-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Omsf5O6a53ODAS8vrV6UyWgN3wylBiXIpt1RBusiALPA187x2dMHLNpzGdrixoow ahntt+Hog1tMMQ5fsB9MeQ== 0000950124-95-003974.txt : 19951202 0000950124-95-003974.hdr.sgml : 19951202 ACCESSION NUMBER: 0000950124-95-003974 CONFORMED SUBMISSION TYPE: 485B24E PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19951130 EFFECTIVENESS DATE: 19951130 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEMPER ADJUSTABLE RATE U S GOVERNMENT FUND CENTRAL INDEX KEY: 0000814955 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 363528556 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1933 Act SEC FILE NUMBER: 033-14832 FILM NUMBER: 95598008 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-05195 FILM NUMBER: 95598009 BUSINESS ADDRESS: STREET 1: 120 S LASALLE ST CITY: CHICAGO STATE: IL ZIP: 60603 BUSINESS PHONE: 3127811121 FORMER COMPANY: FORMER CONFORMED NAME: KEMPER GOVERNMENT INCOME TRUST DATE OF NAME CHANGE: 19870811 485B24E 1 P.E. AMENDMENT #13 TO FORM N-1A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 30, 1995 1933 ACT REGISTRATION NO. 33-14832 1940 ACT REGISTRATION NO. 811-5195 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / / Pre-Effective Amendment No. / / Post-Effective Amendment No. 13 /X/ and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / Amendment No. 14 /X/
(Check appropriate box or boxes) ------------------ KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (Exact name of Registrant as Specified in Charter)
120 South LaSalle Street, Chicago, Illinois 60603 (Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 781-1121 Philip J. Collora, Vice President and Secretary With a copy to: Kemper Adjustable Rate U.S. Government Fund Charles F. Custer 120 South LaSalle Street Vedder, Price, Kaufman & Kammholz Chicago, Illinois 60603 222 North LaSalle Street (Name and Address of Agent for Service) Chicago, Illinois 60601
Registrant has registered an indefinite number of its shares under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for Registrant's fiscal year ended August 31, 1995 was filed on or about October 13, 1995. It is proposed that this filing will become effective (check appropriate box) / / immediately upon filing pursuant to paragraph (b) /X/ on December 1, 1995 pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a)(1) / / 75 days after filing pursuant to paragraph (a)(2) / / on (date) pursuant to paragraph (a)(2) of Rule 485. If appropriate, check the following box: / / this post-effective amendment designates a new effective date for a previously filed post-effective amendment. CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* FEE - ----------------------------------------------------------------------------------------------------------- Shares of beneficial interest, without par value:................................... 6,472,061 $8.30 $290,000 $100.00 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
* The fee is calculated in accordance with Rule 24e-2 (b)(2) 15,167,496; (b)(3) 8,730,374; (b)(4) 6,437,122. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CROSS-REFERENCE SHEET BETWEEN ITEMS ENUMERATED IN PART A OF FORM N-1A AND PROSPECTUS
ITEM NUMBER OF FORM N-1A LOCATION IN PROSPECTUS ------------ ---------------------- 1. Cover Page............................... Cover Page 2. Synopsis................................. Summary; Summary of Expenses; Supplement to Prospectus 3. Condensed Financial Information.......... Financial Highlights; Performance 4. General Description of Registrant........ Summary; Investment Objectives, Policies and Risk Factors; Capital Structure 5. Management of the Fund................... Summary; Investment Manager and Underwriter 5A. Management's Discussion of Fund Performance.............................. Performance 6. Capital Stock and Other Securities....... Summary; Dividends and Taxes; Net Asset Value; Purchase of Shares; Capital Structure 7. Purchase of Securities Being Offered..... Summary; Purchase of Shares; Investment Manager and Underwriter; Special Features; Supplement to Prospectus 8. Redemption or Repurchase................. Summary; Redemption or Repurchase of Shares 9. Pending Legal Proceedings................ Inapplicable
3 KEMPER FIXED INCOME FUNDS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 1, 1995 CLASS I SHARES KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND KEMPER CASH RESERVES FUND KEMPER DIVERSIFIED INCOME FUND KEMPER U.S. GOVERNMENT SECURITIES FUND KEMPER HIGH YIELD FUND KEMPER INCOME AND CAPITAL PRESERVATION FUND KEMPER U.S. MORTGAGE FUND KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND Kemper Adjustable Rate U.S. Government Fund (the "Adjustable Rate Fund"), Kemper Cash Reserves Fund (the "Cash Reserves Fund"), Kemper Diversified Income Fund (the "Diversified Fund"), Kemper U.S. Government Securities Fund (the "Government Fund"), Kemper High Yield Fund (the "High Yield Fund"), Kemper Income and Capital Preservation Fund (the "Income and Capital Fund"), Kemper U.S. Mortgage Fund (the "Mortgage Fund") and Kemper Short-Intermediate Government Fund (the "Short-Intermediate Government Fund") (collectively, the "Funds") currently offer four classes of shares to provide investors with different purchasing options. These are Class A, Class B and Class C shares, which are described in the prospectus, and Class I shares, which are described in the prospectus as supplemented hereby. Class I shares are available for purchase exclusively by the following investors: (a) tax-exempt retirement plans of Kemper Financial Services, Inc. ("KFS") and its affiliates; and (b) the following investment advisory clients of KFS and its investment advisory affiliates (including Kemper Asset Management Company ("KAMCO")) that invest at least $1 million in a Fund: (1) unaffiliated benefit plans, such as qualified retirement plans (other than individual retirement accounts and self-directed retirement plans); (2) unaffiliated banks and insurance companies purchasing for their own accounts; and (3) endowment funds of unaffiliated non-profit organizations. Class I shares currently are available for purchase only from Kemper Distributors, Inc., principal underwriter for the Funds, Share certificates are not available for Class I shares. The primary distinctions among the classes of each Fund's shares lie in their initial and contingent deferred sales charge schedules and in their ongoing expenses, including asset-based sales charges in the form of Rule 12b-1 distribution fees. Class I shares are offered at net asset value without an initial sales charge and are not subject to a contingent deferred sales charge or a Rule 12b-1 distribution fee. Also, there is no administrative services fee charged to Class I shares. As a result of the relatively lower expenses for Class I shares, the level of income dividends per share (as a percentage of net asset value) and, therefore, the overall investment return, will be higher for Class I shares than for Class A, Class B and Class C shares. 4 The following information supplements the indicated sections of the prospectus. SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL FUNDS) CLASS I Maximum Sales Charge on Purchases (as a percentage of offering price)...................................................... None Maximum Sales Charge on Reinvested Dividends............................................... None Redemption Fees............................................................................ None Exchange Fee............................................................................... None Deferred Sales Charge (as a percentage of redemption proceeds)............................. None
ANNUAL FUND INCOME SHORT- OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE (as a percentage of average RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT net assets) FUND FUND FUND FUND FUND FUND FUND FUND ---------- -------- ----------- ---------- ----- ------ -------- ------------ Management Fees............. .55% .40% .56% .41% .53% .53% .50% .55% 12b-1 Fees.................. None None None None None None None None Other Expenses (estimated)............... .09% .06% .09% .08% .08% .09% .08% .09% ---- ---- ---- ---- ---- ---- ---- ---- Total Operating Expenses.... .64% .46% .65% .49% .61% .62% .58% .64% ==== ==== ==== ==== ==== ==== ==== ====
1 3 5 10 EXAMPLE FUND YEAR YEARS YEARS YEARS - ------------------------------------------ ------------------------------- ---- ----- ----- ----- You would pay the following expenses on a Adjustable Rate................ $7 $20 $36 $80 $1,000 investment, assuming (1) 5% annual Cash Reserves.................. $5 $15 $26 $58 return and (2) redemption at the end of each Diversified.................... $7 $21 $36 $81 time period: Government..................... $5 $16 $27 $62 High Yield..................... $6 $20 $34 $76 Income and Capital............. $6 $20 $35 $77 Mortgage....................... $6 $19 $32 $73 Short-Intermediate Government..................... $7 $20 $36 $80
The purpose of the preceding table is to assist investors in understanding the various costs and expenses that an investor in Class I shares of a Fund will bear directly or indirectly. "Other Expenses" for Class I shares have been estimated for the current fiscal year. The Example assumes a 5% annual rate of return pursuant to requirements of the Securities and Exchange Commission. This hypothetical rate of return is not intended to be representative of past or future performance of any Fund. The Example should not be considered to be a representation of past or future expenses. Actual expenses may be greater or lesser than those shown. 2 5 FINANCIAL HIGHLIGHTS No financial information is presented for Class I shares of the Adjustable Rate Fund, Cash Reserves Fund, Diversified Fund, Mortgage Fund and the Short-Intermediate Government Fund since no Class I shares had been issued as of such Funds' fiscal year end. GOVERNMENT FUND
JULY 3, 1995 TO OCT. 31, 1995 --------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.88 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .22 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain .04 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .26 - ------------------------------------------------------------------------------------------------------------------------ Less distribution from net investment income .22 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.92 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (NOT ANNUALIZED) (%): 3.02 - ------------------------------------------------------------------------------------------------------------------------ ANNUALIZED RATIOS TO AVERAGE NET ASSETS (%): Expenses .53 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 7.07 - ------------------------------------------------------------------------------------------------------------------------
HIGH YIELD FUND
DECEMBER 29, 1994 TO SEPTEMBER 30, 1995 -------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.55 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .66 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain .39 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.05 - ------------------------------------------------------------------------------------------------------------------------ Less distribution from net investment income .59 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 8.01 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (NOT ANNUALIZED) (%): 14.37 - ------------------------------------------------------------------------------------------------------------------------ ANNUALIZED RATIOS TO AVERAGE NET ASSETS (%): Expenses .61 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 10.70 - ------------------------------------------------------------------------------------------------------------------------
3 6 INCOME AND CAPITAL FUND
JULY 3, 1995 TO OCT. 31, 1995 --------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.52 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .19 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain .12 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .31 - ------------------------------------------------------------------------------------------------------------------------ Less distribution from net investment income .22 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.61 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (NOT ANNUALIZED) (%): 3.65 - ------------------------------------------------------------------------------------------------------------------------ ANNUALIZED RATIOS TO AVERAGE NET ASSETS (%): Expenses .62 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 6.87 - ------------------------------------------------------------------------------------------------------------------------
SPECIAL FEATURES Shareholders of a Fund's Class I shares may exchange their shares for (i) shares of Kemper Money Market Fund--Money Market Portfolio if the shareholders of Class I shares have purchased shares because they are participants in tax-exempt retirement plans of KFS and its affiliates and (ii) Class I shares of any other "Kemper Mutual Fund" listed under "Special Features--Class A Shares--Combined Purchases" in the prospectus. Conversely, shareholders of Kemper Money Market Fund--Money Market Portfolio who have purchased shares because they are participants in tax-exempt retirement plans of KFS and its affiliates may exchange their shares for Class I shares of "Kemper Mutual Funds" to the extent that they are available through their plan. Exchanges will be made at the shares relative net asset values. Exchanges are subject to the limitations set forth in the prospectus under "Special Features--Exchange Privilege--General." December 1, 1995 KFIF-1I (12/95) 4 7 TABLE OF CONTENTS - ----------------------------------------------- Summary 1 - ----------------------------------------------- Summary of Expenses 3 - ----------------------------------------------- Financial Highlights 5 - ----------------------------------------------- Investment Objectives, Policies and Risk Factors 15 - ----------------------------------------------- Investment Manager and Underwriter 33 - ----------------------------------------------- Dividends and Taxes 37 - ----------------------------------------------- Net Asset Value 38 - ----------------------------------------------- Purchase of Shares 40 - ----------------------------------------------- Redemption or Repurchase of Shares 45 - ----------------------------------------------- Special Features 49 - ----------------------------------------------- Performance 53 - ----------------------------------------------- Capital Structure 54 - ----------------------------------------------- Appendix A--Portfolio Composition 56 - ----------------------------------------------- Appendix B--Ratings of Investments 57 - -----------------------------------------------
This combined prospectus of the Kemper Fixed Income Funds contains information about each of the Funds that you should know before investing and should be retained for future reference. A Statement of Additional Information dated December 1, 1995, has been filed with the Securities and Exchange Commission and is incorporated herein by reference. It is available upon request without charge from the Funds at the address or telephone number on this cover or the firm from which this prospectus was obtained. THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN A FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. KEMPER (LOGO) FIXED INCOME FUNDS PROSPECTUS December 1, 1995 KEMPER FIXED INCOME FUNDS 120 South LaSalle Street, Chicago, Illinois 60603 1-800-621-1048 This prospectus describes a choice of eight fixed income investment portfolios managed by Kemper Financial Services, Inc. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND KEMPER CASH RESERVES FUND KEMPER DIVERSIFIED INCOME FUND KEMPER U.S. GOVERNMENT SECURITIES FUND KEMPER HIGH YIELD FUND KEMPER INCOME AND CAPITAL PRESERVATION FUND KEMPER U.S. MORTGAGE FUND KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund and Kemper Short-Intermediate Government Fund are each a series of Kemper Portfolios. KEMPER DIVERSIFIED INCOME FUND AND KEMPER HIGH YIELD FUND INVEST PRIMARILY IN LOWER RATED BONDS, COMMONLY REFERRED TO AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST THAN INVESTMENTS IN HIGHER RATED SECURITIES. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS. AN INVESTMENT IN KEMPER CASH RESERVES FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. 8 KEMPER FIXED INCOME FUNDS 120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603, TELEPHONE 1-800-621-1048 SUMMARY INVESTMENT OBJECTIVES. The eight open-end, diversified, management investment companies or portfolios thereof (the "Funds") covered in this combined prospectus are as follows: KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (the "Adjustable Rate Fund") seeks high current income consistent with low volatility of principal. KEMPER CASH RESERVES FUND (the "Cash Reserves Fund") seeks maximum current income to the extent consistent with stability of principal from a portfolio of high quality money market instruments. KEMPER DIVERSIFIED INCOME FUND (the "Diversified Fund") seeks a high current return. KEMPER U.S. GOVERNMENT SECURITIES FUND (the "Government Fund") seeks high current income, liquidity and security of principal. KEMPER HIGH YIELD FUND (the "High Yield Fund") seeks the highest level of current income obtainable from a professionally managed, diversified portfolio of fixed income securities which the Fund's investment manager considers consistent with reasonable risk. KEMPER INCOME AND CAPITAL PRESERVATION FUND (the "Income and Capital Fund") seeks as high a level of current income as is consistent with prudent investment management, preservation of capital and ready marketability of its portfolio. KEMPER U.S. MORTGAGE FUND (the "Mortgage Fund") seeks maximum current return from U.S. Government securities. KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (the "Short-Intermediate Government Fund") seeks, with equal emphasis, high current income and preservation of capital from a portfolio composed primarily of short and intermediate-term U.S. Government securities. Each Fund (other than the Cash Reserves Fund) may engage in options and financial futures transactions. The Diversified, High Yield and Income and Capital Funds each may invest a portion of its assets in foreign securities and engage in related foreign currency transactions. See "Investment Objectives, Policies and Risk Factors." RISK FACTORS. There is no assurance that the investment objective of any Fund will be achieved and investment in each Fund includes risks that vary in kind and degree depending upon the investment policies of that Fund. The returns and net asset value of each Fund will fluctuate (except that the Cash Reserves Fund seeks to maintain a net asset value of $1.00 per share). Investors should note that investments in high yield securities by certain Funds (principally the Diversified and High Yield Funds) entail relatively greater risk of loss of income and principal than investments in higher rated securities and market prices of high yield securities may fluctuate more than market prices of higher rated securities. Foreign investments by certain Funds involve risk and opportunity considerations not typically associated with investing in U.S. companies. The U.S. Dollar value of a foreign security tends to decrease when the value of the U.S. Dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. Dollar falls against such currency. Thus, the U.S. Dollar value of foreign securities in a Fund's portfolio, and the Fund's net asset value, may change in response to changes in currency exchange rates even though the value of the foreign securities in local currency terms may not have changed. While a Fund's investments in foreign securities will principally be in developed countries, the Fund may invest a portion of its assets in developing or "emerging" markets, which involve exposure to economic structures that are generally less diverse and mature than in the United States, and to political systems that may be less stable. There are special risks associated with options, financial futures and foreign currency transactions and there is no assurance that use of those investment techniques will be successful. The government guarantee of the U.S. Government securities in which certain Funds invest (principally the Adjustable Rate, Government, Mortgage and Short-Intermediate Government Funds) does not guarantee the market value of the shares of such Funds. Normally, 1 9 the value of investments in U.S. Government securities, as with most debt securities, varies inversely with changes in interest rates. See "Investment Objectives, Policies and Risk Factors." PURCHASES AND REDEMPTIONS. Each Fund provides investors with the option of purchasing shares in the following ways: Class A Shares..................... Offered at net asset value plus a maximum sales charge of 4.5% (3.5% for the Adjustable Rate and Short-Intermediate Government Funds) of the offering price. No initial sales charge applies to purchases of Class A shares of the Cash Reserves Fund, but the applicable sales charge applies for exchanges of such shares into Class A shares of other Kemper Mutual Funds. Reduced sales charges apply to purchases of $100,000 or more. The redemption within one year of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a 1% contingent deferred sales charge. Class B Shares..................... Offered at net asset value, subject to a Rule 12b-1 distribution fee and a contingent deferred sales charge that declines from 4% to zero on certain redemptions made within six years of purchase. Class B shares automatically convert into Class A shares (which have lower ongoing expenses) six years after purchase. Class C Shares..................... Offered at net asset value without an initial or contingent deferred sales charge, but subject to a Rule 12b-1 distribution fee. Class C shares do not convert into another class.
