prospectus are based
upon financial statements that have been audited by Ernst & Young LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as experts
in auditing and accounting.
FURTHER INFORMATION
This prospectus does not contain all of the information set forth in the
Registration Statement that the Fund has filed with the SEC. The complete
Registration Statement may be obtained from the SEC upon payment of the fee
prescribed by its Rules and Regulations.
41
<PAGE> 46
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information.........................................
Additional Information About Investments and Investment
Techniques................................................
Investment Restrictions.....................................
Management..................................................
Ownership of Fund Shares....................................
Portfolio Transactions......................................
Repurchase of Shares........................................
Taxation....................................................
Financial Statements........................................
</TABLE>
42
<PAGE> 47
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS
Standard & Poor's describes classifications of bonds as follows:
"AAA." Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
"AA." Debt rated "AA" has a strong capacity to pay interest and repay
principal and differs from AAA rated debt issues only by a 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 AAA and AA rated debt
issues.
"BBB." Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 debt issues in higher rated categories.
"BB," "B," "CCC," "CC" AND "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 exposure to adverse conditions.
"C1." The rating "C1" is reserved for income bonds on which no interest is
being paid.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
"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 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.
"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 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 well assured. Often the protection of interest
and principal payments may be very moderate and therefore 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 a
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.
A-1
<PAGE> 48
"CAA." Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or elements of danger with respect to principal or interest may be
present.
"CA." Bonds which are rated "Ca" represent obligations which are highly
speculative. Such issues are often in default or have other marked shortcomings.
"C." Bonds which are rated "C" are the lowest rated class of bonds. Debt
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-2
<PAGE> 49
- ------------------------------------------------------
- ------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THIS OFFER. IF OTHER INFORMATION IS GIVEN OR OTHER REPRESENTATIONS ARE MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON SINCE NEITHER WAS
AUTHORIZED BY THE FUND, THE MANAGER OR THE DEALER MANAGER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE FUND'S SHARES, AS DESCRIBED IN THIS PROSPECTUS. THIS
PROSPECTUS ALSO DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE FUND'S SHARES, AS DESCRIBED IN THIS PROSPECTUS, BY ANYONE IN
ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
SUCH PERSON TO WHOM IT IS ILLEGAL TO MAKE SUCH OFFER OR SOLICITATION. THE
INFORMATION IN THIS PROSPECTUS MAY NO LONGER BE CORRECT AFTER THE DATE ON THE
PROSPECTUS. HOWEVER, IF ANY MATERIAL CHANGE OCCURS DURING THE PERIOD IN WHICH
THIS PROSPECTUS IS LEGALLY REQUIRED TO BE DELIVERED, THE PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Fee Table............................. 5
Financial Highlights.................. 6
Capitalization at November 30, 1998... 7
Information Regarding Senior
Securities.......................... 7
Trading and Net Asset Value
Information......................... 7
The Fund.............................. 13
The Offer............................. 13
Use of Proceeds....................... 18
Investment Objectives and Policies.... 19
Other Investment Practices............ 26
Risk Factors and Special
Considerations...................... 30
Management of the Fund................ 34
Portfolio Trading..................... 35
Net Asset Value....................... 35
Dividends and Distributions: Dividend
Reinvestment and Cash Purchase
Plan................................ 36
Federal Taxation...................... 38
Description of Shares of Beneficial
Interest............................ 39
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar...... 41
Legal Matters......................... 41
Reports to Shareholders............... 41
Accountants........................... 41
Further Information................... 41
Table of Contents of Statement of
Additional Information.............. 42
Appendix A: Ratings of Corporate
Obligations......................... A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES OF BENEFICIAL INTEREST
KEMPER HIGH INCOME TRUST
ISSUABLE UPON EXERCISE OF
TRANSFERABLE RIGHTS TO
SUBSCRIBE FOR SUCH
SHARES OF BENEFICIAL INTEREST
------------------------
PROSPECTUS
------------------------
DEALER MANAGER
PAINEWEBBER INCORPORATED
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 50
[KEMPER FUND LOGO]
[SUBJECT TO COMPLETION]
KEMPER HIGH INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
, 1999.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated , 1999.
This Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling
1-800-537-6006. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. The registration statement
may be obtained from the Commission upon payment of the fee prescribed, or
inspected at the Commission's office at no charge.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
<PAGE> 51
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION.........................................
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT
TECHNIQUES................................................
INVESTMENT RESTRICTIONS.....................................
MANAGEMENT..................................................
OWNERSHIP OF FUND SHARES....................................
PORTFOLIO TRANSACTIONS......................................
REPURCHASE OF SHARES........................................
TAXATION....................................................
FINANCIAL STATEMENTS........................................
</TABLE>
2
<PAGE> 52
GENERAL INFORMATION
Kemper High Income Trust (the "Fund") is a diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's investment manager is Scudder Kemper
Investments, Inc. (the "Manager"). The Fund's primary investment objective is to
seek the highest current income obtainable consistent with reasonable risk as
determined by the Manager. As a secondary objective, the Fund seeks capital
gains where consistent with its primary investment objectives. The Fund may
invest its assets in a broad range of income producing securities.
ADDITIONAL INFORMATION ABOUT INVESTMENTS
AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Fund may invest,
subject to its investment objectives, policies and restrictions, are described
in the Prospectus, dated ,1999 (the "Prospectus"), under "Investment
Objectives and Policies" and "Other Investment Practices." Additional
information concerning certain of the Fund's investments and investment
techniques is set forth below.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities
under present regulatory policies, including those of the Board of Governors of
the Federal Reserve System and the SEC. Such loans may be made, without limit,
to brokers, dealers, banks or other recognized institutional borrowers of
securities and would be required to be secured continuously by collateral,
including cash, cash equivalents or U.S. Treasury bills maintained on a current
basis at an amount at least equal to the market value of the securities loaned.
The Fund would have the right to call a loan and obtain the securities loaned at
any time on five days' notice. For the duration of a loan, the Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and would also receive compensation from the
investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund could call the loan in anticipation of an important vote to be taken
among holders of the securities or in anticipation of the giving or withholding
of their consent on a material matter affecting the securities. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Manager to be of
good standing, and when, in the judgment of the Manager, the consideration which
can be earned currently from securities loans of this type justify the attendant
risk. The creditworthiness of firms to which the Fund lends its portfolio
securities will be monitored on an ongoing basis by the Manager pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Board of Trustees
of the Fund.
WHEN-ISSUED AND FORWARD DELIVERY SECURITIES
Securities may be purchased on a "when-issued" or on a "forward delivery"
basis, which means that the obligations will be delivered at a future date
beyond customary settlement time. The commitment to purchase a security for
which payment will be made on a future date may be deemed a separate security.