Each class of shares represents interests in the same portfolio of investments of a Fund. The minimum initial investment is $1,000 and each investment thereafter must be at least $100. Shares are redeemable at net asset value, which may be more or less than original cost, subject, in the case of Class A shares purchased under the Large Order NAV Purchase Privilege and for Class B shares, to any applicable contingent deferred sales charge. See "Purchase of Shares" and "Redemption or Repurchase of Shares." INVESTMENT MANAGER AND UNDERWRITER. Kemper Financial Services, Inc. ("KFS") serves as investment manager, principal underwriter and administrator for each Fund. KFS is paid an investment management fee by each Fund based upon the average daily net assets of that Fund at an effective annual rate that differs for each Fund. Kemper Distributors, Inc. ("KDI"), a wholly owned subsidiary of KFS, is principal underwriter and administrator for each Fund. For Class B shares and Class C shares, KDI receives a Rule 12b-1 distribution fee of .75 of 1% of average daily net assets. KDI also receives the amount of any contingent deferred sales charges paid on the redemption of shares. Administrative services are provided to shareholders under administrative services agreements with KDI. Each Fund pays an administrative services fee at the annual rate of up to .25 of 1% of average daily net assets of each class of the Fund, which KDI pays to financial services firms. See "Investment Manager and Underwriter." DIVIDENDS. The Cash Reserves Fund's net investment income is declared as a dividend daily, and dividends are reinvested or paid in cash monthly. Each of the other Funds normally distributes monthly dividends of net investment income and distributes any net realized short-term and long-term capital gains at least annually. Income and capital gain dividends of a Fund are automatically reinvested in additional shares of that Fund, without a sales charge, unless the shareholder makes a different election. See "Dividends and Taxes." GENERAL. In the opinion of the staff of the Securities and Exchange Commission, the use of this combined prospectus may make each Fund liable for any misstatement or omission in this prospectus regardless of the particular Fund to which it pertains. 2 10 SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL FUNDS)(1) CLASS A CLASS B CLASS C -------- ------------------- ------- Maximum Sales Charge on Purchases %(2) (as a percentage of offering price).................... 3.5*/4.5 None None Maximum Sales Charge on Reinvested Dividends............. None None None Redemption Fees.......................................... None None None Exchange Fee............................................. None None None Deferred Sales Charge (as a percentage of redemption None(3) 4% during the first None proceeds).............................................. year, 3% during the second and third years, 2% during the fourth and fifth years and 1% in the sixth year
* 3.5% APPLIES TO THE ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS ONLY. - --------------- (1) Investment dealers and other firms may independently charge additional fees for shareholder transactions or for advisory services; please see their materials for details. (2) Reduced sales charges apply to purchases of $100,000 or more. See "Purchase of Shares -- Initial Sales Charge Alternative -- Class A Shares." No initial sales charge applies to purchases of Class A shares of the Cash Reserves Fund but the applicable sales charge applies for exchanges into Class A shares of other Kemper Mutual Funds. (3) The redemption within one year of shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a 1% contingent deferred sales charge. See "Purchase of Shares -- Initial Sales Charge Alternative -- Class A Shares." CLASS A SHARES
ANNUAL FUND INCOME SHORT- OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE (as a percentage of average net RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT assets) FUND FUND FUND FUND FUND FUND FUND FUND ------- ------- ------- ------- ------- ------- ------- ------- Management Fees................ .55% .40% .56% .41% .53% .53% .50% .55% 12b-1 Fees..................... None None None None None None None None Other Expenses................. .55% .52% .53% .31% .37% .37% .44% .50% ------- ------- ------- ------- ------- ------- ------- ------- Total Operating Expenses....... 1.10% .92% 1.09% .72% .90% .90% .94% 1.05% ====== ====== ====== ====== ====== ====== ====== ======
CLASS B SHARES
ANNUAL FUND INCOME SHORT- OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE (as a percentage of average net RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT assets) FUND FUND FUND FUND FUND FUND FUND FUND ------- ------- ------- ------- ------- ------- ------- ------- Management Fees................ .55% .40% .56% .41% .53% .53% .50% .55% 12b-1 Fees(4).................. .75% .75% .75% .75% .75% .75% .75% .75% Other Expenses................. .55% .64% .73% .53% .49% .53% .54% .61% ------- ------- ------- ------- ------- ------- ------- ------- Total Operating Expenses....... 1.85% 1.79% 2.04% 1.69% 1.77% 1.81% 1.79% 1.91% ====== ====== ====== ====== ====== ====== ====== ======
- --------------- (4) Long-term shareholders may pay more than the economic equivalent of the maximum initial sales charges permitted by the National Association of Securities Dealers, although KDI believes that it is unlikely because of the automatic conversion feature described under "Purchase of Shares--Deferred Sales Charge Alternative--Class B Shares." 3 11 CLASS C SHARES
ANNUAL FUND INCOME SHORT- OPERATING EXPENSES ADJUSTABLE CASH HIGH AND INTERMEDIATE (as a percentage of average RATE RESERVES DIVERSIFIED GOVERNMENT YIELD CAPITAL MORTGAGE GOVERNMENT net assets) FUND FUND FUND FUND FUND FUND FUND FUND ---------- -------- ----------- ---------- ----- ------ -------- ------------ Management Fees............... .55% .40% .56% .41% .53% .53% .50% .55% 12b-1 Fees(5)................. .75% .75% .75% .75% .75% .75% .75% .75% Other Expenses................ .49% .63% .53% .48% .43% .50% .44% .44% ----- -------- ----- ----- ----- ------ -------- ----- Total Operating Expenses...... 1.79% 1.78% 1.84% 1.64% 1.71% 1.78% 1.69% 1.74% ======== ====== ======== ========= ==== ===== ======= =========
- --------------- (5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay more than the economic equivalent of the maximum initial sales charges permitted by the National Association of Securities Dealers. CLASS A SHARES
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------ ------ ------- ------- -------- EXAMPLE You would pay the following Adjustable Rate $ 46 $69 $ 94 $164 expenses on a $1,000 Cash Reserves $ 9 $29 $ 51 $113 investment, assuming (1) 5% Diversified $56 $78 $102 $172 annual return and (2) Government $52 $67 $ 83 $130 redemption at the end of each High Yield $54 $72 $ 93 $151 time period: Income and Capital $54 $72 $ 93 $151 Mortgage $54 $74 $ 95 $155 Short-Intermediate Government $45 $67 $ 91 $159
CLASS B SHARES
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------ ------ ------- ------- -------- EXAMPLE(6) You would pay the following Adjustable Rate $ 49 $78 $ 110 $179 expenses on a $1,000 Cash Reserves $48 $76 $107 $167 investment, assuming (1) 5% Diversified $51 $84 $120 $190 annual return and (2) Government $47 $73 $102 $150 redemption at the end of each High Yield $48 $76 $106 $164 time period: Income and Capital $48 $77 $108 $167 Mortgage $48 $76 $107 $168 Short-Intermediate Government $49 $80 $113 $180 You would pay the following Adjustable Rate $ 19 $58 $ 100 $179 expenses on the same Cash Reserves $ 18 $56 $ 97 $167 investment, assuming no redemption: Diversified $ 21 $64 $ 110 $190 Government $ 17 $53 $ 92 $150 High Yield $ 18 $56 $ 96 $164 Income and Capital $ 19 $57 $ 98 $167 Mortgage $ 18 $56 $ 97 $168 Short-Intermediate Government $ 19 $60 $ 103 $180
- --------------- (6) Assumes conversion to Class A shares six years after purchase and was calculated based upon the assumption that the shareholder was an owner of the shares on the first day of the first year and the contingent deferred sales charge was applied as follows: 1 year (3%), 3 years (2%), 5 years (1%) and 10 years (0%). See "Redemption or Repurchase of Shares -- Contingent Deferred Sales Charge -- Class B Shares" for more information regarding the calculation of the contingent deferred sales charge. 4 12 CLASS C SHARES
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------ ------ ------- ------- -------- EXAMPLE You would pay the following Adjustable Rate $ 18 $56 $ 97 $211 expenses on a $1,000 Cash Reserves $ 18 $56 $ 96 $209 investment, assuming (1) 5% annual return Diversified $ 19 $58 $ 100 $216 and (2) redemption at the end Government $ 17 $52 $ 89 $194 of each time period: High Yield $ 17 $54 $ 93 $202 Income and Capital $ 18 $56 $ 96 $209 Mortgage $ 17 $53 $ 92 $200 Short-Intermediate Government $ 18 $55 $ 94 $205
The purpose of the preceding table is to assist investors in understanding the various costs and expenses that an investor in a Fund will bear directly or indirectly. See "Investment Manager and Underwriter" for more information. The Example assumes a 5% annual rate of return pursuant to requirements of the Securities and Exchange Commission. This hypothetical rate of return is not intended to be representative of past or future performance of any Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. FINANCIAL HIGHLIGHTS The tables below show financial information for each Fund expressed in terms of one share outstanding throughout the period. The information in the table for each Fund is covered by the report of the Fund's independent auditors. The report for each Fund is contained in its Registration Statement and is available from that Fund. The financial statements contained in each Fund's 1995 Annual Report to Shareholders (and for Kemper Portfolios, the period from August 1, 1995 to September 30, 1995) are incorporated herein by reference and may be obtained by writing or calling that Fund. 5 13 ADJUSTABLE RATE FUND
JULY 1, SEPTEMBER 1, 1991 TO 1987 TO YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30, JUNE 30, CLASS A SHARES 1995 1994 1993 1992 1991 1991 1990 1989 1988 -------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79 9.00 - -------------------------------------- Income from investment operations: Net investment income .48 .34 .47 .63 .13 .79 .81 .87 .52 - -------------------------------------- Net realized and unrealized gain (loss) (.04) (.29) .02 .22 .17 .02 (.41) (.08) (.14) - -------------------------------------- Total from investment operations .44 .05 .49 .85 .30 .81 .40 .79 .38 - -------------------------------------- Less dividends: Distribution from net investment income .47 .40 .44 .59 .14 .81 .78 .85 .49 - -------------------------------------- Distribution from net realized gain -- -- -- -- -- -- .07 .07 .10 - -------------------------------------- Total dividends .47 .40 .44 .59 .14 .81 .85 .92 .59 - -------------------------------------- Net asset value, end of period $8.30 8.33 8.68 8.63 8.37 8.21 8.21 8.66 8.79 - -------------------------------------- TOTAL RETURN (%): 5.52 .59 5.87 10.56 3.62 10.33 4.85 9.64 4.29 - -------------------------------------- RATIOS TO AVERAGE NET ASSETS (%)(A): Expenses 1.10 .93 .21 .28 1.09 1.07 1.37 1.41 1.51 - -------------------------------------- Net investment income 5.76 3.96 5.44 7.02 9.45 9.62 9.60 10.10 8.63 - --------------------------------------
CLASS B MAY 31, 1994 CLASS C MAY 31, 1994 YEAR ENDED TO YEAR ENDED TO CLASS B & CLASS C SHARES AUGUST 31, 1995 AUGUST 31, 1994 AUGUST 31, 1995 AUGUST 31, 1994 ----------------------------------- ----------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.32 8.37 $8.33 8.37 - ------------------------------------------------------------------------------ ----------------------------------- Income from investment operations: Net investment income .43 .07 .43 .08 - ------------------------------------------------------------------------------ ----------------------------------- Net realized and unrealized gain (loss) (.04) (.04) (.04) (.04) - ------------------------------------------------------------------------------ ----------------------------------- Total from investment operations .39 .03 .39 .04 - ------------------------------------------------------------------------------ ----------------------------------- Less distribution from net investment income .40 .08 .40 .08 - ------------------------------------------------------------------------------ ----------------------------------- Net asset value, end of period $8.31 8.32 $8.32 8.33 - ------------------------------------------------------------------------------ ----------------------------------- TOTAL RETURN (%): 4.84 .34 4.89 .47 - ------------------------------------------------------------------------------ ----------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.85 1.96 1.79 1.88 - ------------------------------------------------------------------------------ ----------------------------------- Net investment income 5.01 3.36 5.07 3.52 - ------------------------------------------------------------------------------ -----------------------------------
JULY 1, SEPTEMBER 1, 1991 TO 1987 TO YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED JUNE 30, JUNE 30, ALL CLASSES 1995 1994 1993 1992 1991 1991 1990 1989 1988 --------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of period (in thousands) $129,757 202,815 212,694 174,967 76,749 75,012 75,913 75,704 59,054 - ----------------------------------- Portfolio turnover rate (%) 308 533 138 309 228 259 278 265 201 - -----------------------------------
(a) KFS agreed to waive its management fee and to absorb certain other operating expenses of the Adjustable Rate Fund through December 31, 1992. Thereafter, these expenses were gradually reinstated through January 31, 1994. Without this agreement, the ratio of expenses to average net assets and the ratio of net investment income to average net assets for Class A Shares would have been .99% and 3.90%, respectively, for fiscal 1994, .95% and 4.70%, respectively, for fiscal 1993, and .90% and 6.40%, respectively, for fiscal 1992. 6 14 CASH RESERVES FUND
JANUARY 10, AUGUST 1, 1995 1992 TO TO SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31, 1995 1995 1994 1993 1992 CLASS A SHARES ------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 1.00 1.00 1.00 1.00 - ------------------------------------------------------------------------------------------------------------------------ Net investment income and dividends declared .01 .05 .03 .02 .01 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 1.00 1.00 1.00 1.00 1.00 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): .85 4.99 2.78 2.42 1.57 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%)(B): Expenses .92 .89 .92 .93 1.39 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 5.11 4.75 2.86 2.42 2.75 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets at end of period (in thousands) $ 33,666 35,460 52,652 21,751 9,081 - ------------------------------------------------------------------------------------------------------------------------
AUGUST 1, 1995 TO SEPTEMBER 30, YEAR ENDED JULY 31, 1995 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 CLASS B SHARES ---------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 - ---------------------------------------- Net investment income and dividends declared .01 .04 .02 .02 .03 .05 .07 .07 .05 .04 .05 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): .71 4.08 1.78 1.56 2.65 5.35 6.72 7.36 5.42 4.20 5.49 - ---------------------------------------- RATIOS TO AVERAGE NET ASSETS (%)(B): Expenses 1.79 1.78 1.89 1.82 2.22 2.18 2.12 2.08 2.08 2.28 2.41 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 4.24 3.86 1.89 1.53 2.69 5.32 6.52 7.17 5.31 4.19 5.25 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets at end of period (in thousands) $140,617 172,493 370,930 145,057 147,138 240,994 284,977 285,194 245,604 150,683 47,788 - ------------------------------------------------------------------------------------------------------------------------
MAY 31, TO AUGUST 1, 1995 YEAR ENDED JULY TO SEPTEMBER 30, JULY 31, 31, 1995 1995 1994 CLASS C SHARES ----------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 1.00 1.00 - ------------------------------------------------------------------------------------------------------------------------ Net investment income and dividends declared .01 .04 -- - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 1.00 1.00 1.00 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): .71 4.08 .42 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.78 1.76 1.80 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 4.25 3.88 2.64 - ------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DATA: Net assets at end of period (in thousands) $2,274 5,078 735 - ------------------------------------------------------------------------------------------------------------------------
(b) KFS agreed to absorb temporarily, certain operating expenses of the Cash Reserves Fund during a portion of fiscal 1994 and 1993. Without this agreement, ratios of expenses and net investment income to average net assets for the Class A shares would have been 1.15% and 2.63%, respectively, for fiscal 1994 and 1.18% and 2.17%, respectively, for fiscal 1993. Ratios of expenses and net investment income to average net assets for the Class B shares would have been 2.12% and 1.66%, respectively, for fiscal 1994 and 2.07% and 1.28%, respectively, for fiscal 1993. 7 15 DIVERSIFIED FUND
DEC. 1, THIRTEEN 1990 YEAR MONTHS TO ENDED ENDED YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30, YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 CLASS A SHARES --------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $5.77 6.23 5.65 5.47 4.14 5.48 6.06 6.10 7.55 7.99 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .55 .52 .59 .63 .60 .71 .39 .13 .14 .18 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments and foreign currency .16 (.45) .58 .14 1.36 (1.34) .10 .72 (.55) .57 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .71 (.07) 1.17 .77 1.96 (.63) .49 .85 (.41) .75 - ------------------------------------------------------------------------------------------------------------------------ Less dividends: Distribution from net investment income .50 .53 .59 .59 .63 .71 .40 .13 .16 .20 - ------------------------------------------------------------------------------------------------------------------------ Distribution from net realized gain -- -- -- -- -- -- -- .02 .75 .99 - ------------------------------------------------------------------------------------------------------------------------ Paid in surplus -- -- -- -- -- -- .67 .74 .13 -- - ------------------------------------------------------------------------------------------------------------------------ Total dividends .50 .53 .59 .59 .63 .71 1.07 .89 1.04 1.19 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $5.98 5.77 6.23 5.65 5.47 4.14 5.48 6.06 6.10 7.55 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 12.90 1.02 21.60 14.59 50.58 (12.79) 8.59 15.30 (7.64) 9.90 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.09 1.12 1.10 1.19 1.21 1.15 .96 .97 .92 .85 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 9.43 8.81 9.74 11.02 13.41 14.32 6.76 3.08 2.01 2.34 - ------------------------------------------------------------------------------------------------------------------------
CLASS B MAY 31, 1994 CLASS C MAY 31, 1994 YEAR ENDED TO YEAR ENDED TO OCTOBER 31, 1995 OCTOBER 31, 1994 OCTOBER 31, 1995 OCTOBER 31, 1994 CLASS B & C SHARES ------------------------------------ ------------------------------------ PER SHARE OPERATING PERFORMANCE: $5.77 5.94 $5.79 5.95 Net asset value, beginning of period - ---------------------------------------------------------------------------------- ---------------------------------- Income from investment operations: Net investment income .49 .19 .50 .20 - ---------------------------------------------------------------------------------- ---------------------------------- Net realized and unrealized gain (loss) on investments and foreign currency .16 (.17) .16 (.17) - ---------------------------------------------------------------------------------- ---------------------------------- Total from investment operations .65 .02 .66 .03 - ---------------------------------------------------------------------------------- ---------------------------------- Less dividends from net investment income .44 .19 .45 .19 - ---------------------------------------------------------------------------------- ---------------------------------- Net asset value, end of period $5.98 5.77 $6.00 5.79 - ---------------------------------------------------------------------------------- ---------------------------------- TOTAL RETURN (%): 11.87 .35 11.95 .55 - ---------------------------------------------------------------------------------- ---------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 2.04 1.97 1.84 1.96 - ---------------------------------------------------------------------------------- ---------------------------------- Net investment income 8.48 8.01 8.68 8.02 - ---------------------------------------------------------------------------------- ----------------------------------
DEC. 1, THIRTEEN 1990 YEAR MONTHS TO ENDED ENDED YEAR ENDED OCT. 31, OCT. 31, NOV. 30, NOV. 30, YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 ALL CLASSES ---------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of period (in thousands) $754,222 738,014 328,512 244,620 227,625 179,154 284,497 371,758 431,404 635,290 775,794 - ------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (%) 286 179 80 57 20 45 102 16 150 181 185 - ------------------------------------------------------------------------------------------------------------------------
8 16 GOVERNMENT FUND
YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 CLASS A SHARES ------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13 9.89 9.14 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .66 .67 .69 .78 .84 .85 .88 .93 .88 1.03 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) .56 (.97) (.01) (.02) .61 (.38) .09 (.08) (.65) .77 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.22 (.30) .68 .76 1.45 .47 .97 .85 .23 1.80 - ------------------------------------------------------------------------------------------------------------------------ Less dividends: Distribution from net investment income .65 .64 .69 .78 .84 .85 .90 .96 .91 .83 - ------------------------------------------------------------------------------------------------------------------------ Distribution from net realized gain -- -- -- -- -- -- -- -- .08 .22 - ------------------------------------------------------------------------------------------------------------------------ Total dividends .65 .64 .69 .78 .84 .85 .90 .96 .99 1.05 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of year $ 8.92 8.35 9.29 9.30 9.32 8.71 9.09 9.02 9.13 9.89 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 15.24 (3.37) 7.60 8.44 17.41 5.53 11.51 9.73 2.35 20.59 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses .72 .75 .65 .64 .63 .53 .49 .50 .51 .48 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 7.68 7.58 7.36 8.31 9.24 9.62 9.93 10.20 9.26 10.33 - ------------------------------------------------------------------------------------------------------------------------
CLASS B MAY 31, 1994 CLASS C MAY 31, 1994 YEAR ENDED TO YEAR ENDED TO OCTOBER 31, 1995 OCTOBER 31, 1994 OCTOBER 31, 1995 OCTOBER 31, 1994 CLASS B & C SHARES -------------------------------------- -------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 8.34 8.67 $ 8.35 8.67 - -------------------------------------------------------------------------------- ------------------------------------ Income from investment operations: Net investment income .58 .28 .60 .29 - -------------------------------------------------------------------------------- ------------------------------------ Net realized and unrealized gain (loss) .56 (.38) .56 (.38) - -------------------------------------------------------------------------------- ------------------------------------ Total from investment operations 1.14 (.10) 1.16 (.09) - -------------------------------------------------------------------------------- ------------------------------------ Less dividends from net investment income .57 .23 .58 .23 - -------------------------------------------------------------------------------- ------------------------------------ Net asset value, end of period $ 8.91 8.34 $ 8.93 8.35 - -------------------------------------------------------------------------------- ------------------------------------ TOTAL RETURN (%): 14.18 (1.15) 14.33 (1.01) - -------------------------------------------------------------------------------- ------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.69 1.71 1.64 1.68 - -------------------------------------------------------------------------------- ------------------------------------ Net investment income (loss) 6.71 7.09 6.76 7.12 - -------------------------------------------------------------------------------- ------------------------------------
YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ALL CLASSES ------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of year (in thousands) $4,738,415 4,941,451 6,686,735 6,683,092 5,544,095 4,565,689 4,540,382 4,403,110 4,157,927 2,642,174 - ------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (%) 362 1,000 550 569 695 497 289 203 278 252 - ------------------------------------------------------------------------------------------------------------------------
9 17 HIGH YIELD FUND
YEAR ENDED SEPTEMBER 30, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 CLASS A SHARES ---------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23 9.19 8.66 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .83 .73 .81 .85 .92 1.07 1.09 1.10 1.07 1.08 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) .20 (.35) .23 .54 1.15 (2.13) (.58) .09 .01 .50 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.03 .38 1.04 1.39 2.07 (1.06) .51 1.19 1.08 1.58 - ------------------------------------------------------------------------------------------------------------------------ Less dividends: Distribution from net investment income .76 .76 .78 .83 .99 1.06 1.12 1.11 1.04 1.05 - ------------------------------------------------------------------------------------------------------------------------ Distribution from net realized gain -- -- -- -- -- -- -- .36 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total dividends .76 .76 .78 .83 .99 1.06 1.12 1.47 1.04 1.05 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of year $ 8.01 7.74 8.12 7.86 7.30 6.22 8.34 8.95 9.23 9.19 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 14.10 4.64 13.92 19.96 36.82 (13.83) 5.91 14.22 12.03 19.09 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses .90 .86 .80 .82 .85 .73 .67 .72 .72 .68 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 10.74 9.22 10.22 11.00 14.02 14.46 12.40 12.59 11.42 11.90 - ------------------------------------------------------------------------------------------------------------------------
CLASS B MAY 31, 1994 CLASS C MAY 31, 1994 YEAR ENDED TO YEAR ENDED TO SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 -------------------------------------- -------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.73 7.96 $ 7.75 7.96 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- Income from investment operations: Net investment income .76 .23 .77 .25 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- Net realized and unrealized gain (loss) .20 (.23) .20 (.23) - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- Total from investment operations .96 -- .97 .02 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- Less dividends from net investment income .69 .23 .70 .23 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- Net asset value, end of period $ 8.00 7.73 $ 8.02 7.75 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- TOTAL RETURN (%): 13.09 -- 13.13 .27 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.77 1.80 1.71 1.74 - ------------------------------------------------------------------------------ -------------------------------------- -------------------------------------- Net investment income 9.87 8.70 9.93 8.75 - ------------------------------------------------------------------------------ -------------------------------------- --------------------------------------
YEAR ENDED SEPTEMBER 30, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ALL CLASSES ------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of year (in thousands) $3,527,954 3,152,029 1,957,524 1,953,509 1,673,161 1,183,943 1,552,762 978,310 452,771 323,205 - ------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (%) 99 93 101 69 31 37 45 76 118 95 - ------------------------------------------------------------------------------------------------------------------------
10 18 INCOME AND CAPITAL FUND
YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 CLASS A SHARES ------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44 9.12 8.57 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .61 .61 .63 .67 .74 .80 .84 .89 .95 1.03 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) .72 (1.03) .62 .11 .53 (.52) (.26) .12 (.71) .50 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 1.33 (.42) 1.25 .78 1.27 .28 .58 1.01 .24 1.53 - ------------------------------------------------------------------------------------------------------------------------ Less dividends: Distribution from net investment income .62 .59 .62 .66 .75 .80 .89 .92 .92 .98 - ------------------------------------------------------------------------------------------------------------------------ Distribution from net realized gain -- .05 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Total dividends .62 .64 .62 .66 .75 .80 .89 .92 .92 .98 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of year $ 8.62 7.91 8.97 8.34 8.22 7.70 8.22 8.53 8.44 9.12 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 17.47 (4.86) 15.48 9.83 17.26 3.60 7.13 12.67 2.63 18.68 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses .90 .94 .82 .82 .82 .73 .67 .69 .69 .69 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 7.31 7.34 7.26 8.01 9.21 10.05 10.02 10.53 10.70 11.48 - ------------------------------------------------------------------------------------------------------------------------
CLASS B MAY 31, 1994 CLASS C MAY 31, 1994 YEAR ENDED TO YEAR ENDED TO CLASS B & C SHARES OCTOBER 31, 1995 OCTOBER 31, 1994 OCTOBER 31, 1995 OCTOBER 31, 1994 ---------------------------------- ---------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.90 8.16 $ 7.90 8.16 -------------------------------- - ---------------------------------------------------------------------------------- Income from investment operations: Net investment income .51 .23 .53 .23 -------------------------------- - ---------------------------------------------------------------------------------- Net realized and unrealized gain (loss) .72 (.26) .72 (.26) -------------------------------- - ---------------------------------------------------------------------------------- Total from investment operations 1.23 (.03) 1.25 (.03) -------------------------------- - ---------------------------------------------------------------------------------- Less dividends from net investment income .54 .23 .54 .23 -------------------------------- - ---------------------------------------------------------------------------------- Net asset value, end of period $ 8.59 7.90 $ 8.61 7.90 -------------------------------- - ---------------------------------------------------------------------------------- TOTAL RETURN (%): 16.12 (.45) 16.45 (.44) -------------------------------- - ---------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.81 1.92 1.78 1.89 -------------------------------- - ---------------------------------------------------------------------------------- Net investment income 6.40 6.72 6.43 6.75 -------------------------------- - ----------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ALL CLASSES -------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of year (in thousands) $649,427 510,432 569,145 482,009 432,490 394,131 404,995 322,229 255,779 206,108 - ------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (%) 182 163 190 178 115 189 64 34 34 87 - ------------------------------------------------------------------------------------------------------------------------
11 19 MORTGAGE FUND
AUGUST 1, 1995 TO SEPTEMBER 30, YEAR ENDED JULY 31, JANUARY 10, 1992 CLASS A SHARES 1995 1995 1994 1993 TO JULY 31, 1992 ------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.06 6.96 7.56 7.78 7.81 - ------------------------------------------------------ ---------------------------------------------------------------- Income from investment operations: Net investment income .08 .53 .51 .62 .38 - ------------------------------------------------------ ---------------------------------------------------------------- Net realized and unrealized gain (loss) .08 .09 (.59 ) (.21) (.03) - ------------------------------------------------------ ---------------------------------------------------------------- Total from investment operations .16 .62 (.08 ) .41 .35 - ------------------------------------------------------ ---------------------------------------------------------------- Less dividends from net investment income .09 .52 .52 .63 .38 - ------------------------------------------------------ ---------------------------------------------------------------- Net asset value, end of period $ 7.13 7.06 6.96 7.56 7.78 - ------------------------------------------------------ ---------------------------------------------------------------- TOTAL RETURN (%): 2.23 9.48 (1.21) 5.52 4.76 - ------------------------------------------------------ ---------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses .94 .89 .99 .97 .94 - ------------------------------------------------------ ---------------------------------------------------------------- Net investment income 6.87 7.77 7.00 8.22 8.73 - ------------------------------------------------------ ----------------------------------------------------------------
AUGUST 1, 1995 TO SEPTEMBER 30, YEAR ENDED JULY 31, CLASS B SHARES 1995 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01 8.52 8.47 - ------------------------- ------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income .07 .47 .45 .57 .65 .64 .66 .72 .72 .73 .76 - ------------------------- ------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) .08 .09 (.59) (.21) .49 .01 (.36) .07 (.33) (.41) .37 - ------------------------- ------------------------------------------------------------------------------------------------- Total from investment operations .15 .56 (.14) .36 1.14 .65 .30 .79 .39 .32 1.13 - ------------------------- ------------------------------------------------------------------------------------------------- Less dividends: Distribution from net investment income .08 .47 .46 .57 .62 .65 .66 .76 .74 .69 .84 - ------------------------- ------------------------------------------------------------------------------------------------- Distribution from net realized gain -- -- -- -- -- -- -- -- .08 .14 .24 - ------------------------- ------------------------------------------------------------------------------------------------- Total dividends .08 .47 .46 .57 .62 .65 .66 .76 .82 .83 1.08 - ------------------------- ------------------------------------------------------------------------------------------------- Net asset value, end of period $ 7.12 7.05 6.96 7.56 7.77 7.25 7.25 7.61 7.58 8.01 8.52 - ------------------------- ------------------------------------------------------------------------------------------------- TOTAL RETURN (%): 2.09 8.44 (2.00) 4.85 16.36 9.37 4.26 11.12 5.06 3.75 14.30 - ------------------------- ------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.79 1.75 1.79 1.75 1.86 2.03 1.99 1.98 1.98 2.02 1.99 - ------------------------- ------------------------------------------------------------------------------------------------- Net investment income 6.02 6.91 6.27 7.44 8.70 8.86 9.00 9.62 9.28 8.70 8.94 - ------------------------- -------------------------------------------------------------------------------------------------
12 20 MORTGAGE FUND
AUGUST 1, 1995 YEAR ENDED TO SEPTEMBER 30, JULY 31, MAY 31, 1994 CLASS C SHARES 1995 1995 TO JULY 31, 1994 --------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.05 6.95 6.99 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .07 .48 .07 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) .08 .09 (.04) - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .15 .57 .03 - ------------------------------------------------------------------------------------------------------------------------ Less dividend from net investment income .08 .47 .07 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 7.12 7.05 6.95 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 2.10 8.65 .47 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.69 1.71 1.55 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 6.12 6.95 6.46 - ------------------------------------------------------------------------------------------------------------------------
AUGUST 1, 1995 TO SEPTEMBER 30, YEAR ENDED JULY 31, ALL CLASSES 1995 1995 1994 1993 1992 1991 1990 1989 --------------------------------------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of period in thousands) $3,493,052 3,528,329 4,158,066 5,639,097 5,602,682 4,879,832 5,178,159 6,193,674 - ------------------------------------------------------------------------------------------------------------------------ Portfolio turnover rate (%) 249 573 963 551 376 498 206 152 - ------------------------------------------------------------------------------------------------------------------------ ALL CLASSES 1988 1987 1986 SUPPLEMENTAL DATA: Net assets at end of period in thousands) 6,332,021 6,285,550 4,027,821 - ----------------------- ---------------------------------- Portfolio turnover rate (%) 178 139 313 - ----------------------- ----------------------------------
13 21 SHORT-INTERMEDIATE GOVERNMENT FUND
AUGUST 1, JANUARY 10, 1995 TO 1992 TO SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31, CLASS A SHARES 1995 1995 1994 1993(D) 1992 --------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.09 8.11 8.63 8.65 8.59 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .09 .54 .48 .53 .29 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) (.01) (.03) (.44) (.03) .11 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .08 .51 .04 .50 .40 - ------------------------------------------------------------------------------------------------------------------------ Less dividends from: Distribution from net investment income .09 .53 .45 .52 .34 - ------------------------------------------------------------------------------------------------------------------------ Distribution from net realized gain -- -- .11 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total dividends .09 .53 .56 .52 .34 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.08 8.09 8.11 8.63 8.65 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 1.00 6.58 .41 6.01 4.87 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.05 1.06 1.06 1.04 .95 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 6.56 6.65 5.85 6.06 7.48 - ------------------------------------------------------------------------------------------------------------------------
AUGUST 1, FEBRUARY 1, 1995 TO 1989 TO SEPTEMBER 30, YEAR ENDED JULY 31, JULY 31, CLASS B SHARES 1995 1995 1994 1993(D) 1992 1991 1990 1989 ------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.06 8.08 8.61 8.64 8.27 8.42 8.70 8.50 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .08 .47 .40 .45 .58 .69 .72 .36 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) (.01) (.03) (.44) (.02) .36 (.14) (.27) .14 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .07 .44 (.04) .43 .94 .55 .45 .50 - ------------------------------------------------------------------------------------------------------------------------ Less dividends: Distribution from net investment income .08 .46 .38 .46 .57 .70 .72 .30 - ------------------------------------------------------------------------------------------------------------------------ Distribution from net realized gain -- -- .11 -- -- -- .01 -- - ------------------------------------------------------------------------------------------------------------------------ Total dividends .08 .46 .49 .46 .57 .70 .73 .30 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.05 8.06 8.08 8.61 8.64 8.27 8.42 8.70 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): .87 5.68 (.48) 5.13 11.76 6.85 5.52 5.99 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.91 1.87 1.93 1.87 1.89 2.07 2.10 2.24 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 5.70 5.84 4.95 5.23 6.84 8.19 8.60 8.50 - ------------------------------------------------------------------------------------------------------------------------
(d) Per share data for 1993 for the Short-Intermediate Government Fund were based upon average shares outstanding. 14 22 SHORT-INTERMEDIATE GOVERNMENT FUND
AUGUST 1, MAY 31, 1995 TO YEAR ENDED 1994 TO SEPTEMBER 30, JULY 31, JULY 31, CLASS C SHARES 1995 1995 1994 ------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $8.06 8.08 8.09 - ------------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .09 .47 .07 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized loss (.01) (.03) (.01 ) - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations .08 .44 .06 - ------------------------------------------------------------------------------------------------------------------------ Less dividends from net investment income .08 .46 .07 - ------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.06 8.06 8.08 - ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN (%): 1.00 5.73 .77 - ------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS (%): Expenses 1.74 1.78 1.83 - ------------------------------------------------------------------------------------------------------------------------ Net investment income 5.87 5.93 5.54 - ------------------------------------------------------------------------------------------------------------------------
AUGUST 1, 1995 TO SEPTEMBER 30, YEAR ENDED JULY 31, ALL CLASSES 1995 1995 1994 1993 1992 1991 1990 -------------------------------------------------------------------- SUPPLEMENTAL DATA: Net assets at end of period (in thousands) $ 239,619 246,248 266,640 283,249 191,716 104,279 51,741 - ------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 173 597 916 339 120 180 89 - ------------------------------------------------------------------------------------------------------------------------
NOTES FOR ALL FUNDS: Ratios have been determined on an annualized basis, except that total return is not annualized and does not reflect the effect of any sales charges. The Adjustable Rate, Diversified, Government, High Yield and Income and Capital Funds are separate Massachusetts business trusts and the Cash Reserves, Mortgage and Short-Intermediate Government Funds are separate portfolios of Kemper Portfolios, a Massachusetts business trust. See "Capital Structure." As discussed under "Investment Manager and Underwriter," effective May 31, 1994, the investment management fee for each Fund changed, resulting in an increased fee for the Adjustable Rate, Government, High Yield and Income and Capital Funds and a decreased fee for the Cash Reserves, Diversified, Mortgage and Short-Intermediate Government Funds. INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS The following information sets forth each Fund's investment objective and policies. Each Fund's returns and net asset value will fluctuate (except that the Cash Reserves Fund seeks to maintain a net asset value of $1.00 per share) and there is no assurance that any Fund will achieve its objective. ADJUSTABLE RATE FUND. The Adjustable Rate Fund seeks high current income consistent with low volatility of principal. Under normal market conditions, the Fund will, as a fundamental policy, invest at least 65% of its total assets in adjustable rate securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S. Government Securities"). See "Government Fund" below concerning U.S. Government Securities and the risks related to those securities, including the fact that the government guarantee of such securities in the Fund's 15 23 portfolio does not guarantee the net asset value of the Fund's shares. The Fund is designed for the investor who seeks a higher yield than a stable price money market fund or an insured bank certificate of deposit and less fluctuation in net asset value than a longer-term bond fund; unlike money market funds, however, the Fund does not seek to maintain a stable net asset value and, unlike an insured bank certificate of deposit, the Fund's shares are not insured. There is no assurance that the Fund will achieve its objective. Adjustable rate securities bear interest at rates that adjust at periodic intervals in response to changes in market levels of interest rates generally. As the interest rates are reset periodically, yields on such securities will gradually align themselves to reflect changes in market interest rates. The adjustable interest rate feature of the securities in which the Fund invests generally will act as a buffer to reduce sharp changes in the Fund's net asset value in response to normal interest rate fluctuations. As the interest rates on the Fund's investments are reset periodically, yields of portfolio securities will gradually align themselves to reflect changes in market rates and should cause the net asset value of the Fund's shares to fluctuate less dramatically than it would if the Fund invested in long-term, fixed rate securities. Adjustable rate securities allow the Fund to participate in increases in interest rates through periodic adjustments in the interest rate resulting in both higher current yields and lower price fluctuations. During periods of declining interest rates, of course, the coupon rates may readjust downward, resulting in lower yields to the Fund. Further, because of this feature, the value of adjustable rate mortgages is unlikely to rise during periods of declining interest rates to the same extent as fixed rate instruments. As with other mortgage-backed securities, interest rate declines may result in accelerated prepayment of mortgages, and the proceeds from such prepayments must be reinvested at lower prevailing interest rates. However, during periods of rising interest rates, changes in the coupon rate lag behind changes in the market rate, possibly resulting in a lower net asset value until the coupon resets to market rates. Thus, investors could suffer some principal loss if they sold their shares of the Fund before the interest rates on portfolio investments are adjusted to reflect current market rates. During periods of extreme fluctuations in interest rates, the Fund's net asset value will fluctuate as well. The Fund may invest without limit in Mortgage-Backed Securities, as described under "Mortgage Fund" below. Mortgage-Backed Securities can have either a fixed rate of interest or an adjustable rate. Adjustable rate mortgage securities in which the Fund generally invests would have the same characteristics as described above with respect to adjustable rate securities. In addition, since most mortgage securities in the Fund's portfolio will generally have annual reset caps of 100 to 200 basis points (1-2%), fluctuation in interest rates above these levels could cause such mortgage securities to "cap out" and to behave more like long-term, fixed rate debt securities. To help protect the value of the Fund's portfolio from interest rate fluctuations, the Fund may engage in interest rate swaps and purchase interest rate "caps" and "floors." The Fund will enter into these transactions primarily to preserve a return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing. The Fund intends to use these transactions as a hedge and not as a speculative investment. There is no assurance that these transactions will be successful. The Fund will not sell interest rate caps or floors that it does not own. Interest rate swaps are the exchange by the Fund with another party of their respective commitments to pay or receive interest with respect to a notional (agreed upon) principal amount, for example, an exchange of floating rate payments for fixed rate payments. Interest rate swaps are generally entered into to permit the party seeking a floating or fixed rate obligation, as the case may be, the opportunity to acquire such obligation at a lower rate than is directly available in the credit market. The success of such a transaction depends in large part on the availability of fixed rate obligations at a low enough coupon rate to cover the cost involved. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. 16 24 The Fund may also invest up to 35% of its total assets in securities other than adjustable rate U.S. Government Securities including, without limitation, privately issued Mortgage-Backed Securities, commercial paper and other debt obligations of corporations and other business organizations, certificates of deposit, bankers' acceptances and time deposits and other debt securities such as convertible securities and preferred stocks. These securities will, at the time of purchase, be rated within the two highest grades (Aaa or Aa) assigned by Moody's Investors Service, Inc.("Moody's"), or (AAA or AA) by Standard & Poor's Corporation ("S&P"), or will be non-rated but of comparable quality in the opinion of the investment manager. The Fund also may invest in obligations collateralized by a portfolio or pool of mortgages, Mortgage-Backed Securities, U.S. Government Securities or other assets and may engage in options and financial futures transactions, securities lending, delayed delivery transactions and other portfolio strategies. See "Additional Investment Information" below. Additional information concerning the Adjustable Rate Fund appears in the "Additional Information--Adjustable Rate Fund" section under "Investment Policies and Techniques" in the Statement of Additional Information. CASH RESERVES FUND. The Cash Reserves Fund seeks maximum current income to the extent consistent with stability of principal from a portfolio of the following types of U.S. Dollar denominated money market instruments that mature in 12 months or less: 1. Obligations of, or guaranteed by, the U.S. or Canadian Governments, their agencies or instrumentalities. The two broad categories of U.S. Government debt instruments are: (a) direct obligations of the U.S. Treasury and (b) securities issued or guaranteed by agencies and instrumentalities of the U.S. Government. Some obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government are backed by the full faith and credit of the United States and others are backed exclusively by the agency or instrumentality with limited rights of the issuer to borrow from the U.S. Treasury. 2. Bank certificates of deposit, time deposits or bankers' acceptances limited to U.S. banks or Canadian chartered banks having total assets in excess of $1 billion. 3. Bank certificates of deposit, time deposits or bankers' acceptances of U.S. branches of foreign banks having total assets in excess of $10 billion. 4. Commercial paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P, or commercial paper or notes issued by companies with an unsecured debt issue outstanding currently rated A or higher by Moody's or S&P where the obligation is on the same or a higher level of priority as the rated issue, and investments in other corporate obligations such as publicly traded bonds, debentures and notes rated A or higher by Moody's or S&P. 5. Repurchase agreements of obligations which are suitable for investment under the categories set forth above. Repurchase agreements are discussed under "Additional Investment Information" below. In addition, the Fund limits its investments to securities that meet the quality and diversification requirements of Rule 2a-7 under the Investment Company Act of 1940. See "Net Asset Value." To the extent the Fund purchases Eurodollar certificates of deposit issued by London branches of U.S. banks, or commercial paper issued by foreign entities, consideration will be given to their marketability, possible restrictions on international currency transactions and regulations imposed by the domicile country of the foreign issuer. Eurodollar certificates of deposit may not be subject to the same regulatory requirements as certificates issued by U.S. banks and associated income may be subject to the imposition of foreign taxes. The Fund will normally invest at least 25% of its net assets in instruments issued by domestic or foreign banks. The Fund seeks to maintain its net asset value at $1.00 per share by valuing its portfolio of investments on the amortized cost method in accordance with Rule 2a-7. While the Fund will make every effort to maintain a fixed net asset value of $1.00 per share, there can be no assurance that this objective will be achieved. See "Net Asset Value." The Fund may invest in instruments bearing rates of interest that are adjusted periodically or which "float" continuously according to formulae intended to minimize fluctuations in values of the instruments ("Variable Rate Securities"). The interest rate of Variable Rate Securities is ordinarily determined by reference to or is a percentage 17 25 of an objective standard. Generally, the changes in the interest rate on Variable Rate Securities reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed rate obligations. Some Variable Rate Securities ("Variable Rate Demand Securities") have a demand feature entitling the purchaser to resell the securities to the issuer at an amount approximately equal to amortized cost or the principal amount thereof plus accrued interest. As is the case for other Variable Rate Securities, the interest rate on Variable Rate Demand Securities varies according to some objective standard intended to minimize fluctuation in the values of the instruments. The Fund determines the maturity of Variable Rate Securities in accordance with Securities and Exchange Commission rules that allow the Fund to consider certain of such instruments as having maturities earlier than the maturity date on the face of the instrument. Section 4(2) Paper. Subject to its investment objectives and policies, the Fund may invest in commercial paper issued by major corporations under the Securities Act of 1933 in reliance on the exemption from registration afforded by Section 3(a)(3) thereof. Such commercial paper may be issued only to finance current transactions and must mature in nine months or less. Trading of such commercial paper is conducted primarily by institutional investors through investment dealers, and individual investor participation in the commercial paper market is very limited. The Fund also may invest in commercial paper issued in reliance on the so-called "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the federal securities laws, and generally is sold to institutional investors such as the Fund who agree that they are purchasing the paper for investment and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper normally is resold to other institutional investors like the Fund through or with the assistance of the issuer or investment dealers who make a market in the Section 4(2) paper, thus providing liquidity. The investment manager considers the legally restricted but readily saleable Section 4(2) paper to be liquid; however, pursuant to procedures approved by the Board of Trustees, if a particular investment in Section 4(2) paper is not determined to be liquid, that investment will be included within the limitation on illiquid securities. The investment manager monitors the liquidity of the Fund's investments in Section 4(2) paper on a continuing basis. See "Investment Restrictions" in the Statement of Additional Information. DIVERSIFIED FUND. The Diversified Fund seeks high current return. The Fund pursues its objective by investing primarily in fixed income securities and dividend-paying common stocks and by writing options. Current return includes interest income, common stock dividends and any net short-term gains. Investment in fixed income securities will include corporate debt obligations, U.S. and Canadian Government securities, obligations of U.S. and Canadian banking institutions, convertible securities, preferred stocks, and cash and cash equivalents, including repurchase agreements. Investment in equity securities will primarily be in dividend-paying common stocks. The percentage of assets invested in fixed income and equity securities will vary from time to time depending upon the judgment of the investment manager as to general market and economic conditions, trends in yields and interest rates and changes in fiscal or monetary policies. The Fund may invest up to 50% of its total assets in foreign securities that are traded principally in securities markets outside the United States. Foreign securities present certain risks in addition to those presented by domestic securities, including risks associated with currency fluctuations, possible imposition of foreign governmental regulations or taxes adversely affecting portfolio securities and generally different degrees of liquidity, market volatility and availability of information. See "Special Risk Factors--Foreign Securities" below. The Fund may invest without limit in high yield, fixed income securities, commonly referred to as "junk bonds," that are in the lower rating categories and those that are non-rated. The high yield, fixed income securities (debt and preferred stock issues, including convertibles and assignments or participations in loans) in which the Fund may invest normally offer a current yield or yield to maturity that is significantly higher than the yield available from securities rated in the four highest categories assigned by S&P or Moody's. The characteristics of the securities in the Fund's portfolio, such as the maturity and the type of issuer, will affect yields and yield differentials, which vary over 18 26 time. The actual yield realized by the investor is subject, among other things, to the Fund's expenses and the investor's transaction costs. The Fund may also purchase options on securities and index options, purchase and sell financial futures contracts and options on financial futures contracts, engage in foreign currency transactions, engage in delayed delivery transactions and lend its portfolio securities. See "Special Risk Factors--Foreign Securities" and "Additional Investment Information" below. Under normal market conditions, the Fund will invest at least 65% of its total assets in income producing investments. In periods of unusual market conditions, the Fund may, for defensive purposes, temporarily retain all or any part of its assets in cash or cash equivalents. There are market and investment risks with any security and the value of an investment in the Fund will fluctuate over time. In seeking to achieve its investment objective, the Fund will invest in fixed income securities based on the investment manager's analysis without relying on any published ratings. The Fund will invest in a particular fixed income security if in the investment manager's view, the increased yield offered, regardless of published ratings, is sufficient to compensate for a reasonable element of assumed risk. Since investments will be based upon the investment manager's analysis rather than upon published ratings, achievement of the Fund's goals may depend more upon the abilities of the investment manager than would otherwise be the case. Investments in lower rated or non-rated securities, while generally providing greater income and opportunity for gain than investments in higher rated securities, entail greater risk of loss of income and principal. (The High Yield Fund may also invest in lower rated and non-rated securities but may not invest in dividend-paying common stocks and has more limited option writing authority than the Diversified Fund.) See "Special Risk Factors--High Yield (High Risk) Bonds" and "Appendix B--Ratings of Investments" below. Since interest rates vary with changes in economic, market, political and other conditions, there can be no assurance that historic interest rates are indicative of rates that may prevail in the future. The values of fixed income securities in the Fund's portfolio will fluctuate depending upon market factors and inversely with current interest rate levels. The market value of equity securities in the Fund's portfolio will also fluctuate with market and other conditions. GOVERNMENT FUND. The Government Fund seeks high current income, liquidity and security of principal by investing in obligations issued or guaranteed by the U.S. Government or its agencies, and by obtaining rights to acquire such securities. The Fund's yield and net asset value will fluctuate and there can be no assurance that the Fund will attain its objective. The Fund intends to invest some or all of its assets in Government National Mortgage Association ("GNMA") Certificates of the modified pass-through type. These GNMA Certificates are debt securities issued by a mortgage banker or other mortgagee and represent an interest in one or a pool of mortgages insured by the Federal Housing Administration or guaranteed by the Veterans Administration. GNMA guarantees the timely payment of monthly installments of principal and interest on modified pass-through Certificates at the time such payments are due, whether or not such amounts are collected by the issuer of these Certificates on the underlying mortgages. The National Housing Act provides that the full faith and credit of the United States is pledged to the timely payment of principal and interest by GNMA of amounts due on these GNMA Certificates, and an assistant attorney general of the United States has rendered an opinion that this guarantee by GNMA is a general obligation of the United States backed by its full faith and credit. Mortgages included in single family residential mortgage pools backing an issue of GNMA Certificates have a maximum maturity of 30 years. Scheduled payments of principal and interest are made to the registered holders of GNMA Certificates (such as the Fund) each month. Unscheduled prepayments of mortgages included in these pools occur as a result of the prepayment or refinancing of such mortgages by homeowners or as a result of the foreclosure of such mortgages. Such prepayments are passed through to the registered holders of GNMA Certificates with the regular monthly payments of principal and interest, which has the effect of reducing future payments on such Certificates. That portion of monthly payments received by the Fund which represents interest and discount will be 19 27 included in the Fund's net investment income. See "Dividends and Taxes." Principal payments on a GNMA Certificate will be reinvested by the Fund. The balance of the Fund's assets, other than those invested in GNMA Certificates and options and financial futures contracts as discussed below, will be invested in obligations issued or guaranteed by the United States or by its agencies. There are two broad categories of U.S. Government-related debt instruments: (a) direct obligations of the U.S. Treasury, and (b) securities issued or guaranteed by U.S. Government agencies. Examples of direct obligations of the U.S. Treasury are Treasury Bills, Notes, Bonds and other debt securities issued by the U.S. Treasury. These instruments are backed by the "full faith and credit" of the United States. They differ primarily in interest rates, the length of maturities and the dates of issuance. Some obligations issued or guaranteed by agencies of the U.S. Government are backed by the full faith and credit of the United States (such as Maritime Administration Title XI Ship Financing Bonds and Agency for International Development Housing Guarantee Program Bonds) and others are backed only by the rights of the issuer to borrow from the U.S. Treasury (such as Federal Home Loan Bank Bonds and Federal National Mortgage Association Bonds). With respect to securities supported only by the credit of the issuing agency or by an additional line of credit with the U.S. Treasury, there is no guarantee that the U.S. Government will provide support to such agencies and such securities may involve risk of loss of principal and interest. U.S. Government Securities may include "zero coupon" securities that have been stripped by the U.S. Government of their unmatured interest coupons (see "Investment Policies and Techniques--Zero Coupon Government Securities" in the Statement of Additional Information for a discussion of their features and risks) and collateralized obligations issued or guaranteed by a U.S. Government agency or instrumentality (see "Collateralized Obligations" below). U.S. Government Securities of the type in which the Fund may invest have historically involved little risk of loss of principal if held to maturity. The government guarantee of the U.S. Government Securities in the Fund's portfolio, however, does not guarantee the net asset value of the shares of the Fund. There are market risks inherent in all investments in securities and the value of an investment in the Fund will fluctuate over time. Normally, the value of the Fund's investments varies inversely with changes in interest rates. For example, as interest rates rise the value of the Fund's investments will tend to decline, and as interest rates fall the value of the Fund's investments will tend to increase. In addition, the potential for appreciation in the event of a decline in interest rates may be limited or negated by increased principal prepayments in respect to certain Mortgage-Backed Securities, such as GNMA Certificates. Prepayments of high interest rate Mortgage-Backed Securities during times of declining interest rates will tend to lower the return of the Fund and may even result in losses to the Fund if some securities were acquired at a premium. With respect to U.S. Government Securities supported only by the credit of the issuing agency or by an additional line of credit with the U.S. Treasury, there is no guarantee that the U.S. Government will provide support to such agencies and such securities may involve risk of loss of principal and interest. The Fund will not invest in Mortgage-Backed Securities issued by private issuers. The Fund may also write (sell) and purchase options on securities, index options, financial futures contracts and options on financial futures contracts in connection with attempts to hedge its portfolio investments and not for speculation. See "Additional Investment Information" below. HIGH YIELD FUND. The primary objective of the High Yield Fund is to achieve the highest level of current income obtainable from a professionally managed, diversified portfolio of fixed income securities which the investment adviser considers consistent with reasonable risk. As a secondary objective, the Fund will seek capital gain where consistent with its primary objective. The high yield, fixed income securities (debt and preferred stock issues, including convertibles and assignments or participations in loans) in which the Fund intends to invest are commonly referred to as "junk bonds" and normally offer a current yield or yield to maturity that is significantly higher than the yield available from securities rated in the four highest categories assigned by S&P or Moody's. The characteristics of the securities in the Fund's portfolio, such as the maturity and the type of issuer, will affect yields and yield differentials, which vary over time. The actual yield realized by the investor is subject, among other things, to the Fund's expenses and the investor's transaction costs. 