Although the Fund is not limited in the amount of securities for which it may
have commitments to purchase on such basis, it is expected that in normal
circumstances, the Fund will not commit more than 30% of its assets to such
purchases. The Fund does not pay for the securities until received or start
earning interest on them until it is notified of the settlement date. In order
to invest its assets immediately, while awaiting delivery of securities
purchased on such basis, the Fund will normally invest in short term securities
that offer same-day settlement and earnings, but that may bear interest at a
lower rate than longer term securities.
These transactions are subject to market fluctuation; the value of the
securities at delivery may be more or less than their purchase price, and yields
generally available on comparable securities when delivery occurs may be higher
than yields on the securities obtained pursuant to such transactions. Because
the Fund relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be
3
<PAGE> 53
advantageous. The Fund will make commitments to purchase securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"forward delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purpose of investment leverage.
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such investment companies
must either segregate cash or liquid portfolio securities in the amount of their
obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or asset coverage requirements. There is no limitation as to the percentage of
the Fund's assets which may be invested in such transactions.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements (a purchase of, and a
simultaneous commitment to resell, a security at an agreed upon price on an
agreed upon date) only with member banks of the Federal Reserve System and
member firms of the New York Stock Exchange. When participating in repurchase
agreements, the Fund buys securities from a vendor, e.g., a bank or brokerage
firm, with the agreement that the vendor will repurchase the securities at a
higher price at a later date. Such transactions afford an opportunity for the
Fund to earn a return on available cash at minimal market risk, although the
Fund may be subject to various delays and risks of loss if the vendor is unable
to meet its obligation to repurchase. In evaluating whether to enter into a
repurchase agreement, the Manager will carefully consider the creditworthiness
of the vendor. If the member bank or member firm that is the party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
the U.S. Bankruptcy Code, the law regarding the rights of the Fund is unsettled.
The securities underlying a repurchase agreement will be marked to market every
business day so that the value of the collateral is at least equal to the value
of the loan, including the accrued interest thereon.
OPTIONS AND FUTURES
General. The Fund may engage in futures and options transactions in
accordance with its investment objectives and policies. The Fund intends to
engage in such transactions if it appears advantageous to the Manager to do so
in order to pursue its investment objectives, to hedge against the effects of
market conditions and to stabilize the value of its assets. The use of futures
and options, possible benefits and attendant risks are discussed below, along
with information concerning certain other investment policies and techniques.
Financial Futures Contracts. The Fund may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or an amount of foreign currency, or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities 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, 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 financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security or foreign currency. The offsetting of a contractual obligation
is accomplished by purchasing (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for
4
<PAGE> 54
delivery in the same period. Such a transaction cancels the obligation to make
or take delivery of the securities. 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. The Fund will incur brokerage fees when it
purchases or sells contracts, and will be required to maintain margin deposits.
Futures contracts entail risks. If the Manager's judgment about the general
direction of securities markets or exchange rates is wrong, the Fund's overall
performance may be poorer than if the Fund had not entered into such contracts.
There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities 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 securities 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 foreign currencies rather than
engage in closing transactions due to 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 market are less onerous than
margin requirements in the cash market, increased participation by speculators
in the futures market could cause temporary price distortions. Due to the
possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities or foreign
currencies and movements in the prices of futures contracts, a correct forecast
of market trends by the Manager may still not result in a successful hedging
transaction. If this should occur, the Fund could lose money on the financial
futures contracts and also on the value of its portfolio securities.
Options on Financial Futures Contracts. The 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. The 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.
Options on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
Options on Securities. The Fund may write (sell) covered call options so
long as it owns securities which are acceptable for escrow purposes and may
write secured put options, which means that so long as the Fund is obligated as
a writer of a put option, it will invest an amount, not less than the exercise
price of the put option, in eligible securities. 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 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 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 the market price, the price volatility of the underlying security, the option
period, supply and demand and interest rates. The fund 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 benchmark. 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 the
security's price below the exercise price, less the amount paid for the option.
The ability to purchase put options allows the Fund to protect capital gains in
an appreciated security it owns, without being required to actually sell that
security. At times the Fund would like to establish a position in a security
upon which call options are available. By purchasing a call option the 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 the 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.
Over-the-Counter-Options. As previously indicated in the Prospectus (see
"Other Investment Practices -- Securities Options Transactions"), the Fund may
deal in OTC options. The Fund understands the
5
<PAGE> 55
position of the staff of the SEC to be that purchased OTC options and the assets
used as "cover" for written OTC options are illiquid securities. The Fund and
the Manager disagree with this position and have found the dealers with which
they engage in OTC options transactions generally agreeable to and capable of
entering into closing transactions. As also indicated in the Prospectus, the
Fund has adopted procedures for engaging in OTC options for the purpose of
reducing any potential adverse impact of such transactions upon the liquidity of
the Fund's portfolio.
As part of these procedures the Fund will only engage in OTC options
transactions with dealers that have been specifically approved by the Board of
Trustees of the Fund. The Fund and its Manager believe that the approved dealers
should be agreeable and able to enter into closing transactions if necessary
and, therefore, present minimal credit risks to the Fund.
Options on Securities Indices. The Fund also may purchase and write call
and put options on securities indices. Through the writing or purchase of index
options, the 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 the difference
between the closing price of the index and the exercise price of the option.
This amount of cash is equal to the 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 on
price movements in the market generally (or in a particular industry or segment
of the market) rather than price movements in individual securities.
When the Fund writes an option on a securities index, it will be required
to deposit with its Custodian eligible securities equal in value to 100% of the
exercise price in the case of a put, or the contract's value in the case of a
call. 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, until the option expires or is closed out, cash or equivalents equal
in value to such excess.
Options on futures contracts and index options involve risks similar to
those risks relating to transactions in financial futures contracts described
above. Also, an option purchased by the Fund may expire worthless, in which case
the Fund would lose the premium paid therefor.
Forward Foreign Currency Exchange Contracts. 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 Fund does not intend to enter into such forward contracts if the Fund
would have more than 15% of the value of its total assets committed to such
contracts on a regular or continuous basis. The Fund also does not enter such
forward contracts or maintain a net exposure in such contracts where the Fund
would be obligated to delivery an amount of foreign currency in excess of the
value of the Fund's portfolio securities of other assets denominated in that
currency. The 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 the Fund. The Fund's Custodian segregates cash or equity or
debt securities in an amount not less than the value of the Fund's total assets
committed to forward foreign currency exchange contracts entered into under this
second type of transaction. If the value of the securities segregated declines,
additional cash or securities is added so that the segregated amount is less
than the amount of the Fund's commitments with respect to such contracts. The
Fund generally does not enter into a forward contract with Term longer than one
year.
Foreign Currency Options. 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
6
<PAGE> 56
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.
Foreign Currency Futures Transactions. As part of its financial futures
transactions (see "Financial Futures and Options Transactions"), the Fund may
use futures contracts of foreign currencies and options on such. Through the
purchase or sale of such contracts, the Fund may be able to achieve many of the
same objectives through forward foreign currency exchange contracts more
effectively and perhaps at a lower cost.