20 28 There are market and investment risks with any security and the value of an investment in the Fund may fluctuate over time. In seeking to achieve its investment objectives, the Fund will invest in fixed income securities based on the investment manager's analysis without relying on published ratings. The Fund will invest in a particular security if in the view of the investment manager the increased yield offered, regardless of published ratings, is sufficient to compensate for a reasonable element of assumed risk. Since investments will be based upon the investment manager's analysis rather than upon published ratings, achievement of the Fund's goals may depend more upon the abilities of the investment manager than would otherwise be the case. Investment in high yield securities, while providing greater income and opportunity for gain than investment in higher rated securities, entails relatively greater risk of loss of income and principal. See "Special Risk Factors--High Yield (High Risk) Bonds" and "Appendix B--Ratings of Investments" below. As a secondary objective, the Fund will seek capital gain where consistent with its primary objective. However, the Fund intends to hold portfolio securities to maturity unless yields on alternative investments, based on current market prices, are more attractive than those on securities held in the Fund's portfolio or unless the investment manager determines defensive strategies should be implemented. The Fund anticipates that under normal circumstances 90 to 100% of its assets will be invested in fixed income securities (debt and preferred stock issues, including convertibles). The Fund may invest in common stocks, rights or other equity securities when consistent with the Fund's objectives, but will generally hold such equity investments only as a result of purchases of unit offerings of fixed income securities which include such securities or in connection with an actual or proposed conversion or exchange of fixed income securities. The Fund may invest all or a portion of its assets in money market instruments such as obligations of the U.S. Government, its agencies or instrumentalities; other debt securities rated within the three highest grades by Moody's or S&P; commercial paper rated within the two highest grades by either of such rating services; bank certificates of deposit or bankers' acceptances of domestic or Canadian 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 Fund may also purchase and sell options on securities, index options, financial futures contracts and options on financial futures contracts in connection with attempts to hedge its portfolio investments and not for speculation; and it may purchase foreign securities and engage in foreign currency transactions. See "Special Risk Factors--Foreign Securities" and "Additional Investment Information" below. INCOME AND CAPITAL FUND. The Income and Capital Fund seeks as high a level of current income as is consistent with prudent investment management, preservation of capital and ready marketability of its portfolio by investing primarily in a diversified portfolio of investment grade debt securities. Specifically, at least 90% of the Fund's assets will be invested in the following categories: (a) corporate debt securities which are rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P; (b) obligations of, or guaranteed by, the United States, its agencies or instrumentalities; (c) obligations (payable in U.S. Dollars) of, or guaranteed by, the government of Canada or any instrumentality or political subdivision thereof; (d) commercial paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P; (e) bank certificates of deposit or bankers' acceptances issued by domestic or Canadian chartered banks having total deposits in excess of $1 billion; (f) options on securities, index options, financial futures contracts and options on financial futures contracts as described under "Additional Investment Information" in connection with attempts to hedge its portfolio investments and not for speculation; and (g) cash and cash equivalents. There are market and investment risks with any security and the value of an investment in the Fund may fluctuate over time. Normally, the value of the Fund's investments varies inversely with changes in interest rates. There can be no assurance that the objective of the Fund will be achieved. Corporate debt securities rated within the four highest grades by Moody's or S&P are generally considered to be "investment grade." Like higher rated securities, securities rated in the BBB or Baa categories are considered to have adequate capacity to pay principal and interest, although they may have fewer protective provisions than higher rated securities and thus may be adversely affected by severe economic circumstances and are considered to have speculative characteristics. The Fund may invest up 21 29 to 10% of its total assets in fixed income securities that are rated below BBB by S&P and Baa by Moody's or are non-rated. For a discussion of lower rated and non-rated securities, commonly referred to as "junk bonds," and related risks, see "Special Risk Factors--High Yield (High Risk) Bonds" and "Appendix B--Ratings of Investments" below. The Fund may also invest in foreign securities and engage in foreign currency transactions. See "Special Risk Factors--Foreign Securities" below. MORTGAGE FUND. The Mortgage Fund seeks maximum current return from a portfolio of U.S. Government Securities. Additionally, the Fund may engage in options and financial futures transactions which relate to U.S. Government Securities and may purchase or sell securities on a when-issued or delayed delivery basis. See "Additional Investment Information" below for a discussion of such transactions applicable to the Fund. As a non-fundamental policy, at least 65% of the Fund's total assets normally will be invested in "Mortgage-Backed Securities." Mortgage-Backed Securities are securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans secured by real property. There are currently three basic types of Mortgage-Backed Securities: (a) those issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities, such as the Government National Mortgage Association ("Ginnie Mae" or "GNMA"), the Federal National Mortgage Association ("Fannie Mae" or "FNMA") and the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"); (b) those issued by private issuers that represent an interest in or are collateralized by Mortgage-Backed Securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities; and (iii) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or Mortgage-Backed Securities without a government guarantee but usually having some form of private credit enhancement. The dominant issuers or guarantors of Mortgage-Backed Securities today are GNMA, FNMA and FHLMC. GNMA creates mortgage securities from pools of government guaranteed or insured (Federal Housing Authority or Veterans Administration) mortgages originated by mortgage bankers, commercial banks, and savings and loan associations. FNMA and FHLMC issue Mortgage-Backed Securities from pools of conventional and federally insured and/or guaranteed residential mortgages obtained from various entities, including savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers. Mortgage-Backed Securities issued by GNMA, FNMA and FHLMC are considered U.S. Government Securities. The Fund will not invest in Mortgage-Backed Securities issued by private issuers. U.S. Government Securities of the type in which the Fund may invest have historically involved little risk of loss of principal if held to maturity. The government guarantee of the securities in the Fund, however, does not guarantee the net asset value of the shares of the Fund. There are market risks inherent in all investments in securities and the value of an investment in the Fund will fluctuate over time. Normally, the value of the Fund's investments varies inversely with changes in interest rates. For example, as interest rates rise, the value of the Fund's investments will tend to decline and, as interest rates fall, the value of the Fund's investments will tend to increase. In addition, the potential for appreciation in the event of a decline in interest rates may be limited or negated by increased principal prepayments in respect to certain Mortgage-Backed Securities, such as GNMA Certificates. Prepayment of high interest rate Mortgage-Backed Securities during times of declining interest rates will tend to lower the return of the Fund and may even result in losses to the Fund if some securities were acquired at a premium. SHORT-INTERMEDIATE GOVERNMENT FUND. The Short-Intermediate Government Fund seeks, with equal emphasis, high current income and preservation of capital from a portfolio composed primarily of short and intermediate-term U.S. Government Securities. Under normal market conditions, the Fund will, as a fundamental policy, invest at least 65% of its total assets in U.S. Government Securities and repurchase agreements of U.S. Government Securities. See "Government Fund" above for a discussion of U.S. Government Securities and the risks related to those securities, including the fact that the government guarantee of U.S. Government Securities in the Fund does not guarantee the net asset value of the shares of the Fund. Under normal market conditions, the Fund will maintain a Dollar-weighted average portfolio maturity of more than two years but less than five years. The maturity of a security held by the Fund will generally be considered to be the time remaining until repayment of the principal amount of such security, except that the maturity of a security may be considered to be a shorter period in the case of (a) contractual rights to dispose of a security, because such rights 22 30 limit the period during which the Fund bears a market risk with respect to the security, and (b) Mortgage-Backed Securities, because of possible prepayment of principal on the mortgages underlying such securities. Short and intermediate-term securities generally are more stable and less susceptible to principal decline than longer term securities. While short and intermediate-term securities in most cases offer lower yields than securities with longer maturities, the Fund will seek to enhance income through limited investment in fixed income securities other than U.S. Government Securities. The investment manager believes that investment in short and intermediate-term securities allows the Fund to seek both high current income and preservation of capital. There is, however, no assurance that the Fund's objective will be achieved. The return and net asset value of the Fund will fluctuate over time. Up to 35% of the total assets of the Fund may be invested in fixed income securities other than U.S. Government Securities. Such other fixed income securities include: (a) corporate debt securities that are rated at the time of purchase within the four highest grades by either Moody's (Aaa, Aa, A, or Baa) or S&P (AAA, AA, A, or BBB); (b) commercial paper that is rated at the time of purchase within the two highest grades by either Moody's (Prime-1 or Prime-2) or S&P (A-1 or A-2); (c) bank certificates of deposit (including term deposits) or bankers' acceptances issued by domestic banks (including their foreign branches) and Canadian chartered banks having total assets in excess of $1 billion; and (d) repurchase agreements with respect to any of the foregoing. Corporate debt securities rated within the four highest grades by Moody's or S&P are generally considered to be "investment grade." Like higher rated securities, securities rated in the BBB or Baa categories are considered to have adequate capacity to pay principal and interest, although they may have fewer protective provisions than higher rated securities and thus may be adversely affected by severe economic circumstances and are considered to have speculative characteristics. During temporary defensive periods when the investment manager deems it appropriate, the Fund may invest all or a portion of its assets in cash or short-term high quality money market instruments, including short-term U.S. Government Securities and repurchase agreements with respect to such securities. The yields on these securities tend to be lower than the yields on other securities to be purchased by the Fund. The Fund may purchase or sell securities on a when-issued or delayed delivery basis. The Fund may invest in collateralized obligations which, consistent with the limitations reflected above, may be privately issued or may be issued or guaranteed by U.S. Government agencies or instrumentalities. The Fund also may engage in options or financial futures transactions in connection with attempts to hedge its portfolio investments and not for speculation. See "Additional Investment Information" below. SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, the Diversified and High Yield Funds intend to invest a substantial portion of their assets in fixed income securities offering high current income. Subject to its specific investment objective and policies as described above, the Income and Capital Fund may invest up to 10% of its assets in such securities. Such high yield (high risk), fixed income securities ordinarily will be in the lower rating categories (securities rated below the fourth category) of recognized rating agencies or will be non-rated. Lower-rated and non-rated securities, which are commonly referred to as "junk bonds," have widely varying characteristics and quality. These lower rated and non-rated fixed income securities are considered, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and generally will involve more credit risk than securities in the higher rating categories. Accordingly, an investment in the Diversified or High Yield Funds may not constitute a complete investment program and may not be appropriate for all investors. The market values of such securities tend to reflect individual corporate developments to a greater extent than do those of higher rated securities, which react primarily to fluctuations in the general level of interest rates. Such lower rated securities also are more sensitive to economic conditions than are higher rated securities. Adverse publicity and investor perceptions regarding lower rated bonds, whether or not based on fundamental analysis, may depress the prices for such securities. These and other factors adversely affecting the market value of high yield securities will adversely affect each Fund's net asset value. The investment philosophy of the Diversified and High Yield Funds with respect to high yield (high risk) bonds is based upon the premise that over the long term a broadly diversified portfolio of high yield fixed income securities 23 31 should, even taking into account possible losses, provide a higher net return than that achievable on a portfolio of higher rated securities. The Funds seek to achieve the highest yields possible while reducing relative risk through (a) broad diversification, (b) credit analysis by the investment manager of the issuers in which the Funds invest, (c) purchase of high yield securities at discounts from par or stated value when practicable and (d) monitoring and seeking to anticipate changes and trends in the economy and financial markets that might affect the prices of portfolio securities. The investment manager's judgment as to the "reasonableness" of the risk involved in any particular investment will be a function of its experience in managing fixed income investments and its evaluation of general economic and financial conditions, a specific issuer's business and management, cash flow, earnings coverage of interest and dividends, ability to operate under adverse economic conditions, and fair market value of assets, and of such other considerations as the investment manager may deem appropriate. The investment manager, while seeking maximum current yield, will monitor current corporate developments with respect to portfolio securities and potential investments and to broad trends in the economy. In some circumstances, defensive strategies may be implemented to preserve or enhance capital even at the sacrifice of current yield. Defensive strategies, which may be used singly or in any combination, may include, but are not limited to, investments in discount securities or investments in money market instruments as well as futures and options strategies. High yield (high risk) securities frequently are issued by corporations in the growth stage of their development. They may also be issued in connection with a corporate reorganization or a corporate takeover. Companies that issue such high yielding securities often are highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with higher rated securities. For example, during an economic downturn or recession, highly leveraged issuers of high yield securities may experience financial stress. During such periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations may also be adversely affected by specific corporate developments, or the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss from default by the issuer is significantly greater for the holders of high yield securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. Although some risk is inherent in all securities ownership, holders of fixed income securities have a claim on the assets of the issuer prior to the holders of common stock. Therefore, an investment in fixed income securities generally entails less risk than an investment in common stock of the same issuer. A Fund may have difficulty disposing of certain high yield (high risk) securities because they may have a thin trading market. Because not all dealers maintain markets in all high yield securities, the Funds anticipate that such securities could be sold only to a limited number of dealers or institutional investors. The lack of a liquid secondary market may have an adverse effect on the market price and a Fund's ability to dispose of particular issues and may also make it more difficult for a Fund to obtain accurate market quotations for purposes of valuing the Fund's assets. Market quotations generally are available on many high yield issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Zero coupon securities and pay-in-kind bonds involve additional special considerations. Zero coupon securities are debt obligations that do not entitle the holder to any periodic payments of interest prior to maturity or a specified cash payment date when the securities begin paying current interest (the "cash payment date") and therefore are issued and traded at a discount from their face amount or par value. The market prices of zero coupon securities are generally more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do securities paying interest currently having similar maturities and credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry additional risk in that, unlike bonds that pay interest throughout the period to maturity, a Fund will realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, a Fund may obtain no return at all on its investment. Current federal income tax law requires the holder of a zero coupon security or of certain pay-in-kind bonds (bonds which pay interest through the issuance of additional bonds) to accrue income with respect to these securities prior 24 32 to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise taxes, a Fund will be required to distribute income accrued with respect to these securities and may be required to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. Additional information concerning high yield (high risk) securities appears under "Appendix A--Portfolio Composition of High Yield Bonds" and "Appendix B--Ratings of Investments." SPECIAL RISK FACTORS--FOREIGN SECURITIES. The Diversified, High Yield and Income and Capital Funds have the discretion to invest a portion of their assets in foreign securities that are traded principally in securities markets outside the United States. These Funds currently limit investment in foreign securities not publicly traded in the United States to 50% of total assets in the case of the Diversified Fund and 25% of total assets in the case of the High Yield and Income and Capital Funds. These Funds may also invest without limit in U.S. Dollar denominated American Depository Receipts ("ADRs"), which are bought and sold in the United States and are not subject to the preceding limitation. In connection with their foreign securities investments, these Funds may, to a limited extent, engage in foreign currency exchange, options and futures transactions as a hedge and not for speculation. See "Additional Investment Information--Options and Financial Futures Transactions and Foreign Currency Transactions." The Cash Reserves Fund and the Short-Intermediate Government Funds may, subject to their respective quality standards, invest in U.S. Dollar-denominated securities of foreign issuers. Foreign securities involve currency risks. The U.S. Dollar value of a foreign security tends to decrease when the value of the U.S. Dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. Dollar falls against such currency. Fluctuations in exchange rates may also affect the earning power and asset value of the foreign entity issuing the security. Dividend and interest payments may be repatriated based on the exchange rate at the time of disbursement or payment, and restrictions on capital flows may be imposed. Losses and other expenses may be incurred in converting between various currencies. Foreign securities may be subject to foreign government taxes that reduce their attractiveness. Other risks of investing in such securities include political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possible imposition of exchange controls. The prices of such securities may be more volatile than those of domestic securities and the markets for such securities may be less liquid. In addition, there may be less publicly available information about foreign issuers than about domestic issuers. Many foreign issuers are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers. There is generally less regulation of stock exchanges, brokers, banks and listed companies abroad than in the United States. With respect to certain foreign countries, there is a possibility of expropriation or diplomatic developments that could affect investment in these countries. EMERGING MARKETS. While a Fund's investments in foreign securities will principally be in developed countries, a Fund may make investments in developing or "emerging" countries, which involve exposure to economic structures that are generally less diverse and mature than in the United States, and to political systems that may be less stable. A developing or emerging market country can be considered to be a country that is in the initial stages of its industrialization cycle. Currently, emerging markets generally include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. Currently, investing in many emerging markets may not be desirable or feasible because of the lack of adequate custody arrangements for a Fund's assets, overly burdensome repatriation and similar restrictions, the lack of organized and liquid securities markets, unacceptable political risks or other reasons. As opportunities to invest in securities in emerging markets develop, a Fund may expand and further broaden the group of emerging markets in which it invests. In the past, markets of developing or emerging market countries have been more volatile than the markets of developed countries; however, such markets often have provided higher rates of return to investors. The investment manager believes that these characteristics can be expected to continue in the future. Many of the risks described above relating to foreign securities generally will be greater for emerging markets than for developed countries. For instance, economies in individual developing markets may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, currency 25 33 depreciation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many emerging markets have experienced substantial rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets of certain developing markets. Economies in emerging markets generally are dependent heavily upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries with which they trade. Also, the securities markets of developing countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the United States and other more developed countries. Disclosure, regulatory and accounting standards in many respects are less stringent than in the United States and other developed markets. There also may be a lower level of monitoring and regulation of developing markets and the activities of investors in such markets, and enforcement of existing regulations has been extremely limited. In addition, brokerage commissions, custodial services and other costs relating to investment in foreign markets generally are more expensive than in the United States; this is particularly true with respect to emerging markets. Such markets have different settlement and clearance procedures. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such settlement problems may cause emerging market securities to be illiquid. The inability of a Fund to make intended securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result either in losses to a Fund due to subsequent declines in value of the portfolio security or, if a Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Certain emerging markets may lack clearing facilities equivalent to those in developed countries. Accordingly, settlements can pose additional risks in such markets and ultimately can expose a Fund to the risk of losses resulting from a Fund's inability to recover from a counterparty. The risk also exists that an emergency situation may arise in one or more emerging markets as a result of which trading securities may cease or may be substantially curtailed and prices for a Fund's portfolio securities in such markets may not be readily available. A Fund's portfolio securities in the affected markets will be valued at fair value determined in good faith by or under the direction of the Board of Trustees. Investment in certain emerging market securities is restricted or controlled to varying degrees. These restrictions or controls may at times limit or preclude foreign investment in certain emerging market securities and increase the costs and expenses of a Fund. Emerging markets may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if a deterioration occurs in an emerging market's balance of payments, the market could impose temporary restrictions on foreign capital remittances. FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund will invest in foreign fixed income securities based on the investment manager's analysis without relying on published ratings. Since such investments will be based upon the investment manager's analysis rather than upon published ratings, achievement of a Fund's goals may depend more upon the abilities of the investment manager than would otherwise be the case. The value of the foreign fixed income securities held by a Fund, and thus the net asset value of the Fund's shares, generally will fluctuate with (a) changes in the perceived creditworthiness of the issuers of those securities, (b) movements in interest rates, and (c) changes in the relative values of the currencies in which a Fund's investments in fixed income securities are denominated with respect to the U.S. Dollar. The extent of the fluctuation will depend on various factors, such as the average maturity of a Fund's investments in foreign fixed income securities, and the extent to which a Fund hedges its interest rate, credit and currency exchange rate risks. Many of the foreign fixed income obligations in which a Fund will invest will have long maturities. A longer average maturity generally is associated with a higher level of volatility in the market value of such securities in response to changes in market conditions. 26 34 Investments in sovereign debt, including Brady Bonds, involve special risks. Brady Bonds are debt securities issued under a plan implemented to allow debtor nations to restructure their outstanding commercial bank indebtedness. Foreign governmental issuers of debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due. In the event of default, there may be limited or no legal recourse in that, generally, remedies for defaults must be pursued in the courts of the defaulting party. Political conditions, especially a sovereign entity's willingness to meet the terms of its fixed income securities, are of considerable significance. Also, there can be no assurance that the holders of commercial bank loans to the same sovereign entity may not contest payments to the holders of sovereign debt in the event of default under commercial bank loan agreements. In addition, there is no bankruptcy proceeding with respect to sovereign debt on which a sovereign has defaulted, and a Fund may be unable to collect all or any part of its investment in a particular issue. Foreign investment in certain sovereign debt is restricted or controlled to varying degrees, including requiring governmental approval for the repatriation of income, capital or proceed of sales by foreign investors. These restrictions or controls may at times limit or preclude foreign investment in certain sovereign debt or increase the costs and expenses of a Fund. A significant portion of the sovereign debt in which a Fund may invest is issued as part of debt restructuring and such debt is to be considered speculative. There is a history of defaults with respect to commercial bank loans by public and private entities issuing Brady Bonds. All or a portion of the interest payments and/or principal repayment with respect to Brady Bonds may be uncollateralized. PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities issued by enterprises that have undergone or are currently undergoing privatization. The governments of certain foreign countries have, to varying degrees, embarked on privatization programs contemplating the sale of all or part of their interests in state enterprises. A Fund's investments in the securities of privatized enterprises include privately negotiated investments in a government or state-owned or controlled company or enterprise that has not yet conducted an initial equity offering, investments in the initial offering of equity securities of a state enterprise or former state enterprise and investments in the securities of a state enterprise following its initial equity offering. In certain jurisdictions, the ability of foreign entities, such as a Fund, to participate in privatizations may be limited by local law, or the price or terms on which the Fund may be able to participate may be less advantageous than for local investors. Moreover, there can be no assurance that governments that have embarked on privatization programs will continue to divest their ownership of state enterprises, that proposed privatizations will be successful or that governments will not re-nationalize enterprises that have been privatized. In the case of the enterprises in which a Fund may invest, large blocks of the stock of those enterprises may be held by a small group of stockholders, even after the initial equity offerings by those enterprises. The sale of some portion or all of those blocks could have an adverse effect on the price of the stock of any such enterprise. Prior to making an initial equity offering, most state enterprises or former state enterprises go through an internal reorganization or management. Such reorganizations are made in an attempt to better enable these enterprises to compete in the private sector. However, certain reorganizations could result in a management team that does not function as well as the enterprises's prior management and may have a negative effect on such enterprise. In addition, the privatization of an enterprise by its government may occur over a number of years, with the government continuing to hold a controlling position in the enterprise even after the initial equity offering for the enterprise. Prior to privatization, most of the state enterprises in which a Fund may invest enjoy the protection of and receive preferential treatment from the respective sovereigns that own or control them. After making an initial equity offering these enterprises may no longer have such protection or receive such preferential treatment and may become subject to market competition from which they were previously protected. Some of these enterprises may not be able to effectively operate in a competitive market and may suffer losses or experience bankruptcy due to such competition. DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar denominated ADRs, which are bought and sold in the United States and are issued by domestic banks. ADRs represent the right to receive securities of foreign 27 35 issuers deposited in the domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers, such as changes in foreign currency exchange rates. However, by investing in ADRs rather than directly in foreign issuers' stock, the Fund avoids currency risks during the settlement period. In general, there is a large, liquid market in the United States for most ADRs. The Funds may also invest in European Depository Receipts ("EDRs"), which are receipts evidencing an arrangement with a European bank similar to that for ADRs and are designed for use in the European securities markets. EDRs are not necessarily denominated in the currency of the underlying security. ADDITIONAL INVESTMENT INFORMATION. A Fund will not normally engage in the trading of securities for the purpose of realizing short-term profits, but will adjust its portfolio as considered advisable in view of prevailing or anticipated market conditions and its investment objective. Accordingly, a Fund may sell fixed income securities in anticipation of a rise in interest rates and purchase such securities for inclusion in its portfolio in anticipation of a decline in interest rates. Frequency of portfolio turnover will not be a limiting factor should the investment manager deem it desirable to purchase or sell securities. The portfolio turnover rates for the Funds are listed under "Financial Highlights." Since securities with maturities of less than one year are excluded from portfolio turnover rate calculations, the portfolio turnover rate for the Cash Reserves Fund is zero. High portfolio turnover (over 100%) involves correspondingly greater brokerage commissions or other transaction costs. Higher portfolio turnover may result in the realization of greater net short-term capital gains. In order to continue to qualify as a regulated investment company for federal income tax purposes, less than 30% of the annual gross income of a Fund must be derived from the sale or other disposition of securities and certain other investments held by a Fund for less than three months. See "Dividends and Taxes" in the Statement of Additional Information. A Fund (other than the Adjustable Rate, Cash Reserves and Short-Intermediate Government Funds) may take full advantage of the entire range of maturities of fixed income securities and may adjust the average maturity of its portfolio from time to time, depending upon its assessment of relative yields on securities of different maturities and its expectations of future changes in interest rates. Thus, the average maturity of a Fund's portfolio may be relatively short (under 5 years, for example) at some times and relatively long (over 10 years, for example) at other times. Generally, since shorter term debt securities tend to be more stable than longer term debt securities, the portfolio's average maturity will be shorter when interest rates are expected to rise and longer when interest rates are expected to fall. The effective Dollar-weighted average portfolio maturity of the Adjustable Rate Fund generally will range from less than one year to five years. The effective Dollar-weighted average portfolio maturity of the Short-Intermediate Government Fund generally will be more than two years but less than five years. The Cash Reserves Fund will invest only in securities with remaining maturities of 12 months or less and maintains a Dollar-weighted average portfolio maturity of 90 days or less in accordance with Rule 2a-7 under the Investment Company Act of 1940. The Adjustable Rate, Cash Reserves, Mortgage and Short-Intermediate Government Funds each may not borrow money except as a temporary measure for extraordinary or emergency purposes and then only in an amount up to one-third of the value of its total assets in order to meet redemption requests without immediately selling any portfolio securities. If, for any reason, the current value of a Fund's total assets falls below an amount equal to three times the amount of its indebtedness from money borrowed, the Fund will, within three days (not including Sundays and holidays), reduce its indebtedness to the extent necessary. A Fund will not borrow for leverage purposes. The Adjustable Rate Fund may pledge up to 15% of its total assets to secure any such borrowings. The Diversified, Government, High Yield and Income and Capital Funds may each borrow money only for temporary or emergency purposes and not for leverage purposes, and then only in an amount up to 5% of its assets, in order to meet redemption requests without immediately selling any portfolio securities or other assets. These Funds, except for the Government Fund, may not pledge their assets in an amount exceeding the amount of the borrowings secured by such pledge. The Government Fund may pledge up to 7 1/2% of its assets to secure any such borrowings. A Fund will not purchase illiquid securities, including repurchase agreements maturing in more than seven days, if, as a result thereof, more than 15% of the Fund's net assets, valued at the time of the transaction, would be invested in such securities, except that the Cash Reserves and Mortgage Funds may not purchase illiquid securities if more 28 36 than 10% of their total assets (net assets for Cash Reserves Fund) would be invested in such securities. See "Investment Policies and Techniques--Over-the-Counter Options" in the Statement of Additional Information for a description of the extent to which over-the-counter traded options are in effect considered as illiquid for purposes of a Fund's limit on illiquid securities. Each Fund has adopted certain fundamental investment restrictions which are presented in the Statement of Additional Information and that, together with the investment objective and policies of a Fund (for the Adjustable Rate Fund, however, only those policies specifically designated in this prospectus as fundamental), cannot be changed without approval by holders of a majority of its outstanding voting shares. As defined in the Investment Company Act of 1940, this means the lesser of the vote of (a) 67% of the shares of a Fund present at a meeting where more than 50% of the outstanding shares are present in person or by proxy; or (b) more than 50% of the outstanding shares of a Fund. Policies of the Adjustable Rate Fund that are neither designated as fundamental nor incorporated into any of the fundamental investment restrictions referred to above may be changed by the Board of Trustees of the Fund without shareholder approval. OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. A Fund (other than the Cash Reserves Fund) may deal in options on securities and securities indexes, which options may be listed for trading on a national securities exchange or traded over-the-counter. In connection with their foreign securities investments, the Diversified, High Yield and Income and Capital Funds may also purchase and sell foreign currency options. The Diversified Fund may write (sell) covered call options on up to 100% of net assets and may write (sell) secured put options on up to 50% of net assets. The Adjustable Rate, Government, High Yield and Income and Capital Funds each may write (sell) covered call and secured put options on up to 25% of its net assets. Each such Fund may purchase put and call options provided that no more than 5% of its net assets may be invested in premiums on such options. A call option gives the purchaser the right to buy, and the writer the obligation to sell, the underlying security or other asset at the exercise price during the option period. A put option gives the purchaser the right to sell, and the writer the obligation to buy, the underlying security or other asset at the exercise price during the option period. The writer of a covered call owns securities or other assets that are acceptable for escrow and the writer of a secured put invests an amount not less than the exercise price in eligible securities or other assets to the extent that it is obligated as a writer. If a call written by a Fund is exercised, the Fund foregoes any possible profit from an increase in the market price of the underlying security or other asset over the exercise price plus the premium received. In writing puts, there is a risk that a Fund may be required to take delivery of the underlying security or other asset at a disadvantageous price. Over-the-counter traded options ("OTC options") differ from exchange traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and there is a risk of non-performance by the dealer as a result of the insolvency of such dealer or otherwise, in which event a Fund may experience material losses. However, in writing options the premium is paid in advance by the dealer. OTC options are available for a greater variety of securities and other assets, and a wider range of expiration dates and exercise prices, than for exchange traded options. A Fund (other than the Cash Reserves Fund) may engage in financial futures transactions. Financial futures contracts are commodity contracts that obligate the long or short holder to take or make delivery of a specified quantity of a financial instrument, such as a security, or the cash value of a securities index during a specified future period at a specified price. A Fund will "cover" futures contracts sold by the Fund and maintain in a segregated account certain liquid assets in connection with futures contracts purchased by the Fund as described under "Investment Policies and Techniques" in the Statement of Additional Information. In connection with their foreign securities investments, the Diversified, High Yield and Income and Capital Funds may also engage in foreign currency financial futures transactions. A Fund will not enter into any futures contracts or options on futures contracts if the aggregate of the contract value of the outstanding futures contracts of the Fund and futures contracts subject to outstanding options written by the Fund would exceed 50% of the total assets of the Fund. 29 37 The Funds may engage in financial futures transactions and may use index options as an attempt to hedge against market risks. For example, if a Fund owned long-term bonds and interest rates were expected to rise, it could sell financial futures contracts. If interest rates did increase, the value of the bonds in the Fund would decline, but this decline would be offset in whole or in part by an increase in the value of the Fund's futures contracts. If, on the other hand, long-term interest rates were expected to decline, the Fund could hold short-term debt securities and benefit from the income earned by holding such securities, while at the same time the Fund could purchase futures contracts on long-term bonds or the cash value of a securities index. Thus, the Fund could take advantage of the anticipated rise in the value of long-term bonds without actually buying them. The futures contracts and short-term debt securities could then be liquidated and the cash proceeds used to buy long-term bonds. Futures contracts entail risks. If the investment manager's judgment about the general direction of interest rates, markets or exchange rates is wrong, the overall performance may be poorer than if no such contracts had been entered into. There may be an imperfect correlation between movements in prices of futures contracts and portfolio assets being hedged. In addition, the market prices of futures contracts may be affected by certain factors. For example, if participants in the futures market elect to close out their contracts rather than meet margin requirements, distortions in the normal relationship between the underlying assets and futures market could result. Price distortions also could result if investors in futures contracts decide to make or take delivery of underlying securities or other assets rather than engage in closing transactions because of the resultant reduction in the liquidity of the futures market. In addition, because, from the point of view of speculators, margin requirements in the futures market are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities or other assets and movements in the prices of futures contracts, a correct forecast of market trends by the investment manager still may not result in a successful hedging transaction. If any of these events should occur, a Fund could lose money on the financial futures contracts and also on the value of its portfolio assets. The costs incurred in connection with futures transactions could reduce a Fund's return. Index options involve risks similar to those risks relating to transactions in financial futures contracts described above. Also, an option purchased by a Fund may expire worthless, in which case a Fund would lose the premium paid therefor. A Fund may engage in futures transactions only on commodities exchanges or boards of trade. A Fund will not engage in transactions in index options, financial futures contracts or related options for speculation, but only as an attempt to hedge against changes in interest rates or market conditions affecting the values of securities which the Fund owns or intends to purchase. FOREIGN CURRENCY TRANSACTIONS. The Diversified, High Yield and Income and Capital Funds may each invest a limited portion of its assets in securities denominated in foreign currencies. These Funds may engage in foreign currency transactions in connection with their investments in foreign securities but will not speculate in foreign currency exchange. The value of the foreign securities investments of a Fund measured in U.S. Dollars (including ADRs) may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the Fund may incur costs in connection with conversions between various currencies. A Fund will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded directly between currency traders (usually large commercial banks) and their customers. When a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may want to establish the U.S. Dollar cost or proceeds, as the case may be. By entering into a forward contract in U.S. Dollars for the purchase or sale of the amount of foreign currency involved in an underlying security transaction, the 30 38 Fund is able to protect itself against a possible loss between trade and settlement dates resulting from an adverse change in the relationship between the U.S. Dollar and such foreign currency. However, this tends to limit potential gains that might result from a positive change in such currency relationships. A Fund may also hedge its foreign currency exchange rate risk by engaging in foreign currency financial futures and options transactions. When the investment manager believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. Dollar, it may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of the Fund's securities denominated in such foreign currency. The forecasting of short-term currency market movement is extremely difficult and whether such a short-term hedging strategy will be successful is highly uncertain. It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver when a decision is made to sell the security and make delivery of the foreign currency in settlement of a forward contract. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. A Fund will not enter into forward contracts or maintain a net exposure in such contracts where the Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's securities or other assets denominated in that currency. The Diversified, High Yield and Income and Capital Funds do not intend to enter into forward contracts for the purchase of a foreign currency if they would have more than 15% of the value of their total assets committed to such contracts. The Funds segregate cash or liquid high-grade securities in an amount not less than the value of each Fund's total assets committed to forward foreign currency exchange contracts entered into for the purchase of a foreign currency. If the value of the securities segregated declines, additional cash or securities are added so that the segregated amount is not less than the amount of the Fund's commitments with respect to such contracts. A Fund generally does not enter into a forward contract with a term longer than one year. DERIVATIVES. In addition to options and financial futures transactions, consistent with its objective, each Fund may invest in a broad array of financial instruments and securities in which the value of the instrument or security is "derived" from the performance of an underlying asset or a "benchmark" such as a security index, an interest rate or a foreign currency ("derivatives"). Derivatives are most often used to manage investment risk, to increase or decrease exposure to an asset class or benchmark (as a hedge or to enhance return), or to create an investment position indirectly (often because it is more efficient or less costly than direct investment). The types of derivatives used by each Fund and the techniques employed by the investment manager may change over time as new derivatives and strategies are developed or regulatory changes occur. SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER DERIVATIVES. The Statement of Additional Information contains further information about the characteristics, risks and possible benefits of options, futures, foreign currency and other derivative transactions. See "Investment Policies and Techniques" in the Statement of Additional Information. The principal risks are: (a) possible imperfect correlation between movements in the prices of options, currencies, futures or other derivatives contracts and movements in the prices of the securities or currencies hedged, used for cover or that the derivatives intended to replicate; (b) lack of assurance that a liquid secondary market will exist for any particular option, futures, foreign currency or other derivatives contract at any particular time; (c) the need for additional skills and techniques beyond those required for normal portfolio management; (d) losses on futures contracts resulting from market movements not anticipated by the investment manager; (e) the possible need to defer closing out certain options, futures or other derivatives contracts in order to continue to qualify for beneficial tax treatment afforded "regulated investment companies" under the Internal Revenue Code; and (f) the possible non-performance of the counter-party to the derivative contract. DELAYED DELIVERY TRANSACTIONS. Any of the Funds (other than the Cash Reserves Fund) may purchase or sell portfolio securities on a when-issued or delayed delivery basis. When-issued or delayed delivery transactions involve a commitment by a Fund to purchase or sell securities with payment and delivery to take place in the future 31 39 (not to exceed 120 days from trade date for the Government Fund) in order to secure what is considered to be an advantageous price or yield to the Fund at the time of entering into the transaction. The value of fixed yield securities to be delivered in the future will fluctuate as interest rates vary. Because a Fund is required to set aside cash or liquid high-grade securities to satisfy its commitments to purchase when-issued or delayed delivery securities, flexibility to manage the Fund's investments may be limited if commitments to purchase when-issued or delayed delivery securities were to exceed 25% of the value of its assets. To the extent a Fund engages in when-issued or delayed delivery transactions, it will do so for the purpose of acquiring portfolio securities consistent with the Fund's investment objective and policies. A Fund reserves the right to sell these securities before the settlement date if deemed advisable. In when-issued or delayed delivery transactions, delivery of the securities occurs beyond normal settlement periods, but the Fund would not pay for such securities or start earning interest on them until they are delivered. However, when the Fund purchases securities on a when-issued or delayed delivery basis, it immediately assumes the risks of ownership, including the risk of price fluctuation. Failure to deliver a security purchased on a when-issued or delayed delivery basis may result in a loss or missed opportunity to make an alternative investment. Depending on market conditions, the Fund's when-issued and delayed delivery purchase commitments could cause its net asset value per share to be more volatile, because such securities may increase the amount by which its total assets, including the value of when-issued and delayed delivery securities it holds, exceed its net assets. REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, under which it acquires ownership of a security and the broker-dealer or bank agrees to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the Fund's holding period. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Fund might have expenses in enforcing its rights, and could experience losses, including a decline in the value of the underlying securities and loss of income. The securities underlying a repurchase agreement will be marked-to-market every business day so that the value of such securities is at least equal to the investment value of the repurchase agreement, including any accrued interest thereon. In addition, the Fund must take physical possession of the security or receive written confirmation of the purchase and a custodial or safekeeping receipt from a third party or be recorded as the owner of the security through the Federal Reserve Book-Entry System. Repurchase agreements will be limited to transactions with financial institutions believed by the investment adviser to present minimal credit risk. The investment manager will monitor on an on-going basis the creditworthiness of the broker-dealers and banks with which the Funds may engage in repurchase agreements. Repurchase agreements maturing in more than seven days will be considered as illiquid for purposes of the Funds' limitations on illiquid securities. LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory requirements, the Funds (other than the Government Fund) may lend securities (principally to broker-dealers) without limit where such loans are callable at any time and are continuously secured by segregated collateral (cash or U.S. Government Securities) equal to no less than the market value, determined daily, of the securities loaned. The Funds will receive amounts equal to dividends or interest on the securities loaned. The Funds will also earn income for having made the loan. Any cash collateral pursuant to these loans will be invested in short-term money market instruments. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. However, the loans would be made only to firms deemed by the investment manager to be of good standing, and when the investment manager believes the potential earnings to justify the attendant risk. Management will limit such lending to not more than one-third of the value of a Fund's total assets. COLLATERALIZED OBLIGATIONS. Subject to its investment objective and policies, a Fund may purchase collateralized obligations, including interest only ("IO") and principal only ("PO") securities. A collateralized obligation is a debt security issued by a corporation, trust or custodian, or by a U.S. Government agency or instrumentality, that is collateralized by a portfolio or pool of mortgages, Mortgage-Backed Securities, U.S. Government Securities or other assets. The issuer's obligation to make interest and principal payments is secured by the underlying pool or portfolio of securities. Collateralized obligations issued or guaranteed by a U.S. Government agency or instrumentality, such as the Federal Home Loan Mortgage Corporation, are considered U.S. Government Securities for purposes of this 32 40 prospectus. Privately-issued collateralized obligations collateralized by a portfolio of U.S. Government Securities are not direct obligations of the U.S. Government or any of its agencies or instrumentalities and are not considered U.S. Government Securities for purposes of this prospectus. A variety of types of collateralized obligations are available currently and others may become available in the future. Since the collateralized obligations may be issued in classes with varying maturities and interest rates, the investor may obtain greater predictability of maturity than with direct investments in mortgage-backed securities. Classes with shorter maturities may have lower volatility and lower yield while those with longer maturities may have higher volatility and higher yield. This provides the investor with greater control over the characteristics of the investment in a changing interest rate environment. With respect to interest only and principal only securities, an investor has the option to select from a pool of underlying collateral the portion of the cash flows that most closely corresponds to the investor's forecast of interest rate movements. These instruments tend to be highly sensitive to prepayment rates on the underlying collateral and thus place a premium on accurate prepayment projections by the investor. A Fund (other than the Cash Reserves Fund) may invest in collateralized obligations whose yield floats inversely against a specified index rate. These "inverse floaters" are more volatile than conventional fixed or floating rate collateralized obligations and the yield thereon, as well as the value thereof, will fluctuate in inverse proportion to changes in the index upon which interest rate adjustments are based. As a result, the yield on an inverse floater will generally increase when market yields (as reflected by the index) decrease and decrease when market yields increase. The extent of the volatility of inverse floaters depends on the extent of anticipated changes in market rates of interest. Generally, inverse floaters provide for interest rate adjustments based upon a multiple of the specified interest index, which further increases their volatility. The degree of additional volatility will be directly proportional to the size of the multiple used in determining interest rate adjustments. Additional information concerning collateralized obligations is contained in the Statement of Additional Information under "Investment Policies and Techniques--Collateralized Obligations." INVESTMENT MANAGER AND UNDERWRITER INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS"), 120 South LaSalle Street, Chicago, Illinois 60603, is the investment manager of each Fund and provides each Fund with continuous professional investment supervision. KFS is one of the largest investment managers in the country and has been engaged in the management of investment funds for more than forty-five years. KFS and its affiliates provide investment advice and manage investment portfolios for the Kemper Funds, Kemper insurance companies, Kemper Corporation and other corporate, pension, profit-sharing and individual accounts representing approximately $60 billion under management (including approximately $16 billion in U.S. Government securities). KFS acts as investment manager or principal underwriter for 26 open-end and seven closed-end investment companies, with 64 separate investment portfolios, representing more than 3 million shareholder accounts. KFS is a wholly-owned subsidiary of Kemper Financial Companies, Inc., which is a financial services holding company that is more than 99% owned by Kemper Corporation ("Kemper"), a diversified insurance and financial services holding company. Kemper has entered into a definitive agreement with an investor group led by Zurich Insurance Company ("Zurich") pursuant to which Kemper would be acquired by the investor group in a merger transaction. As part of the transaction, Zurich or an affiliate would purchase KFS. The Kemper and Zurich boards have approved the transaction. In addition, because the transaction would constitute an assignment of the Funds' investment management agreements with KFS and potentially, Rule 12b-1 agreements under the Investment Company Act of 1940, and therefore a termination of such agreements. KFS has received approval of new agreements from the Funds' boards and shareholders. Consummation of the transaction is subject to remaining contingencies, including state insurance department regulatory approvals. The investor group has informed Kemper that it expects the transaction to close early in 1996. Responsibility for overall management of each Fund rests with its Board of Trustees and officers. Professional investment supervision is provided by KFS. The investment management agreements provide that KFS shall act as each Fund's investment adviser, manage its investments and provide it with various services and facilities. For 33 41 Funds that invest in foreign securities, KFS will from time to time use the services of Kemper Investment Management Company Limited, 1 Fleet Place, London EC4M 7RQ, a wholly owned subsidiary of KFS, with respect to foreign securities investments of the Funds including analysis, research, execution and trading services. J. Patrick Beimford, Jr. has been the portfolio manager since October, 1995 for the Government Fund (and from 1981 through May, 1995) and the Mortgage Fund (and from 1992 through May, 1995). Mr. Beimford (since October, 1995 and from 1992 through May, 1995) is also a portfolio co-manager with Michelle M. Keeley (since 1994) of the Short-Intermediate Government Fund. Mr. Beimford (since October, 1995 and from 1992 through May, 1995) and Elizabeth A. Byrnes (since 1994) are portfolio co-managers of the Adjustable Rate Fund. Mr. Beimford joined KFS in April 1976 and is currently an Executive Vice President and Chief Investment Officer--Fixed Income Investments of KFS and a Vice President of each Fund. He received a B.S.I.M. in Business from Purdue University, West Lafayette, Indiana, and an M.B.A. in Finance from the University of Chicago, Chicago, Illinois. Mr. Beimford is a Chartered Financial Analyst. Ms. Keeley, a First Vice President of KFS and a Vice President of the Short-Intermediate Government Fund, joined KFS in 1990 and, prior thereto, worked in the fixed income institutional sales department of a national securities firm. She received a B.A. in International Relations from Michigan State University, Lansing, Michigan and an M.M. in Finance from the Kellogg Graduate School of Business, Northwestern University, Chicago, Illinois. Ms. Byrnes joined KFS in 1982 and is a First Vice President of KFS and a Vice President of the Adjustable Rate Fund. She received a B.A. from Miami University, Oxford, Ohio. Frank J. Rachwalski, Jr. is the portfolio manager of the Cash Reserves Fund. He has served in this capacity since the Fund commenced operations in February 1984. Mr. Rachwalski joined KFS in January 1973 and is currently a Senior Vice President of KFS and a Vice President of the Fund. He received a B.B.A. and an M.B.A. from Loyola University, Chicago, Illinois. Michael A. McNamara (since 1990) and Harry E. Resis, Jr. (since 1992) are the portfolio co-managers of the High Yield Fund. Mr. McNamara joined KFS in February 1972 and is a Senior Vice President of KFS and a Vice President of the Fund. He received a B.S. in Business Administration from the University of Missouri, St. Louis, Missouri, and an M.B.A. in Finance from Loyola University, Chicago, Illinois. Mr. Resis joined KFS in June, 1988 and is currently a Senior Vice President of KFS and a Vice President of the Fund. He received a B.A. in Finance from Michigan State University, East Lansing, Michigan. Mr. Resis holds a number of NYSE and NASD licenses. Robert Cessine is the portfolio manager (since 1994) and a Vice President of the Income and Capital Fund. Mr. Cessine joined KFS in 1993 and is a Senior Vice President of KFS and director of investment grade corporate and sovereign bond research. Before joining KFS in 1993, Mr. Cessine was a senior corporate bond analyst and chairman of the bond selection committee of an investment management company. He received a B.S. in Economics from the University of Wisconsin, Madison, Wisconsin, an M.S. in Agricultural and Resource Economics from the University of Maryland, Baltimore/College Park, Maryland and an M.S. in Finance from the University of Wisconsin, Madison, Wisconsin. Mr. Cessine is a Chartered Financial Analyst. Diversified Income Fund is managed by a team of portfolio managers who are specialists in the basic sectors in which it invests. Messrs J. Patrick Beimford, Jr., Robert S. Cessine, Gordon K. Johns, Michael A. McNamara, Harry E. Resis, Jr., and Jonathan W. Trutter are the members of the team. Mr. Johns joined Kemper in 1988 and is Executive Vice President of KFS and managing director of Kemper Investment Management Company Limited in London. Previously, he was head of international fixed income fund management at an investment bank in London. He received a B.A. in law from Balliol College in Oxford, United Kingdom. Mr. Trutter is a First Vice President of KFS. Before joining KFS in 1989, he was a vice president in commercial banking. Mr. Trutter has an A.B. with dual majors in East Asian Languages and International Relations from the University of Southern California, Los Angeles California and an M.B.A. from Kellogg Graduate School of Management at Northwestern University, Chicago, Illinois. He is also a Certified Public Accountant. See above for information on the background of Messrs. Beimford, Cessine, McNamara and Resis. KFS has a Fixed Income Investment Committee that determines overall investment strategy for fixed income portfolios managed by KFS. The Fixed Income Committee is currently comprised of the following members: J. Patrick Beimford, Jr., Robert S. Cessine, Frank E. Collecchia, George Klein, Michael A. McNamara, Christopher J. 34 42 Mier, Frank J. Rachwalski, Jr., Harry E. Resis, Jr., Robert H. Schumacher, John E. Silvia, Stephen B. Timbers, Jonathan W. Trutter and Christopher T. Vincent. The portfolio managers work together as a team with the Fixed Income Committee and various fixed income analysts and traders to manage the Funds. Analysts provide market, economic and financial research and analysis that is used by the Fixed Income Committee to establish broad parameters for the Funds, including duration and cash levels. In addition, credit research by analysts is used by portfolio managers in selecting securities appropriate for the Funds' policies. The KFS International Fixed Income Investments area, directed by Gordon K. Johns, provides research and analysis regarding foreign investments to the portfolio managers. After investment decisions are made, fixed income traders execute the portfolio manager's instructions through various broker-dealer firms. The Funds pay KFS investment management fees, payable monthly, at the annual rates shown below. Before May 31, 1994, the Funds paid fees under different fee schedules that are described in "Investment Manager and Underwriter" in the Statement of Additional Information.