Unlike forward 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 exchange. It is
anticipated that such contracts may provide greater liquidity and lower cost
than forward currency exchange contracts.
Regulatory Restrictions. To the extent required to comply with SEC Release
No. 10666, when purchasing a futures contracts or writing a put option, the fund
will maintain, in a segregated account, cash or liquid securities equal to the
value of such contracts.
The Fund will typically enter into a futures contract or related option
only if it constitutes a bona fide hedging position under applicable
regulations. Otherwise the Fund will limit its investments in futures contracts
and related options so that, immediately after such investment, the sum of the
amount of its initial margin deposits on open futures contracts and its premiums
on open options contracts will not exceed 5% of the Fund's total assets at
current value.
Accounting and Tax Considerations. When the Fund writes an option, an
amount equal to the premium received by it is included in the Fund's Statement
of Net Assets as a liability. The amount of the liability is subsequently marked
to market to reflect the current market value of the option written. When the
Fund purchases an option, the premium paid by the Fund is recorded as an asset
and is subsequently adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the Fund,
an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset is subsequently adjusted to reflect changes in the amount of
the deposit as well as changes in the value of the contract.
Certain listed options, futures contracts and forward foreign currency
contracts are considered "section 1256 contracts" for federal income tax
purposes. In general under the Internal Revenue Code of 1986, as amended (the
"Code"), gain or loss realized by the Fund on section 1256 contracts will be
considered 60% long term and 40% short term capital gain or loss. Also, section
1256 contracts held by the Fund at the end of each taxable year (and at October
31 for purposes of calculating the excise tax) will be "marked to market," that
is, treated for federal income tax purposes as though sold for fair market value
on the last business day of such taxable year. The Fund can elect to exempt its
section 1256 contracts which are part of a "mixed straddle" (as described below)
from the application of section 1256.
With respect to certain over-the-counter put and call options, gain or loss
realized by the Fund upon the expiration or sale of such options held by the
Fund will be either long term or short term capital gain or loss depending upon
the Fund's holding period with respect to such option. However, gain or loss
realized upon the expiration or closing out of such options that are written by
the Fund will be treated as short-term capital gain or loss. In general, if the
Fund exercises an option, or an option that the Fund has written is exercised,
gain or loss on the option will not be separately recognized but the premium
received or paid will be included in the calculation of gain or loss upon
disposition of the property underlying the option.
Any security, option, futures contract, forward foreign currency contract,
forward commitment, or other position entered into or held by the Fund in
conjunction with any other position held by the Fund may constitute a "straddle"
for federal income tax purposes. A straddle of which at least one, but not all,
the positions are section 1256 contracts will constitute a "mixed straddle." In
general, straddles are subject to certain rules that may affect the character
and timing of the Fund's gains and losses with respect to straddle
7
<PAGE> 57
positions by requiring, among other things, that loss realized on disposition of
one position of a straddle be deferred to the extent of any unrealized gain in
an offsetting position of one position of a straddle be deferred to the extent
of any unrealized gain in an offsetting position until such position is disposed
of; that the Fund's holding period in certain straddle positions not begin until
the straddle is terminated (possibly resulting in gain being treated as short
term capital gain rather than long term capital gain); and that losses
recognized with respect to certain straddle positions, which would otherwise
constitute short term capital losses, be treated as long term capital losses.
Different elections are available to the Fund, which may mitigate the effects of
the straddle rules, particularly with respect to mixed straddles.
Under the Code section 988, foreign currency gain or loss realized with
respect to foreign currency denominated debt instruments and other foreign
currency denominated positions held or entered into by the Fund, and which are
not marked to market Code section 1256, will be characterized as U.S. source
ordinary income or loss.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following investment restrictions
are fundamental policies of the Fund and accordingly may not be changed without
the approval of the holders of a majority of the Fund's outstanding shares of
beneficial interest (which for this purpose and under the 1940 Act means the
lesser of (i) 67% of the shares of beneficial interest if the holders of more
than 50% of the outstanding shares are present or represented by proxy or (ii)
more than 50% of the outstanding shares). Subsequent to the issuance of a class
or classes of preferred shares, the following investment restrictions may not be
changed without the approval of a majority of the outstanding shares of
beneficial interest and of the preferred shares, voting together as a class, and
the approval of a majority of the outstanding shares of preferred shares, voting
separately by class. All other investment policies and practices described in
this Prospectus are not fundamental and may be changed without shareholder
approval. The Fund may not:
1. Borrow money, except to the extent permitted by applicable law;
2. Purchase any security or evidence of interest therein on margin
except that the Fund may obtain such short term credit as may be necessary
for the clearance of purchases and sales of securities and except that the
Fund may make deposits on margin in connection with currency, interest rate
and other hedging transactions and options described in the Prospectus or
this SAI;
3. Underwrite securities issued by other persons except insofar as the
Fund may technically be deemed an underwriter under the Securities Act of
1933 in selling a portfolio security;
4. Purchase or sell real estate (except that the Fund may invest in
securities secured by real estate or interests therein and securities of
issuers which invest or deal in real estate), interests in oil, gas or
mineral leases, commodities or commodity contracts (except for hedging
transactions and except for investments in the securities of the issuers
which invest in or sponsor such programs) in the ordinary course of
business of the Fund (the Fund reserves the freedom of action to hold and
to sell real estate acquired as a result of the ownership of securities);
5. Invest 25% or more of its total assets in securities of issuers
conducting their principal business activities in the same industry;
provided that this limitation shall not apply with respect to investments
in U.S. Government securities;
6. Invest more than 5% of its total assets in securities of any one
issuer, except that this limitation shall not apply to securities of the
U.S. Government, its agencies and instrumentalities or to the investment of
25% of its total assets;
7. Except for the borrowing provided in Paragraph 1, issue any "senior
security" as that term is defined in the 1940 Act (for the purpose of this
restriction, collateral arrangements with respect to options, future
contracts and options on future contracts and collateral arrangements
meeting applicable SEC requirements with respect to initial and variation
margin are not deemed to be the issuance of a senior security);
8
<PAGE> 58
8. Make loans to other persons except through the lending of its
portfolio securities not in excess of 30% of its total assets (taken at
market value) and except through the use of repurchase agreements, the
purchase of commercial paper or the purchase of commercial paper or the
purchase of all or a portion of an issue of debt securities in accordance
with its investment objectives, policies and restrictions;
9. Except for options transactions, make short sales of securities or
maintain a short position, unless at all times when a short position is
open it owns an equal amount of such securities or securities convertible
into or exchangeable, without payment of any further consideration for
securities of the same issue as, and equal in amount to, the securities
sold short ("short sales against the box"), and unless not more than 10% of
the Fund's net asset's (taken at market value) is held as collateral for
such sales at any one time (it is the Fund's present intention to make such
sales only for the purpose of deferring realization of gain or loss for
federal income tax purposes; such sales would not be made of securities
subject to outstanding options); and
10. Invest in securities of any other investment company, if more than
3% of the outstanding voting stock of such investment company would be held
by the Fund; if more than 5% of the total assets of the Fund would be
invested in any such investment company; or if the Fund would own, in the
aggregate, securities of other investment companies representing more than
10% of its assets.