ADJUSTABLE RATE, INCOME DIVERSIFIED AND CAPITAL, MORTGAGE CASH AND AVERAGE DAILY NET ASSETS AND SHORT-INTERMEDIATE GOV'T RESERVES HIGH YIELD GOVERNMENT - -------------------------------------------- ---------------------------- -------- ---------- ---------- $0 - $250 million........................... .55% .40% .58% .45% $250 million - $1 billion................... .52 .38 .55 .43 $1 billion - $2.5 billion................... .50 .35 .53 .41 $2.5 billion - $5 billion................... .48 .32 .51 .40 $5 billion - $7.5 billion................... .45 .30 .48 .38 $7.5 billion - $10 billion.................. .43 .28 .46 .36 $10 billion - $12.5 billion................. .41 .26 .44 .34 Over $12.5 billion.......................... .40 .25 .42 .32
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services agreement ("distribution agreement") with each Fund, Kemper Distributors, Inc. ("KDI"), 120 South LaSalle Street, Chicago, Illinois 60603, a wholly owned subsidiary of KFS, is the principal underwriter and distributor of each Fund's shares and acts as agent of each Fund in the sale of its shares. KDI bears all its expenses of providing services pursuant to the distribution agreement, including the payment of any commissions. KDI provides for the preparation of advertising or sales literature and bears the cost of printing and mailing prospectuses to persons other than shareholders. KDI bears the cost of qualifying and maintaining the qualification of Fund shares for sale under the securities laws of the various states and each Fund bears the expense of registering its shares with the Securities and Exchange Commission. KDI may enter into related selling group agreements with various broker-dealers, including affiliates of KDI, that provide distribution services to investors. KDI also may provide some of the distribution services. Before February 1, 1995, KFS was the Funds' principal underwriter and distributor. Class A Shares. KDI receives no compensation from the Funds as principal underwriter for Class A shares and pays all expenses of distribution of each Fund's Class A shares under the distribution agreements not otherwise paid by dealers or other financial services firms. As indicated under "Purchase of Shares," KDI retains the sales charge upon the purchase of shares and pays or allows concessions or discounts to firms for the sale of each Fund's shares. Class B Shares. For its services under the distribution agreement, KDI receives a fee from each Fund, payable monthly, at the annual rate of .75% of average daily net assets of each Fund attributable to Class B shares. This fee is accrued daily as an expense of Class B shares. KDI also receives any contingent deferred sales charges. See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class B Shares." KDI currently compensates firms for sales of Class B shares at a commission rate of 3.75%. Class C Shares. For its services under the distribution agreement, KDI receives a fee from each Fund, payable monthly, at the annual rate of .75% of average daily net assets of each Fund attributable to Class C shares. This fee is accrued daily as an expense of Class C shares. KDI currently pays firms for sales of Class C shares a distribution fee, 35 43 payable quarterly, at an annual rate of .75% of net assets attributable to Class C shares maintained and serviced by the firm. A firm becomes eligible for the distribution fee based upon assets in accounts in the month of purchase and the fee continues until terminated by KDI or a Fund. Rule 12b-1 Plan. Since each distribution agreement provides for fees payable as an expense of the Class B shares and the Class C shares that are used by KDI to pay for distribution services for those classes, that agreement is approved and reviewed separately for the Class B shares and the Class C shares in accordance with Rule 12b-1 under the Investment Company Act of 1940, which regulates the manner in which an investment company may, directly or indirectly, bear the expenses of distributing its shares. The table below shows amounts paid in connection with each Fund's Rule 12b-1 Plan during its 1995 fiscal year.
DISTRIBUTION EXPENSES DISTRIBUTION FEES CONTINGENT DEFERRED INCURRED BY PAID BY FUND SALES CHARGES PAID UNDERWRITER TO UNDERWRITER TO UNDERWRITER ---------------------- ---------------------- ------------------- FUND CLASS B CLASS C CLASS B CLASS C CLASS B - ------------------------------------- ---------- ------- ---------- ------- ------------------- Adjustable Rate...................... $ 241,000 69,000 35,000 8,000 30,000 Cash Reserves+....................... $5,789,000 354,000 2,125,000 33,000 1,629,000 Diversified.......................... $2,421,000 84,000 1,925,000 14,000 688,000 Government........................... $2,537,000 109,000 254,000 19,000 91,000 High Yield........................... $7,183,000 424,000 7,344,000 68,000 1,785,000 Income and Capital................... $1,470,000 67,000 289,000 12,000 86,000 Mortgage+............................ $4,770,000 47,000 15,132,000 5,000 4,977,000 Short-Intermediate Government+....... $1,301,000 169,000 1,979,000 19,000 1,011,000
- --------------- + Includes amounts paid during fiscal year ended July 31, 1995 and fiscal period from August 1, 1995 to September 30, 1995. If a Rule 12b-1 Plan is terminated in accordance with its terms, the obligation of a Fund to make payments to KDI pursuant to the Plan will cease and the Fund will not be required to make any payments past the termination date. Thus, there is no legal obligation for the Fund to pay any expenses incurred by KDI in excess of its fees under a Plan, if for any reason the Plan is terminated in accordance with its terms. Future fees under the Plan may or may not be sufficient to reimburse KDI (or KFS as predecessor to KDI) for its expenses incurred. ADMINISTRATIVE SERVICES. KDI also provides information and administrative services for shareholders of each Fund pursuant to administrative services agreements ("administrative agreements"). KDI may enter into related arrangements with various financial services firms, such as broker-dealer firms or banks ("firms"), that provide services and facilities for their customers or clients who are shareholders of the Funds. Such administrative services and assistance may include, but are not limited to, establishing and maintaining shareholder accounts and records, processing purchase and redemption transactions, answering routine inquiries regarding each Fund and its special features and such other services as may be agreed upon from time to time and permitted by applicable statute, rule or regulation. KDI bears all its expenses of providing services pursuant to the administrative agreement, including the payment of any service fees. For services under the administrative agreements, each Fund pays KDI a fee, payable monthly, at an annual rate of up to .25% of average daily net assets of each class of such Fund. With respect to Class A shares, KDI then pays each firm a service fee at an annual rate of (a) up to .15% of net assets (.25% for the Cash Reserves, Mortgage and Short-Intermediate Government Funds) of those accounts that it maintains and services for each Fund attributable to shares acquired prior to October 1, 1993, and (b) up to .25% of net assets of those accounts that it maintains and services for each Fund attributable to Class A shares acquired on or after October 1, 1993. With respect to Class B shares and Class C shares, KDI pays each firm a service fee, payable quarterly, at an annual rate of up to .25% of net assets of those accounts in the Fund that it maintains and services attributable to Class B shares and Class C shares, respectively. Firms to which service fees may be paid include broker-dealers affiliated with KDI. A firm becomes eligible for the service fee based on assets in the accounts in the month following the month of purchase (in the month of purchase for Class C shares) and the fee continues until 36 44 terminated by KDI or a Fund. The fees are calculated monthly and paid quarterly. KDI may advance to financial services firms the first year service fee related to Class B shares sold by such firms at a rate of up to .25% of the purchase price of such shares. As compensation therefor, KDI may retain the administrative services fee paid by a Fund with respect to such shares for the first year after purchase. Financial services firms will become eligible for future service fees with respect to such shares commencing in the thirteenth month following the month of purchase. KDI also may provide some of the above services and may retain any portion of the fee under the administrative agreements not paid to firms to compensate itself for administrative functions performed for each Fund. Currently, the administrative services fee payable to KDI is based only upon Fund assets in accounts for which there is a firm listed on a Fund's records and it is intended that KDI will pay all the administrative services fee that it receives from each Fund to firms in the form of service fees. The effective administrative services fee rate to be charged against all assets of each Fund while this procedure is in effect will depend upon the proportion of Fund assets that is in accounts for which there is a firm of record, as well as, with respect to Class A shares (except for the Cash Reserves, Mortgage and Short-Intermediate Government Funds), the date when shares representing such assets were purchased. CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as sub-custodian, have custody of all securities and cash of each Fund maintained in the United States. For Funds that invest in foreign securities, The Chase Manhattan Bank, N.A., Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of all securities and cash of each Fund held outside the United States. IFTC also is the Funds' transfer agent and dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper Service Company, an affiliate of KFS, serves as "Shareholder Service Agent" of the Funds and as such, performs all of IFTC's duties as transfer agent and dividend-paying agent. For a description of custodian, transfer agent and shareholder service agent fees payable to IFTC and the Shareholder Service Agent, see "Investment Manager and Underwriter" in the Statement of Additional Information. PORTFOLIO TRANSACTIONS. KFS places all orders for purchases and sales of a Fund's securities. Subject to seeking best execution of orders, KFS may consider sales of shares of a Fund and other funds managed by KFS or its affiliates as a factor in selecting broker-dealers. See "Portfolio Transactions" in the Statement of Additional Information. DIVIDENDS AND TAXES DIVIDENDS. The Cash Reserves Fund's net investment income is declared as a dividend daily, and dividends are reinvested or paid in cash monthly. Each other Fund normally declares and distributes monthly dividends of net investment income and distributes any net realized short-term and long-term capital gains at least annually. Dividends paid by a Fund as to each class of its shares will be calculated in the same manner, at the same time and on the same day. The level of income dividends per share (as a percentage of net asset value) will be lower for Class B and Class C shares than for Class A shares primarily as a result of the distribution services fee applicable to Class B and Class C shares. Distributions of capital gains, if any, will be paid in the same amount for each class. Income dividends and capital gain dividends, if any, of a Fund will be credited to shareholder accounts in full and fractional shares of the same class of that Fund at net asset value, except that, upon written request to the Shareholder Service Agent, a shareholder may select one of the following options: (1) To receive income and short-term capital gain dividends in cash and long-term capital gain dividends in shares of the same class at net asset value; or (2) To receive income and capital gain dividends in cash. 37 45 Any dividends of a Fund that are reinvested normally will be reinvested in shares of the same class of that same Fund. However, upon written request to the Shareholder Service Agent, a shareholder may elect to have dividends of a Fund invested in shares of the same class of another Kemper Fund at the net asset value of such class of such other fund. See "Special Features--Class A Shares--Combined Purchases" for a list of such other Kemper Funds. To use this privilege of investing dividends of a Fund in shares of another Kemper Fund, shareholders must maintain a minimum account value of $1,000 in the Fund distributing the dividends and a minimum account value of $1,000 in the Kemper Fund in which dividends are reinvested. The Funds reinvest dividend checks (and future dividends) in shares of that same Fund and class if checks are returned as undeliverable. TAXES. Each Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code") and, if so qualified, will not be liable for federal income taxes to the extent its earnings are distributed. Dividends derived from net investment income and net short-term capital gains are taxable to shareholders as ordinary income and long-term capital gain dividends are taxable to shareholders as long-term capital gain regardless of how long the shares have been held and whether received in cash or shares. Long-term capital gain dividends received by individual shareholders are taxed at a maximum rate of 28%. Dividends declared in October, November or December to shareholders of record as of a date in one of those months and paid during the following January are treated as paid on December 31 of the calendar year declared. A portion of the dividends paid by the Diversified or High Yield Funds may qualify for the dividends received deduction available to corporate shareholders. However, it is anticipated that only a small portion, if any, of the dividends paid by such Funds will so qualify. No portion of the dividends paid by the Adjustable Rate, Cash Reserves, Government, Income and Capital, Mortgage or Short-Intermediate Government Funds will qualify for the dividends received deduction. A dividend received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend and, although in effect a return of capital, will be taxable to the shareholder. If the net asset value of shares were reduced below the shareholder's cost by dividends representing gains realized on sales of securities, such dividends would be a return of investment though taxable as stated above. Fund dividends that are derived from interest on direct (but not guaranteed) obligations of the U.S. Government and certain of its agencies and instrumentalities may be exempt from state and local taxes in certain states. In other states, arguments can be made that such distributions should be exempt from state and local taxes based on federal law, 31 U.S.C. Section 3124, and the U.S. Supreme Court's interpretation of that provision in American Bank and Trust Co. v. Dallas County, 463 U.S. 855 (1983). Shareholders should consult their tax advisers regarding the possible exclusion of such portion of their dividends for state and local income tax purposes. Each Fund is required by law to withhold 31% of taxable dividends and redemption proceeds paid to certain shareholders who do not furnish a correct taxpayer identification number (in the case of individuals, a social security number) and in certain other circumstances. Trustees of qualified retirement plans and 403(b)(7) accounts are required by law to withhold 20% of the taxable portion of any distribution that is eligible to be "rolled over." The 20% withholding requirement does not apply to distributions from Individual Retirement Accounts ("IRAs") or any part of a distribution that is transferred directly to another qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should consult with their tax advisers regarding the 20% withholding requirement. After each transaction, shareholders will receive a confirmation statement giving complete details of the transaction except that statements will be sent quarterly for transactions involving dividend reinvestment and periodic investment and redemption programs. Information for income tax purposes, including information regarding any foreign taxes and credits, will be provided after the end of the calendar year. Shareholders are encouraged to retain copies of their account confirmation statements or year-end statements for tax reporting purposes. However, those who have incomplete records may obtain historical account transaction information at a reasonable fee. NET ASSET VALUE For each Fund except the Cash Reserves Fund, the net asset value per share is determined separately for each class by dividing the value of the Fund's net assets attributable to that class by the number of shares of that class outstanding. The per share net asset value of the Class B and Class C shares of a Fund (other than the Cash Reserves 38 46 Fund) will generally be lower than that of the Class A shares of the Fund because of the higher expenses borne by the Class B and Class C shares. Fixed income securities are valued by using market quotations, or independent pricing services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Portfolio securities that are primarily traded on a domestic securities exchange or securities listed on the NASDAQ National Market are valued at the last sale price on the exchange or market where primarily traded or listed or, if there is no recent sale price available, at the last current bid quotation. Portfolio securities that are primarily traded on foreign securities exchanges are generally valued at the preceding closing values of such securities on their respective exchanges where primarily traded. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security by the Board of Trustees or its delegates. Securities not so traded or listed are valued at the last current bid quotation if market quotations are available. Equity options are valued at the last sale price unless the bid price is higher or the ask price is lower, in which event such bid or asked price is used. Exchange traded fixed income options are valued at the last sale price unless there is no sale price, in which event current prices provided by market makers are used. Over-the-counter traded options are valued based upon current prices provided by market makers. Financial futures and options thereon are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Other securities and assets are valued at fair value as determined in good faith by the Board of Trustees. Because of the need to obtain prices as of the close of trading on various exchanges throughout the world, the calculation of net asset value of a Fund investing in foreign securities does not necessarily take place contemporaneously with the determination of the prices of the Fund's foreign securities, which may be made prior to the determination of net asset value. For purposes of determining the net asset value of a Fund investing in foreign securities, all assets and liabilities initially expressed in foreign currency values will be converted into U.S. Dollar values at the mean between the bid and offered quotations of such currencies against U.S. Dollars as last quoted by a recognized dealer. If an event were to occur, after the value of a security was so established but before the net asset value per share was determined, which was likely to materially change the net asset value, then that security would be valued using fair value considerations by the Board of Trustees or its delegates. On each day the New York Stock Exchange (the "Exchange") is open for trading, the net asset value is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. For the Cash Reserves Fund, the net asset value per share is determined separately for each class as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange on each day the Exchange is open for trading. The Fund seeks to maintain a net asset value of $1.00 per share in each class but there is no assurance that it will do so. The net asset value per share of a class is determined by dividing the Fund's net assets attributable to that class by the total number of shares of the class outstanding. The Fund values its portfolio instruments at amortized cost, which means that they are valued at their acquisition cost (as adjusted for amortization of premium or discount) rather than at current market value. Calculations are made to compare the value of its investments valued at amortized cost with market-based values. Market-based values are obtained by using actual quotations provided by market makers, estimates of market value, or values obtained from yield data relating to classes of money market instruments published by reputable sources at the mean between the bid and asked prices for the instruments. If a deviation of 1/2 of 1% or more were to occur between the Fund's $1.00 per share net asset value, calculated at amortized cost, and the net asset value per share calculated by reference to market-based quotations, or if there is any other deviation which the Board of Trustees believes would result in a material dilution to shareholders or purchasers, the Board of Trustees will promptly consider what action, if any, should be initiated. In order to value its investments at amortized cost, the Fund purchases only securities with a maturity of 12 months or less and maintains a Dollar-weighted average portfolio maturity of 90 days or less. In addition, the Fund limits its portfolio investments to securities that meet the quality and diversification requirements of Rule 2a-7. Under the quality requirements of Rule 2a-7, the Fund may only purchase U.S. Dollar denominated instruments that are determined to present minimal credit risks and that are at the time of acquisition "Eligible Securities" as defined in Rule 2a-7. "Eligible Securities" under Rule 2a-7 include only securities that are rated in the top two rating categories by the required number of nationally recognized statistical rating organizations (at least two or, if only one such organization has rated the security, that one organization) or, if unrated, are deemed comparable in quality. The diversification requirements of Rule 2a-7 provide generally that the Fund may not at the time of acquisition invest more than 5% of its assets in securities of any one issuer or invest more than 5% of its assets in 39 47 securities that are Eligible Securities that have not been rated in the highest category by the required number of rating organizations or, if unrated, have not been deemed comparable, except U.S. Government Securities and repurchase agreements of such securities. See "Investment Objectives and Policies--Cash Reserves Fund." PURCHASE OF SHARES ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund (other than the Cash Reserves Fund), are sold to investors subject to an initial sales charge. Class A shares of Cash Reserve Fund exchanged into Class A shares of another Kemper Mutual Fund are subject to the applicable sales charge of the Kemper Mutual Fund at the time of the exchange Class B shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are sold without an initial or a contingent deferred sales charge but are subject to higher ongoing expenses than Class A shares and do not convert into another class. When placing purchase orders, investors must specify whether the order is for Class A, Class B or Class C shares. The primary distinctions among the classes of each Fund's shares lie in their initial and contingent deferred sales charge structures and in their ongoing expenses, including asset-based sales charges in the form of Rule 12b-1 distribution fees. These differences are summarized in the table below. See, also, "Summary of Expenses." Each class has distinct advantages and disadvantages for different investors, and investors may choose the class that best suits their circumstances and objectives.