9
<PAGE> 59
MANAGEMENT
INVESTMENT MANAGER
Scudder Kemper Investments, Inc., the global investment management business
of Zurich Financial Services Group, is one of the largest and most experienced
investment management organization in the world, managing more than $280 billion
in assets for institutional and corporate clients, retirement and pension plans,
insurance companies, mutual fund investors, and individuals. Scudder Kemper
investments offers a full range of investment counsel and asset management
capabilities, based on a combination of proprietary research and disciplined,
long-term investment strategies.
Headquartered in Zurich, Switzerland, Zurich Financial Services Group is
one of the global leaders in the financial services industry, providing its
customers with the products and solutions in the area of financial protection
and asset accumulation. The Group has four core businesses: non-life and life
insurance, reinsurance and asset management.
The Investment Management Agreement provides that the Manager will provide
portfolio management services, place portfolio transactions in accordance with
policies expressed in the Fund's registration statement, pay the Fund's office
rent, and render significant administrative services on behalf of the Fund (not
otherwise provided by third parties) necessary for the Fund's operating as a
closed-end investment company, including, but not limited to, preparing reports
to and meeting materials for the Fund's Board and reports and notices to Fund
shareholders; supervising, negotiating contractual arrangements with, to the
extent appropriate, and monitoring the performance of various third-party and
affiliated service providers to the Fund (such as the Fund's transfer and
pricing agents, fund accounting agent, custodian, accountants and others) and
other persons in any capacity deemed necessary or desirable to Fund operations;
preparing and making filings with the SEC and other regulatory and
self-regulatory organizations, including but not limited to, preliminary and
definitive proxy materials, post-effective amendments to the Registration
Statement and semi-annual reports on Form N-SAR; overseeing the tabulation of
proxies by the Fund's transfer agent; assisting in the preparation of filing of
the Fund's federal, state and local tax returns; preparing and filing the Fund's
federal excise tax returns pursuant to Section 4982 of the Internal Revenue Code
of 1986, as amended; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent such books, records and reports and
other information are not maintained by the Fund's custodian or other agents of
the Fund; assisting in establishing accounting policies of the Fund; assisting
in the resolution of accounting issues that may arise with respect to the Fund's
operations and consulting with the Fund's independent accountants, legal counsel
and other agents as necessary in connection therewith; establishing and
monitoring the Fund's operating expense budgets; reviewing the Fund's bills;
processing the payment of bills that have been approved by an authorized person;
assisting the Fund in determining the amount of dividends and distributions
available to be paid by the Fund to its shareholders, preparing and arranging
for the printing of dividend notices to shareholders, and providing the transfer
and dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions; and otherwise assisting the Fund in the conduct of its
business, subject to the direction and control of the Fund's Board.
Under the Investment Management Agreement, the Fund is responsible for
other expenses, including organizational expenses (including out-of-pocket
expenses, but not including the Manager's overhead or employee costs); brokers'
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; legal, auditing and accounting expenses; payment for portfolio
pricing or valuation services to pricing agents, accountants, bankers and other
specialists, if any; taxes and governmental fees; the fees and expenses of the
Fund's transfer agent; expenses of preparing share certificates and any other
expenses, including clerical expenses, of issuance, offering, distribution,
sale, redemption or repurchase of shares; the expenses of and fees for
registering or qualifying securities for sale; the fees and expenses of those
Trustees who are not "interested persons" of the Fund (as defined in the 1940
Act); the cost of printing and distributing reports, notices and dividends to
current shareholders; and the fees and expenses of the Fund's custodians,
subcustodians,
10
<PAGE> 60
accounting agent, dividend disbursing agents and registrars. The Fund may
arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of the Fund. The Fund is also
responsible for expenses of shareholders' and other meetings and its expenses
incurred in connection with litigation and the legal obligation it may have to
indemnify officers and Trustees of the Fund with respect thereto. The Fund is
also responsible for the maintenance of books and records which are required to
be maintained by the Fund's custodian or other agents of the Fund; telephone,
telex, facsimile, postage and other communications expenses; any fees, dues and
expenses incurred by the Fund in connection with membership in investment
company trade organizations; expenses of printing and mailing prospectuses and
statements of additional information of the Fund and supplements thereto to
current shareholders; costs of stationery; fees payable to the Manager and to
any other Fund advisors or consultants; expenses relating to investor and public
relations; interest charges, bond premiums and other insurance expense; freight,
insurance and other charges in connection with the shipment of the Fund's
portfolio securities; and other expenses.
The Manager is responsible for the payment of the compensation and expenses
of all Trustees, officers and executive employees of the Fund (including the
Fund's share of payroll taxes) affiliated with the Manager and making available,
without expense to the Fund, the services of such Trustees, officers and
employees as may duly be elected officers of the Fund, subject to their
individual consent to serve and to any limitations imposed by law. The Fund is
responsible for the fees and expenses (specifically including travel expenses
relating to Fund business) of Trustees not affiliated with the Manager
("Non-Interested Trustees") Under the Investment Management Agreement, the
Manager also pays the Fund's share of payroll taxes. During the Fund's most
recent fiscal year, no compensation, direct or otherwise (other than through
fees paid to the Manager, was paid or became payable by the Fund to any of its
officers or Trustees who were affiliated with the Manager.
In return for the services provided by the Manager as investment manager
and the expenses it assumes under the Investment Management Agreement, the Fund
pays the Manager a management fee which is payable monthly at an annual rate of
0.85% of the Fund's average weekly net assets.
The Investment Management Agreement further provides that the Manager shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by any Fund in connection with matters to which such agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Manager in the performance of its duties or from reckless
disregard by the Manager of its obligations and duties under such agreement. The
Investment Management Agreement also provides that purchase and sale
opportunities, which are suitable for more than one client of the Manager, will
be allocated by the Manager in an equitable manner. Lastly, the Investment
Management Agreement contains a provision stating that it supersedes all prior
agreements.
The Investment Management Agreement may be terminated without penalty upon
sixty (60) days' written notice by either party. The Fund may agree to terminate
its Investment Management Agreement either by the vote of a majority of the
outstanding voting securities of the Fund, or by a vote of the Board. The
Investment Management Agreement may also be terminated at any time without
penalty by the vote of a majority of the outstanding voting securities of the
Fund or by a vote of the Board if a court establishes that the Manager or any of
its officers or directors has taken any action resulting in a breach of the
Manager's covenants under the Investment Management Agreement. As stated above,
the Investment Management Agreement automatically terminates in the event of its
assignment.
For the fiscal years ended November 30, 1998, 1997 and 1996, the Manager or
its predecessor was paid investment management fees of $ , $
and $ , respectively.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Manager,
is responsible for determining the net asset value for the fund and maintaining
all accounting records related thereto. Currently, SFAC receives no fee for its
services to the Fund; however, subject to Board approval, at some time in the
future, SFAC may seek payment for its services under this agreement.
11
<PAGE> 61
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Fund and their principal
occupations during the last five years are set forth below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE POSITION WITH THE FUND THE PAST FIVE YEARS
- --------------------- ------------------------ -----------------------------------------
<S> <C> <C>
James E. Akins Trustee Consultant on International, Political
2904 Garfield Terrace, N.W. and Economic Affairs; formerly a career
Washington, DC 20008 United States Foreign Service Officer,
Age: 73 Energy Advisor for the White House, and
United States Ambassador to Saudi Arabia.
Arthur R. Gottschalk Trustee Retired; formerly, President, Illinois
10642 Brookridge Drive Manufacturers Association; Trustee,
Frankfort, IL Illinois Masonic Medical Center;
Age: 74 formerly, Illinois State Senator;
formerly, Vice President, The Reuben H.
Donnelly Corporation.
*Daniel Pierce Trustee Chairman of the Chairman of the Board and Managing
Two International Place Board Director Scudder Kemper Investments;
Boston, MA 02110 Director, Fiduciary Trust Company;
Age: 65 Director, Fiduciary Company Incorporated.
*Thomas W. Littauer Trustee Vice President Managing Director, Scudder Kemper
Two International Place Investments, Inc.; formerly, Head of
Boston, MA 02110 Broker Dealer Division of an unaffiliated
Age: 43 investment management firm during 1997;
prior thereto, President of Client
Management Services of an unaffiliated
investment management firm from 1991 to
1996.
Frederick T. Kelsey Trustee Retired; formerly, consultant to Goldman,
4010 Arbor Lane Sachs & Co; formerly, President,
Unit 102 Treasurer and Trustee of Liquid Assets
Northfield, IL 60093 and its affiliated mutual funds; Trustee
Age: 71 of the Northern Institutional Funds;
formerly Trustee of the Pilot Funds.
Fred B. Renwick Trustee Professor of finance, New York
3 Hanover Square University, Stern School of Business;
Suite 20H Director, the Wartburg Home Foundation;
New York, NY 10004 Chairman, Investment Committee of
Age: 69 Morehouse College Board of Trustees;
Director, American Bible Society
Investment Committee; formerly, member of
the Investment Committee of Atlanta
University Board of Trustees; formerly,
Director of Board of Pensions Evangelical
Lutheran Church of America.
John B. Tingleff Trustee Retired; formerly, President, Tingleff &
2015 South Lake Shore Drive Associates (management consulting firm);
Harbor Springs, MI formerly, Senior Vice President,
Age: 64 Continental Illinois National Bank &
Trust Company.
</TABLE>
12
<PAGE> 62
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE POSITION WITH THE FUND THE PAST FIVE YEARS
- --------------------- ------------------------ -----------------------------------------
<S> <C> <C>
John G. Weithers Trustee Retired; formerly, Chairman of the Board
311 Springlake and Chief Executive Officer, Chicago
Hinsdale, IL 60521 Stock Exchange; Director, Federal Life
Age: 67 Insurance Company; President of the
Members of the Corporation and Trustee,
DePaul University.
Mark S. Casady President Managing Director, Scudder Kemper
Two International Place Investments, Inc.
Boston, MA 02110
Age:38
Philip J. Collora Vice President, Senior Vice President, Scudder Kemper
222 South Riverside Plaza Secretary and Treasurer Investments, Inc.
Chicago, IL 60606
Age: 53
John R. Hebble Treasurer Senior Vice President, Scudder Kemper
222 South Riverside Plaza Investments, Inc.
Chicago, IL 60606
Age: 40
Jerard K. Hartman Vice President [Biography to be added]
Age: [ ]
Ann M. McCreary Vice President Managing Director Scudder Kemper
345 Park Avenue Investment, Inc.
New York, NY 10154
Age: 42
Michael A. McNamara Vice President [Biography to be added]
222 South Riverside Plaza
Chicago, IL 60606
Age: [ ]
Robert C. Peck Vice President [Biography to be added]
222 South Riverside Plaza
Chicago, IL 60606
Age: [ ]
</TABLE>
- ---------------
* Messrs. Pierce and Littauer are "interested persons" of the Fund (as that term
is defined in the 1940 Act).
The Board has an audit and governance committee that is composed of Messrs.
Akins, Gottschalk, Kelsey, Renwick, Tingleff, and Weithers. The Committee makes
recommendations regarding the selection of independent auditors for the Fund,
confers with the independent auditors regarding the Fund's financial statements,
the results of audits and related matters, seeks and reviews nominees for Board
membership and performance other tasks as the Board assigns.
COMPENSATION OF TRUSTEES
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's fiscal year ended November 30, 1998, except that the information
regarding the total compensation from the Fund and Fund complex in the last
column is for the calendar year 1998.
13
<PAGE> 63
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM FUND AND
COMPENSATION FUND COMPLEX(2)
NAME FROM FUND PAID TO TRUSTEES
- ---- ------------ ------------------
<S> <C> <C>
James E. Akins.............................................. $ [] $ []
Arthur R. Gottschalk(1)..................................... $ [] $ []
Frederick T. Kelsey(1)...................................... $ [] $ []
Fred B. Renwick............................................. $ [] $ []
John B. Tingleff............................................ $ [] $ []
John G. Weithers............................................ $ [] $ []
</TABLE>
- ---------------
(1) Includes deferred fees. Pursuant to a deferred compensation agreement with
the Fund, deferred amounts accrued interest monthly at a rate approximate to
the yield of Zurich Money Funds -- Zurich Money Market Fund. Total deferred
fees (including interest thereon) payable from the Fund are $ for Mr.
Gottschalk [and $ for Mr. Kelsey].
(2) Includes compensation for service on the Boards of Kemper Funds
with fund portfolios. Each trustee currently serves as trustee of
Kemper Funds with funds portfolios.
OWNERSHIP OF FUND SHARES
As of , 1999, the Trustees and Officers of the Fund as a Group
owned shares, representing % of the outstanding shares of the
Fund.
As of , 1999, the following persons owned, beneficially or of
record, more than 5% of the outstanding shares of the Fund:
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS SHARES PERCENTAGE OF OUTSTANDING SHARES
---------------- ----------- --------------------------------
<S> <C> <C>
</TABLE>
[INSERT TABLE & INFORMATION]
PORTFOLIO TRANSACTIONS
At times investment decisions may be made to purchase or sell the same
investment security for the Fund and for one or more of the other clients
advised by the Manager. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security, the transactions are
allocated as to amount and price in a manner considered equitable to each so
that each receives to the extent practicable the average price of such
transactions.
National securities exchanges have established limitations governing the
maximum number of options in each class, which may be written by a single
investor, or group of investors acting in concert. An exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose certain other sanctions. These position limits may restrict the number of
options the Fund will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities
or prices of securities and options or futures contracts available to the Fund.