ANNUAL 12B-1 FEES (AS A % OF AVERAGE DAILY SALES CHARGE NET ASSETS) OTHER INFORMATION ---------------------------------- ------------------------ ---------------------------------- Class A* Maximum initial sales charge of None Initial sales charge waived or 4.5% of the public offering price reduced for certain purchases (3.5% for the Adjustable Rate and Short-Intermediate Government Funds) Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares charge of 4% of redemption six years after issuance proceeds; declines to zero after six years Class C None 0.75% No conversion feature
- --------------- * No initial sales charge applies to purchases of Class A shares of the Cash Reserves Fund, but the applicable sales charge applies for exchanges into Class A shares of other Kemper Mutual Funds. The minimum initial investment for each Fund is $1,000 and the minimum subsequent investment is $100. The minimum initial investment for an Individual Retirement Account is $250 and the minimum subsequent investment is $50. Under an automatic investment plan, such as Bank Direct Deposit, Payroll Direct Deposit or Government Direct Deposit, the minimum initial and subsequent investment is $50. These minimum amounts may be changed at any time in management's discretion. In order to begin accruing income dividends as soon as possible, purchasers may wire payment to the Fund's custodian, Investors Fiduciary Trust Company, 127 West 10th Street, Kansas City, Missouri 64105. The Cash Reserves Fund seeks to be as fully invested as possible at all times in order to achieve maximum income. Since the Fund will be investing in instruments which normally require immediate payment in Federal Funds (monies credited to a bank's account with its regional Federal Reserve Bank), the Fund has adopted certain procedures for the convenience of its shareholders and to ensure that the Fund receives investable funds. (a) Wire transfer. Orders received by wire transfer in the form of Federal Funds will be effected at the next determined net asset value after receipt by the Fund's Shareholder Service Agent and such shares will receive the dividend for the next calendar day following the day when the purchase is effective. If payment is wired in Federal Funds, the payment should be wired to State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, the sub-custodian for the Fund. If payment is to be wired, the firm which services the account should handle the details of the transaction. (b) Check. Orders for purchase accompanied by a check or other negotiable bank draft will be accepted and effected as of the close of the Exchange on the business day following receipt and such shares 40 48 will receive the dividend for the next calendar day following the day when the purchase is effective. (c) Dealer Trades. Orders processed through dealers or other financial services firms, including trades via Fund/SERV, will be effected at the net asset value effective on the trade date. These purchases will begin earning dividends the calendar day following the payment date. See "Dividends and Taxes" for more information. Share certificates will not be issued unless requested in writing. It is recommended that investors not request share certificates unless needed for a specific purpose. You cannot redeem shares by telephone or wire transfer or use the telephone exchange privilege if share certificates have been issued. A lost or destroyed certificate is difficult to replace and can be expensive to the shareholder (a bond worth 2% or more of the certificate value is normally required). INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of Class A shares for purchasers of the Adjustable Rate and Short-Intermediate Government Funds choosing the initial sales charge alternative is the net asset value plus a sales charge, as set forth below. ADJUSTABLE RATE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS
Sales Charge ---------------------------------- Allowed to As a Dealers As a Percentage as a Percentage of Percentage of Net of Offering Asset Offering Amount of Purchase Price Value* Price ---- ---- ---- Less than $100,000........................................ 3.50% 3.63% 3.00% $100,000 but less than $250,000........................... 3.00 3.09 2.50 $250,000 but less than $500,000........................... 2.50 2.56 2.25 $500,000 but less than $1 million......................... 2.00 2.04 1.75 $1 million and over....................................... .00** .00** ***
- --------------- * Rounded to the nearest one-hundredth percent. ** Redemption of shares may be subject to a contingent deferred sales charge as discussed below. *** Commission is payable by KDI as discussed below. The public offering price of Class A shares for purchasers of the Diversified, Government, High Yield, Income and Capital and Mortgage Funds choosing the initial sales charge alternative is the net asset value plus a sales charge, as set forth below. DIVERSIFIED, GOVERNMENT, HIGH YIELD, INCOME AND CAPITAL AND MORTGAGE FUNDS
Sales Charge ---------------------------------- Allowed to As a Dealers As a Percentage as a Percentage of Percentage of Net of Offering Asset Offering Amount of Purchase Price Value* Price ---- ---- ---- Less than $100,000........................................ 4.50% 4.71% 4.00% $100,000 but less than $250,000........................... 3.50 3.63 3.00 $250,000 but less than $500,000........................... 2.60 2.67 2.25 $500,000 but less than $1 million......................... 2.00 2.04 1.75 $1 million and over....................................... .00** .00** ***
- --------------- * Rounded to the nearest one-hundredth percent. ** Redemption of shares may be subject to a contingent deferred sales charge as discussed below. *** Commission is payable by KDI as discussed below. Each Fund receives the entire net asset value of all its Class A shares sold. KDI, the Funds' principal underwriter, retains the sales charge on sales of Class A shares from which it allows discounts from the applicable public offering price to investment dealers, which discounts are uniform for all dealers in the United States and its territories. The normal discount allowed to dealers is set forth in the above table. Upon notice to all dealers with whom it has sales agreements, KDI may reallow up to the full applicable sales charge, as shown in the above table, during periods and for transactions specified in such notice and such reallowances may be based upon attainment of minimum sales 41 49 levels. During periods when 90% or more of the sales charge is reallowed, such dealers may be deemed to be underwriters as that term is defined in the Securities Act of 1933. Class A shares of a Fund may be purchased at net asset value to the extent that the amount invested represents the net proceeds from a redemption of shares of a mutual fund for which KFS or an affiliate does not serve as investment manager ("non-Kemper fund") provided that: (a) the investor has previously paid either an initial sales charge in connection with the purchase of the non-Kemper fund shares redeemed or a contingent deferred sales charge in connection with the redemption of the non-Kemper fund shares, and (b) the purchase of Fund shares is made within 90 days after the date of such redemption. To make such a purchase at net asset value, the investor or the investor's dealer must, at the time of purchase, submit a request that the purchase be processed at net asset value pursuant to this privilege. The redemption of the shares of the non-Kemper fund is, for federal income tax purposes, a sale upon which a gain or loss may be realized. Class A shares of a Fund may be purchased at net asset value by: (a) any purchaser provided that the amount invested in such Fund or other Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined Purchases" totals at least $1,000,000 including purchases of Class A shares pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features described under "Special Features;" or (b) a participant-directed qualified retirement plan described in Code Section 401(a) or a participant-directed non-qualified deferred compensation plan described in Code Section 457 provided in either case that such plan has not less than 200 eligible employees (the "Large Order NAV Purchase Privilege"). Redemption within one year of shares purchased under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege." KDI may in its discretion compensate investment dealers or other financial services firms in connection with the sale of Class A shares of a Fund to employer sponsored employee benefit plans using the subaccount recordkeeping system made available through the Shareholder Service Agent at net asset value in accordance with the Large Order NAV Purchase Privilege up to the following amounts: 1.00% of the net asset value of shares sold on amounts up to $5 million in any calendar year, .50% on the next $5 million and .25% on amounts over $10 million in such calendar year. KDI may in its discretion compensate investment dealers or other financial services firms in connection with the sale of Class A shares of each Fund to other purchasers at net asset value in accordance with the Large Order NAV Purchase Privilege up to the following amounts: .70% of the net asset value of shares sold on amounts up to $3 million, .50% on the next $2 million and .25% on amounts over $5 million. For purposes of determining the appropriate commission percentage to be applied to a particular sale under the foregoing schedules, KDI will consider the cumulative amount invested by the purchaser in a Fund and other Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined Purchases," including purchases pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features referred to above. The privilege of purchasing Class A shares of a Fund at net asset value under the Large Order NAV Purchase Privilege is not available if another net asset value purchase privilege is also applicable. Class A shares may be sold at net asset value in any amount to: (a) officers, trustees, directors, employees (including retirees) and sales representatives of a Fund, its investment manager, its principal underwriter or certain affiliated companies, for themselves or members of their families; (b) registered representatives and employees of broker-dealers having selling group agreements with KDI and officers, directors and employees of service agents of the Funds, for themselves or their spouses or dependent children; (c) shareholders who owned shares of Kemper-Dreman Fund, Inc. ("KDF") on September 8, 1995, and have continuously owned shares of KDF (or a Kemper Fund acquired by exchange of KDF shares) since that date, for themselves or members of their families, and (d) any trust or pension, profit-sharing or other benefit plan for only such persons. Class A shares may be sold at net asset value in any amount to selected employees (including their spouses and dependent children) of banks and other financial services firms that provide administrative services related to order placement and payment to facilitate transactions in shares of the Funds for their clients pursuant to an agreement with KDI or one of its affiliates. Only those employees of such banks and other firms who as part of their usual duties provide services related to 42 50 transactions in Fund Class A shares may purchase Fund shares at net asset value hereunder. Class A shares may be sold at net asset value in any amount to unit investment trusts sponsored by Everen Securities, Inc. In addition, unitholders of unit investment trusts sponsored by Everen Securities, Inc. or its predecessors may purchase a Fund's Class A shares at net asset value through reinvestment programs described in the prospectuses of such trusts that have such programs. Class A shares of a Fund may be sold at net asset value through certain investment advisers registered under the Investment Advisers Act of 1940 and other financial services firms that adhere to certain standards established by KDI, including a requirement that such shares be sold for the benefit of their clients participating in a "wrap account" or similar program under which such clients pay a fee to the investment adviser or other firm. Such shares are sold for investment purposes and on the condition that they will not be resold except through redemption or repurchase by the Funds. The Funds may also issue Class A shares at net asset value in connection with the acquisition of the assets of or merger or consolidation with another investment company, or to shareholders in connection with the investment or reinvestment of income and capital gain dividends. Effective on a date discussed below, Class A shares of a Fund may be purchased at net asset value in any amount by members of the plaintiff class in the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is generally non-transferrable and continues for the lifetime of individual class members and for a ten year period for non-individual class members. This privilege is subject to final approval by the court in the aforementioned proceeding and will become effective on a date as described in appropriate court documents, now estimated to be February 1, 1996. To make a purchase at net asset value under this privilege, the investor must, at the time of purchase, submit a written request that the purchase be processed at net asset value pursuant to this privilege specifically identifying the purchaser as a member of the "Tabankin Class." Shares purchased under this privilege will be maintained in a separate account that includes only shares purchased under this privilege. For more details concerning this privilege, class members should refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in connection with the aforementioned court proceeding. For sales of Fund shares at net asset value pursuant to this privilege, KDI may at its discretion pay investment dealers and other financial services firms a concession, payable quarterly, at an annual rate of up to .25% of net assets attributable to such shares maintained and serviced by the firm. A firm becomes eligible for the concession based upon assets in accounts attributable to shares purchased under this privilege in the month after the month of purchase and the concession continues until terminated by KDI. The privilege of purchasing Class A shares of a Fund at net asset value under this privilege is not available if another net asset value purchase privilege also applies (including the purchase of Class A shares of the Cash Reserves Fund). The sales charge scale is applicable to purchases made at one time by any "purchaser" which includes: an individual; or an individual, his or her spouse and children under the age of 21; or a trustee or other fiduciary of a single trust estate or single fiduciary account; or an organization exempt from federal income tax under Section 501(c)(3) or (13) of the Code; or a pension, profit-sharing or other employee benefit plan whether or not qualified under Section 401 of the Code; or other organized group of persons whether incorporated or not, provided the organization has been in existence for at least six months and has some purpose other than the purchase of redeemable securities of a registered investment company at a discount. In order to qualify for a lower sales charge, all orders from an organized group will have to be placed through a single investment dealer or other firm and identified as originating from a qualifying purchaser. DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the deferred sales charge alternative may purchase Class B shares at net asset value per share without any sales charge at the time of purchase. Since Class B shares are being sold without an initial sales charge, the full amount of the investor's purchase payment will be invested in Class B shares for his or her account. A contingent deferred sales charge may be imposed upon redemption of Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge --Class B Shares." 43 51 KDI compensates firms for sales of Class B shares at the time of sale at a commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is compensated by each Fund for services as distributor and principal underwriter for Class B shares. See "Investment Manager and Underwriter." Class B shares of a Fund will automatically convert to Class A shares of the same Fund six years after issuance on the basis of the relative net asset value per share. Class B shareholders of the Funds who originally acquired their shares as Initial Shares of Kemper Portfolios, formerly known as Kemper Investment Portfolios ("KIP"), hold them subject to the same conversion period schedule as that of their KIP Portfolio. Class B shares originally representing Initial Shares of a KIP Portfolio will automatically convert to Class A shares of the applicable Fund six years after issuance of the Initial Shares for shares issued on or after February 1, 1991 and seven years after issuance of the Initial Shares for shares issued before February 1, 1991. The purpose of the conversion feature is to relieve holders of Class B shares from the distribution services fee when they have been outstanding long enough for KDI to have been compensated for distribution related expenses. For purposes of conversion to Class A shares, shares purchased through the reinvestment of dividends and other distributions paid with respect to Class B shares in a shareholder's Fund account will be converted to Class A shares on a pro rata basis. PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a Fund is the next determined net asset value. No initial or contingent deferred sales charge is imposed. Since Class C shares are sold without an initial sales charge, the full amount of the investor's purchase payment will be invested in Class C shares for his or her account. KDI pays firms for sales of Class C shares a distribution fee, payable quarterly, at an annual rate of .75% of net assets attributable to Class C shares maintained and serviced by the firm. KDI is compensated by each Fund as distributor and principal underwriter for Class C shares. See "Investment Manager and Underwriter." WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares provides a more suitable investment for an investor depends on a number of factors, including the amount and intended length of the investment, and for Cash Reserves Fund, the other Kemper Mutual Fund into which the investor may wish to exchange in the future. Investors making investments that qualify for reduced sales charges might consider Class A shares. Investors who prefer not to pay an initial sales charge and who plan to hold their investment for more than six years might consider Class B shares. Investors who prefer not to pay an initial sales charge but who plan to redeem their shares within six years might consider Class C shares. Orders for Class B shares or Class C shares for $500,000 or more will be declined. Orders for Class B shares or Class C shares by employer sponsored employee benefit plans using the subaccount record keeping system made available through the Shareholder Service Agent will be invested instead in Class A shares at net asset value where the combined subaccount value in a Fund or other Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined Purchases" is in excess of $5 million including purchases pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features described under "Special Features." For more information about the three sales arrangements, consult your financial representative or the Shareholder Service Agent. Financial services firms may receive different compensation depending upon which class of shares they sell. GENERAL. Banks and other financial services firms may provide administrative services related to order placement and payment to facilitate transactions in shares of a Fund for their clients, and KDI may pay them a transaction fee up to the level of the discount or commission allowable or payable to dealers, as described above. Banks are currently prohibited under the Glass-Steagall Act from providing certain underwriting or distribution services. Banks or other financial services firms may be subject to various state laws regarding the services described above and may be required to register as dealers pursuant to state law. If banking firms were prohibited from acting in any capacity or providing any of the described services, management would consider what action, if any, would be appropriate. KDI does not believe that termination of a relationship with a bank would result in any material adverse consequences to a Fund. In addition to the discounts or commissions described above, KDI will, from time to time, pay or allow additional discounts, commissions or promotional incentives, in the form of cash or other compensation, to firms that sell shares of the Funds. Non-cash compensation includes luxury merchandise and trips to luxury resorts. In some instances, such discounts, commissions or other incentives will be offered only to certain firms that sell or are 44 52 expected to sell during specified time periods certain minimum amounts of shares of the Funds or other funds underwritten by KDI. Orders for the purchase of shares of a Fund will be confirmed at a price based on the net asset value of that Fund next determined after receipt by KDI of the order accompanied by payment. However, orders received by dealers or other financial services firms prior to the determination of net asset value (see "Net Asset Value") and received by KDI prior to the close of its business day will be confirmed at a price based on the net asset value effective on that day ("trade date"). The Funds reserve the right to determine the net asset value more frequently than once a day if deemed desirable. Dealers and other financial services firms are obligated to transmit orders promptly. Collection may take significantly longer for a check drawn on a foreign bank than for a check drawn on a domestic bank. Therefore, if an order is accompanied by a check drawn on a foreign bank, funds must normally be collected before shares will be purchased. See "Purchase and Redemption of Shares" in the Statement of Additional Information. Investment dealers and other firms provide varying arrangements for their clients to purchase and redeem the Funds' shares. Some may establish higher minimum investment requirements than set forth above. Firms may arrange with their clients for other investment or administrative services. Such firms may independently establish and charge additional amounts to their clients for such services, which charges would reduce the clients' return. Firms also may hold the Funds' shares in nominee or street name as agent for and on behalf of their customers. In such instances, the Funds' transfer agent will have no information with respect to or control over the accounts of specific shareholders. Such shareholders may obtain access to their accounts and information about their accounts only from their firm. Certain of these firms may receive compensation from the Funds through the Shareholder Service Agent for recordkeeping and other expenses relating to these nominee accounts. In addition, certain privileges with respect to the purchase and redemption of shares or the reinvestment of dividends may not be available through such firms. Some firms may participate in a program allowing them access to their clients' accounts for servicing including, without limitation, transfers of registration and dividend payee changes; and may perform functions such as generation of confirmation statements and disbursement of cash dividends. Such firms, including affiliates of KDI, may receive compensation from the Funds through the Shareholder Service Agent for these services. This prospectus should be read in connection with such firms' material regarding their fees and services. The Funds reserve the right to withdraw all or any part of the offering made by this prospectus and to reject purchase orders. Also, from time to time, each Fund may temporarily suspend the offering of any class of its shares to new investors. During the period of such suspension, persons who are already shareholders of such class of the Fund normally are permitted to continue to purchase additional shares of such class and to have dividends reinvested. Shareholders should direct their inquiries to Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105-2005 or to the firm from which they received this prospectus. REDEMPTION OR REPURCHASE OF SHARES GENERAL. Any shareholder may require a Fund to redeem his or her shares. When shares are held for the account of a shareholder by the Funds' transfer agent, the shareholder may redeem them by sending a written request with signatures guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box 419557, Kansas City, Missouri 64141-6557. When certificates for shares have been issued, they must be mailed to or deposited with the Shareholder Service Agent, along with a duly endorsed stock power and accompanied by a written request for redemption. Redemption requests and a stock power must be endorsed by the account holder with signatures guaranteed by a commercial bank, trust company, savings and loan association, federal savings bank, member firm of a national securities exchange or other eligible financial institution. The redemption request and stock power must be signed exactly as the account is registered including any special capacity of the registered owner. Additional documentation may be requested, and a signature guarantee is normally required, from institutional and fiduciary account holders, such as corporations, custodians (e.g., under the Uniform Transfers to Minors Act), executors, administrators, trustees or guardians. 45 53 The redemption price for shares of a Fund will be the net asset value per share of that Fund next determined following receipt by the Shareholder Service Agent of a properly executed request with any required documents as described above. Payment for shares redeemed will be made in cash as promptly as practicable but in no event later than seven days after receipt of a properly executed request accompanied by any outstanding share certificates in proper form for transfer. When a Fund is asked to redeem shares for which it may not have yet received good payment, it may delay transmittal of redemption proceeds until it has determined that collected funds have been received for the purchase of such shares, which will be up to 15 days from receipt by a Fund of the purchase amount. The redemption within one year of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a 1% contingent deferred sales charge (see "Purchase of Shares") and the redemption of Class B shares may be subject to a contingent deferred sales charge (see "Contingent Deferred Sales Charge--Class B Shares" below). Because of the high cost of maintaining small accounts, the Funds reserve the right to redeem an account (and, in the case of Class B shares, impose any applicable contingent deferred sales charge) that falls below the minimum investment level, currently $1,000, as a result of redemptions. Currently, Individual Retirement Accounts and employee benefit plan accounts are not subject to this procedure. A shareholder will be notified in writing and will be allowed 60 days to make additional purchases to bring the account value up to the minimum investment level before a Fund redeems the shareholder's account. The investment required to reach that level may be made at net asset value (without any initial sales charge in the case of Class A shares). Shareholders can request the following telephone privileges: expedited wire transfer redemptions and EXPRESS-Transfer transactions (see "Special Features") and exchange transactions for individual and institutional accounts and pre-authorized telephone redemption transactions for certain institutional accounts. Shareholders may choose these privileges on the account application or by contacting the Shareholder Service Agent for appropriate instructions. Please note that the telephone exchange privilege is automatic unless the shareholder refuses it on the account application. A Fund or its agents may be liable for any losses, expenses or costs arising out of fraudulent or unauthorized telephone requests pursuant to these privileges unless the Fund or its agents reasonably believe, based upon reasonable verification procedures, that the telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS, including loss resulting from fraudulent or unauthorized transactions, as long as the reasonable verification procedures are followed. The verification procedures include recording instructions, requiring certain identifying information before acting upon instructions and sending written confirmations. TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the imposition of any contingent deferred sales charge in the case of Class B shares) are $50,000 or less and the proceeds are payable to the shareholder of record at the address of record, normally a telephone request or a written request by any one account holder without a signature guarantee is sufficient for redemptions by individual or joint account holders, and trust, executor and guardian account holders (excluding custodial accounts for gifts and transfers to minors), provided the trustee, executor or guardian is named in the account registration. Other institutional account holders and guardian account holders of custodial accounts for gifts and transfers to minors may exercise this special privilege of redeeming shares by telephone request or written request without signature guarantee subject to the same conditions as individual account holders and subject to the limitations on liability described under "General" above, provided that this privilege has been pre-authorized by the institutional account holder or guardian account holder by written instruction to the Shareholder Service Agent with signatures guaranteed. Telephone requests may be made by calling 1-800-621-1048. Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege of redeeming shares by telephone request until such shares have been owned for at least 15 days. This privilege of redeeming shares by telephone request or by written request without a signature guarantee may not be used to redeem shares held in certificated form and may not be used if the shareholder's account has had an address change within 30 days of the redemption request. During periods when it is difficult to contact the Shareholder Service Agent by telephone, it may be difficult to use the telephone redemption privilege, although investors can still redeem by mail. The Funds reserve the right to terminate or modify this privilege at any time. 46 54 REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be communicated by a shareholder through a securities dealer or other financial services firm to KDI, which each Fund has authorized to act as its agent. There is no charge by KDI with respect to repurchases; however, dealers or other firms may charge customary commissions for their services. Dealers and other financial services firms are obligated to transmit orders promptly. The repurchase price will be the net asset value of the Fund next determined after receipt of a request by KDI. However, requests for repurchases received by dealers or other firms prior to the determination of net asset value (see "Net Asset Value") and received by KDI prior to the close of KDI's business day will be confirmed at the net asset value effective on that day. The offer to repurchase may be suspended at any time. Requirements as to stock powers, certificates, payments and delay of payments are the same as for redemptions. EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given authorization for expedited wire redemption to the account holder's brokerage or bank account, shares of a Fund can be redeemed and proceeds sent by federal wire transfer to a single previously designated account. Requests received by the Shareholder Service Agent prior to the determination of net asset value will result in shares being redeemed that day at the net asset value of the Fund effective on that day and normally the proceeds will be sent to the designated account the following business day. Delivery of the proceeds of a wire redemption request of $250,000 or more may be delayed by the Fund for up to seven days if the investment manager deems it appropriate under then current market conditions. Once authorization is on file, the Shareholder Service Agent will honor requests by telephone at 1-800-621-1048 or in writing, subject to the limitations on liability described under "General" above. The Funds are not responsible for the efficiency of the federal wire system or the account holder's financial services firm or bank. The Funds currently do not charge the account holder for wire transfers. The account holder is responsible for any charges imposed by the account holder's firm or bank. There is a $1,000 wire redemption minimum (including any contingent deferred sales charge). To change the designated account to receive wire redemption proceeds, send a written request to the Shareholder Service Agent with signatures guaranteed as described above or contact the firm through which shares of the Fund were purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed by wire transfer until such shares have been owned for at least 15 days. Account holders may not use this privilege to redeem shares held in certificated form. During periods when it is difficult to contact the Shareholder Service Agent by telephone, it may be difficult to use the expedited redemption privilege. The Funds reserve the right to terminate or modify this privilege at any time. CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A contingent deferred sales charge of 1% may be imposed upon redemption of Class A shares that are purchased under the Large Order NAV Purchase Privilege if they are redeemed within one year of purchase. The charge will not be imposed upon redemption of reinvested dividends or share appreciation. The charge is applied to the value of the shares redeemed excluding amounts not subject to the charge. The contingent deferred sales charge will be waived in the event of: (a) redemptions by a participant-directed qualified retirement plan described in Code Section 401(a) or a participant-directed non-qualified deferred compensation plan described in Code Section 457; (b) redemptions by employer sponsored employee benefit plans using the subaccount record keeping system made available through the Shareholder Service Agent; (c) redemption of shares of a shareholder (including a registered joint owner) who has died; (d) redemption of shares of a shareholder (including a registered joint owner) who after purchase of the shares being redeemed becomes totally disabled (as evidenced by a determination by the federal Social Security Administration); and (e) redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per year of the net asset value of the account. 47 55 CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales charge may be imposed upon redemption of Class B shares. There is no such charge upon redemption of any share appreciation or reinvested dividends on Class B shares. The charge is computed at the following rates applied to the value of the shares redeemed excluding amounts not subject to the charge.