On the other hand, the ability of the Fund to participate in volume transactions
may produce better executions for the Fund in some cases. The Board of Trustees
of the Fund believes that the benefits of the Manager's organization outweigh
any limitations that may arise from simultaneous transactions.
14
<PAGE> 64
The Manager, in effecting purchases and sales of portfolio securities for
the account of the Fund, will implement the Fund's policy of seeking best
execution of orders. Consistent with this policy, orders for portfolio
transactions are placed with broker-dealer firms, banks and other securities
dealers giving consideration to the quality, quantity and nature of each firm's
professional services which include execution, clearance procedures, wire
service quotations and statistical and other research information provided to
the Fund and the Manager. Any research benefits derived are available for all
clients including those of affiliated companies. Since statistical and other
research information is only supplementary to the research efforts of the
Manager and still must be analyzed and reviewed by its staff, the receipt of
research information is not expected to materially reduce its expenses. In
selecting among firms believed to meet the criteria for handling a particular
transaction the Manager may give consideration to those firms which have sold or
are selling shares of the Scudder Kemper mutual funds, as well as to those firms
which provide market, statistical and other research information to the Fund and
the Manager, although the Manager is not authorized to pay higher commissions to
firms which provide such services. While the Manager will be primarily
responsible for the placement of the Fund's business, the policies and practices
in this regard must be consistent with the foregoing and will at all times be
subject to review by the Board of Trustees of the Fund.
The Fund paid no brokerage commissions during the fiscal years ended
November 30, 1998, 1997, and 1996, as all portfolio transactions during this
period were effected on a principal basis.
PORTFOLIO TURNOVER
Generally, the Fund will not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Manager. (The portfolio turnover rate is calculated by dividing
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. For purposes of determining
this rate, all securities whose maturities at the time of acquisition are one
year or less are excluded.) The annual rate of the Fund's total portfolio
turnover for the years ended December 31, 1998, 1997 and 1996, was %, 79% and
74%, respectively.
REPURCHASE OF SHARES
Shares of closed-end management investment companies frequently trade at a
discount from net asset value but in some cases trade at a premium. In
recognition of the possibility that the Fund's shares might similarly trade at a
discount, the Fund's Board of Trustees has determined that it would be in the
interest of shareholders for the Fund to take action to attempt to reduce or
eliminate a market value discount from net asset value. To that end, the
Trustees presently contemplate that the Fund could from time-to-time take action
either to repurchase its shares in the open market or to tender for its own
shares at net asset value. The Board of Trustees, in consultation with the
Manager, will review on a quarterly basis the possibility of open market
repurchases and/or tender offers for Fund shares. There are no assurances that
the Board of Trustees will, in fact, decide to undertake either of these actions
or, if undertaken, that such actions will result in the Fund's shares trading at
a price which is equal to or approximates their net asset value. In addition,
the Board of Trustees will not necessarily announce when it has given
consideration to these matters.
Subject to the Fund's investment policies and restrictions with respect to
borrowings, the Fund may incur debt to finance repurchases and/or tenders. See
"Investment Objectives and Policies" in the Fund's Prospectus and "Investment
Restrictions" herein. Interest on any such borrowings will reduce the Fund's net
investment income.
There can be no assurance that repurchases and/or tenders will result in
the Fund's shares trading at a price that approximates or is equal to their net
asset value. The Fund anticipates that the market price of its shares will from
time to time vary from net asset value. The market price of the Fund's shares
will, among other things, be determined by the relative demand for and supply of
such shares in the market, the Fund's investment performance, the Fund's
dividends and yield and investor perception of the Fund's overall attractiveness
as an investment as compared with other investment alternatives. Nevertheless,
the fact that the
15
<PAGE> 65
Fund's shares may be the subject of tender offers at net asset value from time
to time may reduce the spread between market price and net asset value that
might otherwise exist. In the opinion of the Manager, sellers may be less
inclined to accept a significant discount if they have a reasonable expectation
of being able to recover net asset value in conjunction with a possible tender
offer.
Although the Board of Trustees believes that share repurchases and tenders
generally would have a favorable effect on the market price of the Fund's
shares, it should be recognized that the acquisition of shares by the Fund will
decrease the total assets of the Fund and, therefore, have the effect of
increasing the Fund's expense ratio. Because of the nature of the Fund's
investment objectives and policies and the Fund's portfolio, the Manager does
not anticipate that repurchases and tenders should have a materially adverse
effect on the Fund's investment performance and does not anticipate any material
difficulty in disposing of portfolio securities in order to consummate share
repurchases and tenders.
Even if a tender offer has been made, it is the Trustees' announced policy,
which may be changed by the Trustees, that the Fund cannot accept tenders or
effect repurchases if (1) such transactions, if consummated, would (a) result in
the delisting of the Fund's shares from the NYSE (the NYSE having advised the
Fund that it would consider delisting if the aggregate market value of the
Fund's outstanding shares is less than $5,000,000, the number of publicly held
shares falls below 600,000 or the number of round-lot holders falls below
1,200), or (b) impair the Fund's status as a regulated investment company under
the Code (which would make the Fund a taxable entity, causing the Fund's income
to be taxed at the corporate level in addition to the taxation of shareholders
who receive dividends from the Funds, (2) the amount of securities tendered
would require liquidation of such a substantial portion of the Fund's securities
that the Fund would not be able to liquidate portfolio securities in an orderly
manner in light of the existing market conditions and such liquidation would
have an adverse effect on the net asset value of the Fund to the detriment of
nontendering shareholders; or (3) there is, in the Board of Trustees' judgment,
any material (a) legal action or proceeding instituted or threatened challenging
such transactions or otherwise materially adversely affecting the Fund; (b)
suspension of or limitation on prices for trading securities generally on the
NYSE or any foreign exchange on which portfolio securities of the Fund are
traded; (c) declaration of a banking moratorium by federal, state or foreign
authorities or any suspension of payment by banks in the United States, New York
State or foreign countries in which the Fund invests; (d) limitation affecting
the Fund or the issuers of its portfolio securities imposed by federal, state or
foreign authorities on the extension of credit by lending institutions or on the
exchange of foreign currency; (e) commencement of war, armed hostilities or
other international or national calamity directly or indirectly involving the
United States or other countries in which the Fund invests, or (f) other event
or condition which would have a material adverse effect on the Fund or its
shareholders if shares were repurchased. The Trustees may modify these
conditions in light of experience.
Any tender offer made by the Fund will be at a price equal to the net asset
value of the shares on a date subsequent to the Fund's receipt of all tenders.
During the pendency of any tender offer by the Fund, the Fund will calculate
daily the net asset value of the shares and will establish procedures which will
be specified in the tender offer documents, to enable shareholders to ascertain
readily such net asset value. Each offer will be made and shareholders notified
in accordance with the requirements of the Securities Exchange Act of 1934 and
the 1940 Act, either by publication or mailing or both. Each offering document
will contain such information as is prescribed by such laws and the rules and
regulations promulgated thereunder. When a tender offer is authorized to be made
by the Fund's Trustees, a shareholder wishing to accept the offer will be
required to tender all (but not less than all) of the shares owned by such
shareholder (or attributed to him for federal income tax purposes under Section
318 of the Code). The Fund will not specify a record date for the tender offer
which will not permit a shareholder of record on the effective date of the
tender offer to tender his shares. The Fund will purchase all shares tendered in
accordance with the terms of the offer unless it determines to accept none of
them (based upon one of the conditions set forth above). Each person tendering
shares will pay to the Fund a reasonable service charge currently anticipated to
be $[25.00], subject to change, to help defray certain costs, including the
processing of tender forms, effecting payment, postage and handling. It is the
position of the staff of the SEC that such service charge may not be deducted
from the proceeds of the purchase. The Fund's transfer agent will receive the
fee as an offset to these costs. The Fund expects the
16
<PAGE> 66
costs to the Fund of effecting a tender offer will exceed the aggregate of all
service charges received from those who tender their shares. Costs associated
with the tender will be charged against capital.
Tendered shares that have been accepted and purchased by the Fund will be
held in treasury and may be retired by the Trustees. Treasury shares will be
recorded and reported as an offset to shareholders' equity and accordingly will
reduce the Fund's total assets. If treasury shares are retired, shares issued
and outstanding and capital in excess of par value will be reduced.
If the Fund must liquidate portfolio securities in order to purchase Fund
shares tendered, the Fund may realize gains and losses. If the portfolio
securities sold are "Section 988" items, the Fund's distributable net investment
income could be positively or adversely affected. The portfolio turnover rate of
the Fund may or may not be affected by the Fund's repurchases of shares pursuant
to a tender offer.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Code, the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisers with regard to the federal tax consequences of the purchase, ownership,
or disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
TAX STATUS OF THE FUND
The Fund intends to be taxed as a regulated investment company under
Subchapter M of the Code. Accordingly, the Fund must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to
U.S. federal income tax on income and gains that it distributes to shareholders,
if at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax at
the Fund level. To avoid the tax, the Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if
it is declared by the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during
17
<PAGE> 67
January of the following year. Such a distribution will be taxable to
shareholders in the calendar year in which the distribution is declared, rather
than the calendar year in which it is received.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by the Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
The excess of net long-term capital gains over net short-term capital
losses realized, distributed and properly designated by the Fund, whether paid
in cash or reinvested in Fund shares, will generally be taxable to shareholders
as long-term gain, regardless of how long a shareholder has held Fund shares.
Net capital gains from assets held for one year or less will be taxed as
ordinary income.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
FOREIGN TAXES
The Fund may be subject to certain taxes imposed by the countries in which
it invests or operates. If the Fund qualifies as a regulated investment company
and if more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of stocks or securities of foreign corporations, the Fund
may elect, for U.S. federal income tax purposes, to treat any foreign taxes paid
by the Fund that qualify as income or similar taxes under U.S. income tax
principles as having been paid by the Fund's shareholders. For any year for
which the Fund makes such an election, each shareholder will be required to
include in its gross income an amount equal to its allocable share of such taxes
paid by the Fund and the shareholders will be entitled, subject to certain
limitations, to credit their portions of these amounts against their U.S.
federal income tax liability, if any, or to deduct their portions from their
U.S. taxable income, if any. No deduction for foreign taxes may be claimed by
individuals who do not itemize deductions. In any year in which it elects to
"pass through" foreign taxes to shareholders, the Fund will notify shareholders
within 60 days after the close of the Fund's taxable year of the amount of such
taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities may have to be treated as derived from U.S. sources
and certain currency fluctuation gains, including Section 988 gains (defined
below), may have to be treated as derived from U.S. sources. The limitation of
the foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from the Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be applied to
offset no more than 90% of the alternative minimum tax imposed on corporations
and individuals.
The foregoing is only a general description of the foreign tax credit.
Because application of the credit depends on the particular circumstances of
each shareholder, shareholders are advised to consult their own tax advisers.
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<PAGE> 68
DISPOSITIONS
Upon a redemption, sale or exchange of shares of the Fund, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. A gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands, and the rate of tax will depend upon
the shareholder's holding period for the shares. Any loss realized on a
redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days, beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case the basis of the shares acquired will be
adjusted to reflect the disallowed loss. If a shareholder holds Fund shares for
six months or less and during that period receives a distribution taxable to the
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six-month period would be a long-term loss to the extent of
such distribution.
If, within 90 days after purchasing Fund shares with a sales charge, a
shareholder exchanges the shares and acquires new shares at a reduced (or
without any) sales charge pursuant to a right acquired with the original shares,
then the shareholder may not take the original sales charge into account in
determining the shareholder's gain or loss on the disposition of the shares.
Gain or loss will generally be determined by excluding all or a portion of the
sales charge from the shareholder's tax basis in the exchanged shares, and the
amount excluded will be treated as an amount paid for the new shares.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid (other than
exempt-interest dividends), capital gain distributions, and redemption proceeds
to shareholders if (1) the shareholder fails to furnish the Fund with the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the shareholder or the Fund that the shareholder has failed
to report properly certain interest and dividend income to the IRS and to
respond to notices to that effect, or (3) when required to do so, the
shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
FUND INVESTMENTS
Market Discount. If the Fund purchases a debt security at a price lower
than the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount." If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
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<PAGE> 69
Original Issue Discount. Certain debt securities acquired by the Fund may
be treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts
and certain options (namely, nonequity options and dealer equity options) in
which the Fund may invest may be "section 1256 contracts." Gains (or losses) on
these contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the
Fund may result in "straddles" for federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by the Fund, and
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. In addition, certain carrying charges (including interest expense)
associated with positions in a straddle may be required to be capitalized rather
than deducted currently. Certain elections that the Fund may make with respect
to its straddle positions may also affect the amount, character and timing of
the recognition of gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize
gain from a constructive sale of an "appreciated financial position" it holds if
it enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
Section 988 Gains or Losses. Gains or losses attributable to fluctuations
in exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition and disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any
20
<PAGE> 70
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, reducing each shareholder's basis in his or her
Fund shares.
Passive Foreign Investment Companies. The Fund may invest in shares of
foreign corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income is investment-type income. If the Fund
receives a so-called "excess distribution" with respect to PFIC stock, the Fund
itself may be subject to a tax on a portion of the excess distribution, whether
or not the corresponding income is distributed by the Fund to shareholders. In
general, under the PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which the Fund held the PFIC shares. The
Fund will itself be subject to tax on the portion, if any, of an excess
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund would be required to include in its gross income its
share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be treated as though they were realized
and reported as ordinary income. Any mark-to-market losses and any loss from an
actual disposition of PFIC shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP are the Fund's independent accounts providing audit and
tax return preparation services and assistance and consultation in connection
with the review of various SEC filings. The address of Ernst & Young LLP is 233
South Wacker Drive, Chicago, Illinois 60606. The financial statements
incorporated by reference in this SAI have been so incorporated and the
financial highlights included in the Prospectus have been so included, in
reliance upon the report of Ernst & Young LLP given on the authority of said
firm as experts in accounting and auditing.
INCORPORATION BY REFERENCE
The Fund's Annual Report for the fiscal year ended November 30, 1998 (the
"Report"), which either accompanies this Statement of Additional Information or
has previously been provided to the person to whom this Statement of Additional
Information is being sent, is incorporated herein by reference with respect to
all information other than the information set forth in the Letter to
Shareholders included therein. The Fund will furnish, without charge, a copy of
its Report upon request to Kemper High Income Trust, 222 South Riverside Plaza,
Chicago, Illinois 60606 or call 1-800-537-6006.
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<PAGE> 71
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Contained in Part A:
(a) Financial Highlights
Incorporated in Part B by reference to Registrant's November 30, 1998
Annual Report:
(a) Portfolio of Investments as of November 30, 1998
(b) Statement of Assets and Liabilities as of November 30, 1998
(c) Statement of Operations for the year ended November 30, 1998
(d) Statements of Changes in Net Assets for the year ended November 30,
1998
(e) Statement of Cash Flows for the year ended November 30, 1998
(f) Notes to Financial Statements
(g) Report of Independent Accountants dated , 199
2. Exhibits
(a) Amended and Restated Agreement and Declaration of Trust of the
Registrant*
(b) By-Laws of the Registrant*
(c) Not Applicable
(d) (1) Specimen Certificate for Shares of Beneficial Interest of the
Registrant*
(d) (2) Form of Subscription Certificate*
(d) (3) Form of Notice of Guaranteed Delivery*
(d) (4) Form of Nominee Holder Over-Subscription Exercise Form*
(d) (5) Form of Beneficial Owner Listing Certification*
(e) Dividend Reinvestment and Cash Purchase Plan of the Registrant*
(f) Not Applicable
(g) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc.*
(h) Form of Dealer Manager Agreement between the Registrant and
PaineWebber Incorporated*
(i) Not Applicable
(j) Custody Agreement between the Registrant and Investors Fiduciary
Trust Company*
(k) (1) [Form of Subscription Agreement with Kemper Financial Services,
Inc.]*
(2) Form of Agency Agreement between the Registrant and Investors
Fiduciary Trust Company*
(3) Supplement to Agency Agreement*
(l) Opinion and Consent of Dechert Price & Rhoads*
(m) Not Applicable
<PAGE> 72
(n) Consent of Ernst & Young LLP*
(o) Not Applicable
(p) Subscription Agreement for Initial Capital*
(q) Not Applicable
(r) Financial Data Schedule*
(s) Powers of Attorney*
- ---------------
* To be filed by amendment.
ITEM 25. MARKETING AGREEMENTS
See Form of Dealer Manager Agreement to be filed as Exhibit (h) to this
Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
Registration Fees...........................................
Printing and Engraving Expenses.............................
Rating Agency Fees and Expenses.............................
Legal Fees and Expenses.....................................
New York Stock Exchange Listing Fees........................
National Association of Securities Dealers, Inc. Fees.......
Accounting Fees and Expenses................................
Dealer Manager Expense Reimbursement........................
Subscription Agent Fees and Expenses........................
Information Agent's Fees and Expenses.......................
Miscellaneous Expenses......................................
Total.............................................
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 27. PERSON CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
TITLE OF CLASS AS OF FEBRUARY 10, 1999
- -------------- ------------------------
<S> <C>
Shares of Beneficial Interest.......................... 4,434
</TABLE>
ITEM 29. INDEMNIFICATION
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit (a) hereto, which is incorporated by reference herein) provides in
effect that the Registrant will indemnify its officers and trustees under
certain circumstances. However, in accordance with Section 17(h) and 17(i) of
the Investment Company Act of 1940 and its own terms, said Article of the
Agreement and Declaration of Trust does not protect any person against any
liability to the Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise,
2
<PAGE> 73
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The description of the business of Scudder Kemper Investments, Inc. is set
forth under the caption "Management of the Fund" in the Prospectus forming part
of this Registration Statement.
The information as to the Directors and officers of Scudder Kemper
Investments, Inc. set forth in Scudder Kemper Investment's Form ADV filed with
the Securities and Exchange Commission (File No. 801-252), as amended through
the date hereof, is incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
Accounts and Records of the Fund are maintained at (i) the Fund's office at
222 South Riverside Plaza, Chicago, Illinois 60606, (ii) the offices of Scudder
Kemper Investments, Inc. at 345 Park Avenue, New York, New York, 10154-0010, and
(iii) the offices of Scudder Kemper Investments, Inc. at 2 International Place,
Boston, Massachusetts 02110-4103.
In addition, Investors Fiduciary Trust Company, 127 West 10th Street,
Kansas City, Missouri 64105, maintains all the required records in its capacity
as transfer, dividend paying and shareholder service agent of the Registrant.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the Offer until the prospectus is
amended if (1) subsequent to the effective date of this registration statement,
the net asset value declines more than ten percent from its net asset value as
of the effective date of this registration statement or (2) the net asset value
increases to an amount greater than the net proceeds as stated in the prospectus
included in this registration statement.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5. The Registrant undertakes:
a. for the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
3
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Washington, D.C. on this 11th day of February, 1999.
KEMPER HIGH INCOME TRUST
By: /s/ MARK S. CASADY
------------------------------------
Mark S. Casady
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<S> <C> <C>
/s/ MARK S. CASADY President February 11, 1999
- ------------------------------------------
Mark S. Casady
/s/ DANIEL PIERCE Chairman and Trustee February 11, 1999
- ------------------------------------------
Daniel Pierce
/s/ JAMES E. AKINS Trustee February 11, 1999
- ------------------------------------------
James E. Akins
/s/ ARTHUR T. GOTTSCHALK Trustee February 11, 1999
- ------------------------------------------
Arthur T. Gottschalk
/s/ FREDERICK T. KELSEY Trustee February 11, 1999
- ------------------------------------------
Frederick T. Kelsey
/s/ FRED B. RENWICK Trustee February 11, 1999
- ------------------------------------------
Fred B. Renwick
/s/ JOHN B. TINGLEFF Trustee February 11, 1999
- ------------------------------------------
John B. Tingleff
/s/ THOMAS W. LITTAUER Trustee February 11, 1999
- ------------------------------------------
Thomas W. Littauer
/s/ JOHN G. WEITHERS Trustee February 11, 1999
- ------------------------------------------
John G. Weithers
/s/ JOHN R. HEBBLE Treasurer February 11, 1999
- ------------------------------------------
John R. Hebble
</TABLE>