YEAR OF CONTINGENT REDEMPTION DEFERRED AFTER SALES PURCHASE CHARGE - ---------- ---------- First..................................................................... 4% Second.................................................................... 3% Third..................................................................... 3% Fourth.................................................................... 2% Fifth..................................................................... 2% Sixth..................................................................... 1%
Class B shareholders who originally acquired their shares as Initial Shares of Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them subject to the same CDSC schedule that applied when those shares were purchased, as follows:
CONTINGENT DEFERRED SALES CHARGE YEAR OF --------------------------------------------------------------------------------------- REDEMPTION SHARES PURCHASED ON OR AFTER AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991 ----------------------- ---------------------------- ---------------------------- ----------------------- First.................. 4% 3% 5% Second................. 3% 3% 4% Third.................. 3% 2% 3% Fourth................. 2% 2% 2% Fifth.................. 2% 1% 2% Sixth.................. 1% 1% 1%
The following example will illustrate the operation of the contingent deferred sales charge. Assume that an investor makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months later the value of the shares has grown by $1,000 through reinvested dividends and by an additional $1,000 in appreciation to a total of $12,000. If the investor were then to redeem the entire $12,000 in share value, the contingent deferred sales charge would be payable only with respect to $10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation is subject to the charge. The charge would be at the rate of 3% ($300) because it was in the second year after the purchase was made. The rate of the contingent deferred sales charge under the schedule above is determined by the length of the period of ownership. Investments are tracked on a monthly basis. The period of ownership for this purpose begins the first day of the month in which the order for the investment is received. For example, an investment made in June, 1994 will be eligible for the 3% charge if redeemed on or after June 1, 1995. In the event no specific order is requested, the redemption will be made first from Class B shares representing reinvested dividends and then from the earliest purchase of Class B shares. KDI receives any contingent deferred sales charge directly. The contingent deferred sales charge will be waived: (a) in the event of the total disability (as evidenced by a determination by the federal Social Security Administration) of the shareholder (including a registered joint owner) occurring after the purchase of the shares being redeemed, (b) in the event of the death of the shareholder (including a registered joint owner), (c) for redemptions made pursuant to a systematic withdrawal plan (see "Special Features--Systematic Withdrawal Plan" below) and (d) for redemptions made pursuant to any IRA systematic withdrawal based on the shareholder's life expectancy including, but not limited to, substantially equal 48 56 periodic payments described in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; and (e) for redemptions to satisfy required minimum distributions after age 70 1/2 from an IRA account (with the maximum amount subject to this waiver being based only upon the shareholder's Kemper IRA accounts). The contingent deferred sales charge will also be waived in connection with the following redemptions of shares held by employer sponsored employee benefit plans maintained on the subaccount record keeping system made available by the Shareholder Service Agent: (a) redemptions to satisfy participant loan advances (note that loan repayments constitute new purchases for purposes of the contingent deferred sales charge and the conversion privilege), (b) redemptions in connection with retirement distributions (limited at any one time to 10% of the total value of plan assets invested in a Fund), (c) redemptions in connection with distributions qualifying under the hardship provisions of the Internal Revenue Code and (d) redemptions representing returns of excess contributions to such plans. REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of a Fund other than shares of the Cash Reserves Fund not acquired by exchange from another Kemper Mutual Fund or any other Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases" may reinvest up to the full amount redeemed at net asset value at the time of the reinvestment in Class A shares of a Fund or of the other listed Kemper Mutual Funds (other than shares of the Cash Reserves Fund not acquired by exchange from another Kemper Mutual Fund). A shareholder of a Fund or other Kemper Mutual Fund who redeems Class A shares purchased under the Large Order NAV Purchase Privilege (see "Purchase of Shares") or Class B shares and incurs a contingent deferred sales charge may reinvest up to the full amount redeemed at net asset value at the time of the reinvestment in Class A shares or Class B shares, as the case may be, of a Fund or of other Kemper Mutual Funds. The amount of any contingent deferred sales charge also will be reinvested. These reinvested shares will retain their original cost and purchase date for purposes of the contingent deferred sales charge. Also, a holder of Class B shares who has redeemed shares may reinvest up to the full amount redeemed, less any applicable contingent deferred sales charge that may have been imposed upon the redemption of such shares, at net asset value in Class A shares of a Fund or of the other Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined Purchases." Purchases through the reinvestment privilege are subject to the minimum investment requirements applicable to the shares being purchased and may only be made for Kemper Funds available for sale in the shareholder's state of residence as listed under "Special Features--Exchange Privilege." The reinvestment privilege can be used only once as to any specific shares and reinvestment must be effected within six months of the redemption. If a loss is realized on the redemption of a Funds' shares, the reinvestment in the same Fund may be subject to the "wash sale" rules if made within 30 days of the redemption, resulting in a postponement of the recognition of such loss for federal income tax purposes. The reinvestment privilege may be terminated or modified at any time. SPECIAL FEATURES CLASS A SHARES -- COMBINED PURCHASES. Each Fund's Class A shares (or the equivalent) may be purchased at the rate applicable to the discount bracket attained by combining concurrent investments in Class A shares of any of the following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield Fund, Kemper U.S. Government Securities Fund, Kemper International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Target Equity Fund (series are subject to a limited offering period), Kemper Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper-Dreman Fund, Inc. and Kemper Value+Growth Fund ("Kemper Mutual Funds"). Except as noted below, there is no combined purchase credit for direct purchases of shares of Kemper Money Market Fund, Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York Money Market Fund or Investors Cash Trust ("Money Market Funds"), which are not considered "Kemper Mutual Funds" for purposes hereof. For purposes of the Combined Purchases feature described above as well as for the Letter of Intent and Cumulative Discount features described below, employer sponsored employee benefit plans using the subaccount record keeping system made available through 49 57 the Shareholder Service Agent may include: (a) Money Market Funds as "Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual Fund, and (c) the value of any other plan investments, such as guaranteed investment contracts and employer stock, maintained on such subaccount record keeping system. CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for Class A shares, as shown in the applicable prospectus, also apply to the aggregate amount of purchases of such Kemper Mutual Funds listed above made by any purchaser within a 24-month period under a written Letter of Intent ("Letter") provided by KDI. The Letter, which imposes no obligation to purchase or sell additional Class A shares, provides for a price adjustment depending upon the actual amount purchased within such period. The Letter provides that the first purchase following execution of the Letter must be at least 5% of the amount of the intended purchase, and that 5% of the amount of the intended purchase normally will be held in escrow in the form of shares pending completion of the intended purchase. If the total investments under the Letter are less than the intended amount and thereby qualify only for a higher sales charge than actually paid, the appropriate number of escrowed shares are redeemed and the proceeds used toward satisfaction of the obligation to pay the increased sales charge. The Letter for an employer sponsored employee benefit plan maintained on the subaccount record keeping system available through the Shareholder Service Agent may have special provisions regarding payment of any increased sales charge resulting from a failure to complete the intended purchase under the Letter. A shareholder may include the value (at the maximum offering price) of all shares of such Kemper Mutual Funds held of record as of the initial purchase date under the Letter as an "accumulation credit" toward the completion of the Letter, but no price adjustment will be made on such shares. Only investments in Class A shares of a Fund are included for this privilege. CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of a Fund may also be purchased at the rate applicable to the discount bracket attained by adding to the cost of shares of a Fund being purchased, the value of all Class A shares of the above mentioned Kemper Mutual Funds (computed at the maximum offering price at the time of the purchase for which the discount is applicable) already owned by the investor. CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the investor's dealer or other financial services firm must notify the Shareholder Service Agent or KDI whenever a quantity discount or reduced sales charge is applicable to a purchase. Upon such notification, the investor will receive the lowest applicable sales charge. Quantity discounts described above may be modified or terminated at any time. EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may exchange their shares for shares of the corresponding class of other Kemper Mutual Funds in accordance with the provisions below. Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the Money Market Funds listed under "Special Features--Class A Shares--Combined Purchases" above may be exchanged for each other at their relative net asset values. Shares of Money Market Funds and the Cash Reserves Fund that were acquired by purchase (not including shares acquired by dividend reinvestment) are subject to the applicable sales charge on exchange. Series of Kemper Target Equity Fund are available on exchange only during the Offering Period for such series as described in the applicable prospectus. Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York Money Market Fund and Investors Cash Trust are available on exchange but only through a financial services firm having a services agreement with KDI. Exchanges may only be made for funds that are available for sale in the shareholder's state of residence. Currently, Tax-Exempt California Money Market Fund is available for sale only in California and Tax-Exempt New York Money Market Fund is available for sale only in New York, Connecticut, New Jersey and Pennsylvania. Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege may be exchanged for Class A shares of another Kemper Mutual Fund or a Money Market Fund under the exchange privilege described above without paying any contingent deferred sales charge at the time of exchange. If the Class A shares received on exchange are redeemed thereafter, a contingent deferred sales charge may be imposed in accordance with the foregoing requirements provided that the shares redeemed will retain their original cost and purchase date for purposes of the contingent deferred sales charge. 50 58 Class B Shares. Class B shares of a Fund and Class B shares of any other Kemper Mutual Fund listed under "Special Features --Class A Shares--Combined Purchases" may be exchanged for each other at their relative net asset values. Class B shares may be exchanged without any contingent deferred sales charge being imposed at the time of exchange. For purposes of the contingent deferred sales charge that may be imposed upon the redemption of the shares received on exchange, amounts exchanged retain their original cost and purchase date. Class C Shares. Class C shares of a Fund and Class C shares of any other Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases" may be exchanged for each other at their relative net asset values. General. Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may not be exchanged until they have been owned for at least 15 days. In addition, shares of a Kemper Mutual Fund (except Kemper Cash Reserves Fund) acquired by exchange from another Kemper Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until they have been owned for 15 days. The total value of shares being exchanged must at least equal the minimum investment requirement of the fund into which they are being exchanged. Exchanges are made based on relative dollar values of the shares involved in the exchange. There is no service fee for an exchange; however, dealers or other firms may charge for their services in effecting exchange transactions. Exchanges will be effected by redemption of shares of the fund held and purchase of shares of the other fund. For federal income tax purposes, any such exchange constitutes a sale upon which a gain or loss may be realized, depending upon whether the value of the shares being exchanged is more or less than the shareholder's adjusted cost basis of such shares. Shareholders interested in exercising the exchange privilege may obtain prospectuses of the other funds from dealers, other firms or KDI. Exchanges may be accomplished by a written request to Kemper Mutual Funds, Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the shareholder has given authorization. Once the authorization is on file, the Shareholder Service Agent will honor requests by telephone at 1-800-621-1048, subject to the limitations on liability under "Redemption or Repurchase of Shares -- General." Any share certificates must be deposited prior to any exchange of such shares. During periods when it is difficult to contact the Shareholder Service Agent by telephone, it may be difficult to use the telephone exchange privilege. The exchange privilege is not a right and may be suspended, terminated or modified at any time. Except as otherwise permitted by applicable regulations, 60 days' prior written notice of any termination or material change will be provided. SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic exchange of a specified amount ($100 minimum) of such shares for shares of the same class of another such Kemper Fund. If selected, exchanges will be made automatically until the privilege is terminated by the shareholder or the Kemper Fund. Exchanges are subject to the terms and conditions described above under "Exchange Privilege" including the $1,000 minimum investment requirement for the Kemper Fund acquired on exchange. This privilege may not be used for the exchange of shares held in certificated form. EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the Automated Clearing House System (minimum $100 and maximum $2,500) from a shareholder's bank, savings and loan, or credit union account to purchase shares in a Fund. Shareholders can also redeem shares (minimum $500 and maximum $2,500) from their Fund account and transfer the proceeds to their bank, savings and loan, or credit union checking account. By enrolling in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to rely upon telephone instructions from ANY PERSON to transfer the specified amounts between the shareholder's Fund account and the predesignated bank, savings and loan or credit union account, subject to the limitations on liability under "Redemption or Repurchase of Shares -- General." Once enrolled in EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00 a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415. Termination will become effective as soon as the Shareholder Service Agent has had a reasonable time to act upon the request. EXPRESS-Transfer 51 59 cannot be used with passbook savings accounts or for tax-deferred plans such as Individual Retirement Accounts ("IRAs"). BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of a Fund through an automatic investment program. With the Bank Direct Deposit Purchase Plan, monthly investments are made automatically from the shareholder's account at a bank, savings and loan or credit union into the shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder authorizes the Fund and its agents to either draw checks or initiate Automated Clearing House debits against the designated account at a bank or other financial institution. This privilege may be selected by completing the appropriate section on the Account Application or by contacting the Shareholder Service Agent for appropriate forms. A shareholder may terminate his or her Plan by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415. Termination by a shareholder will become effective within thirty days after the Shareholder Service Agent has received the request. A Fund may immediately terminate a shareholder's Plan in the event that any item is unpaid by the shareholder's financial institution. The Funds may terminate or modify this privilege at any time. PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under these programs, all or a portion of a shareholder's net pay or government check is automatically invested in a Fund account each payment period. A shareholder may terminate participation in these programs by giving written notice to the shareholder's employer or government agency, as appropriate. (A reasonable time to act is required.) A Fund is not responsible for the efficiency of the employer or government agency making the payment or any financial institutions transmitting payments. SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a Fund's shares at the offering price (net asset value plus, in the case of Class A shares, the initial sales charge) may provide for the payment from the owner's account of any requested dollar amount to be paid to the owner or a designated payee monthly, quarterly, semiannually or annually. The $5,000 minimum account size is not applicable to Individual Retirement Accounts. The minimum periodic payment is $100. The maximum annual rate at which Class B shares may be redeemed under a systematic withdrawal plan is 10% of the net asset value of the account. Shares are redeemed so that the payee will receive payment approximately the first of the month. Any income and capital gain dividends will be automatically reinvested at net asset value. A sufficient number of full and fractional shares will be redeemed to make the designated payment. Depending upon the size of the payments requested and fluctuations in the net asset value of the shares redeemed, redemptions for the purpose of making such payments may reduce or even exhaust the account. The purchase of Class A shares while participating in a systematic withdrawal plan will ordinarily be disadvantageous to the investor because the investor will be paying a sales charge on the purchase of shares at the same time that the investor is redeeming shares upon which a sales charge may have already been paid. Therefore, a Fund will not knowingly permit additional investments of less than $2,000 if the investor is at the same time making systematic withdrawals. KDI will waive the contingent deferred sales charge on redemptions of Class B shares made pursuant to a systematic withdrawal plan. The right is reserved to amend the systematic withdrawal plan on 30 days' notice. The plan may be terminated at any time by the investor or the Funds. TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides retirement plan services and documents and KDI can establish investor accounts in any of the following types of retirement plans: - - Individual Retirement Accounts ("IRAs") trusteed by IFTC. This includes Simplified Employee Pension Plan ("SEP") IRA accounts and prototype documents. - - 403(b)(7) Custodial Accounts also trusteed by IFTC. This type of plan is available to employees of most non-profit organizations. - - Prototype money purchase pension and profit-sharing plans may be adopted by employers. The maximum annual contribution per participant is the lesser of 25% of compensation or $30,000. Brochures describing the above plans as well as model defined benefit plans, target benefit plans, 457 plans, 401(k) plans and materials for establishing them are available from the Shareholder Service Agent upon request. The 52 60 brochures for plans trusteed by IFTC describe the current fees payable to IFTC for its services as trustee. Investors should consult with their own tax advisers before establishing a retirement plan. PERFORMANCE A Fund may advertise several types of performance information for a class of shares, including "yield" and, for each Fund except the Cash Reserves Fund, "average annual total return" and "total return." The Cash Reserves Fund also may advertise its "effective yield." Performance information will be computed separately for Class A, Class B and Class C shares. Each of these figures is based upon historical results and is not representative of the future performance of any class of a Fund. A Fund with fees or expenses being waived or absorbed by KFS may also advertise performance information before and after the effect of the fee waiver or expense absorption. A Fund's yield is a measure of the net investment income per share earned over a specific one month or 30-day period (seven-day period for the Cash Reserves Fund) expressed as a percentage of the maximum offering price of the Fund's shares at the end of the period. Yield is an annualized figure, which means that it is assumed that a Fund generates the same level of net investment income over a one year period. The effective yield for the Cash Reserves Fund is calculated similarly, but the net investment income earned is assumed to be compounded when annualized. The Cash Reserves Fund's effective yield will be slightly higher than its yield due to this compounding. Net investment income is assumed to be compounded semiannually when it is annualized for Funds other than the Cash Reserves Fund. Average annual total return and total return figures measure both the net investment income generated by, and the effect of any realized and unrealized appreciation or depreciation of, the underlying investments in a Fund's portfolio for the period referenced, assuming the reinvestment of all dividends. Thus, these figures reflect the change in the value of an investment in a Fund during a specified period. Average annual total return will be quoted for at least the one, five and ten year periods ending on a recent calendar quarter (or if such periods have not yet elapsed, at the end of a shorter period corresponding to the life of the Fund for performance purposes). Average annual total return figures represent the average annual percentage change over the period in question. Total return figures represent the aggregate percentage or dollar value change over the period in question. A Fund's performance may be compared to that of the Consumer Price Index or various unmanaged bond indexes including, but not limited to, the Salomon Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index and may also be compared to the performance of other mutual funds or mutual fund indexes with similar objectives and policies as reported by independent mutual fund reporting services such as Lipper Analytical Services, Inc. ("Lipper"). Lipper performance calculations are based upon changes in net asset value with all dividends reinvested and do not include the effect of any sales charges. Information may be quoted from publications such as Morningstar, Inc., The Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune, USA Today, Institutional Investor and Registered Representative. Also, investors may want to compare the historical returns of various investments, performance indexes of those investments or economic indicators, including but not limited to stocks, bonds, certificates of deposit and other bank products, money market funds and U.S. Treasury obligations. Bank product performance may be based upon, among other things, the BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes. Money market fund performance may be based upon, among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting services on money market funds. Performance of U.S. Treasury obligations may be based upon, among other things, various U.S. Treasury bill indexes. Certain of these alternative investments may offer fixed rates of return and guaranteed principal and may be insured. Economic indicators may include, without limitation, indicators of market rate trends and cost of funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index ("COFI"). A Fund may depict the historical performance of the securities in which the Fund may invest over periods reflecting a variety of market or economic conditions either alone or in comparison with alternative investments, performance 53 61 indexes of those investments or economic indicators. A Fund may also describe its portfolio holdings and depict its size or relative size compared to other mutual funds, the number and make-up of its shareholder base and other descriptive factors concerning the Fund. The yield or price volatility of a Fund (particularly the Adjustable Rate Fund) may be compared to various securities, such as U.S. Government Securities, or indexes, such as the COFI referred to above or the Constant Maturity Treasury Index ("CMT") published by the Federal Reserve Board. A Fund may include in its sales literature and shareholder reports a quotation of the current "distribution rate" for the Fund. Distribution rate is simply a measure of the level of dividends distributed for a specified period. It differs from yield, which is a measure of the income actually earned by the Fund's investments, and from total return, which is a measure of the income actually earned by, plus the effect of any realized and unrealized appreciation or depreciation of, such investments during the period. Distribution rate is, therefore, not intended to be a complete measure of performance. Distribution rate may sometimes be greater than yield since, for instance, it may include gains from the sale of options or other short-term and possibly long-term gains (which may be non-recurring) and may not include the effect of amortization of bond premiums. As reflected under "Investment Objectives and Policies--Additional Investment Information," option writing can limit the potential for capital appreciation. Class A shares of each Fund other than the Cash Reserves Fund are sold at net asset value plus a maximum sales charge of 4.5% of the offering price (3.5% for the Adjustable Rate and Short-Intermediate Government Funds). While the maximum sales charge is normally reflected in a Fund's Class A performance figures, certain total return calculations may not include such charge and those results would be reduced if it were included. Class B shares and Class C shares are sold at net asset value. Redemptions of Class B shares within the first six years after purchase may be subject to a contingent deferred sales charge that ranges from 4% during the first year to 0% after six years. Average annual total return figures do, and total return figures may, include the effect of the contingent deferred sales charge for the Class B shares that may be imposed at the end of the period in question. Performance figures for the Class B shares not including the effect of the applicable contingent deferred sales charge would be reduced if it were included. Each Fund's returns and net asset value will fluctuate and shares of a Fund are redeemable by an investor at the then current net asset value, which may be more or less than original cost, except that the Cash Reserves Fund seeks to maintain a net asset value of $1.00 per share. Redemption of Class B shares may be subject to a contingent deferred sales charge as described above. Additional information concerning each Fund's performance appears in the Statement of Additional Information. Additional information about each Fund's performance also appears in its Annual Report to Shareholders, which is available without charge from the applicable Fund. CAPITAL STRUCTURE The Adjustable Rate, Diversified, Government, High Yield and Income and Capital Funds are open-end management investment companies, organized as separate business trusts under the laws of Massachusetts. The Adjustable Rate Fund was organized as a business trust under the laws of Massachusetts on May 28, 1987. Prior to January 1, 1992, the Fund was known as "Kemper Enhanced Government Income Fund." The Diversified Fund was organized as a business trust under the laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund pursuant to a reorganization succeeded to the assets and liabilities of Kemper Option Income Fund, Inc., a Maryland corporation organized in 1977. Prior to February 1, 1989, the Fund was known as "Kemper Option Income Fund." The Government Fund was organized as a business trust under the laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund pursuant to a reorganization succeeded to the assets and liabilities of Kemper U.S. Government Securities Fund, Inc., a Maryland corporation (formerly known as Kemper Fund For Government Guaranteed Securities, Inc.) organized in 1980 as successor to a Pennsylvania business trust organized in 1977. The High Yield Fund was organized as a business trust under the laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund pursuant to a reorganization succeeded to the assets and liabilities of Kemper High Yield Fund, Inc., a Maryland corporation organized in 1977. The Income and Capital Fund was organized as a business trust under the laws of Massachusetts on October 24, 1985. Effective January 31, 1986, that Fund pursuant to a reorganization succeeded to 54 62 the assets and liabilities of Kemper Income and Capital Preservation Fund, Inc., a Maryland corporation organized in 1972. The Cash Reserves, Mortgage and Short-Intermediate Government Funds are separate series, or "Portfolios", of Kemper Portfolios ("KP"), an open-end management investment company organized as a business trust under the laws of Massachusetts on August 9, 1985. Effective November 20, 1987, KP pursuant to a reorganization succeeded to the assets and liabilities of Investment Portfolios, Inc., a Maryland corporation organized on March 26, 1982. After such reorganization, KP was known as Investment Portfolios until February 1, 1991, and thereafter until May 28, 1994, as Kemper Investment Portfolios, when the name of KP became "Kemper Portfolios." Until December 1, 1989, the Mortgage Fund was known as the "Government Plus Portfolio" and prior to May 28, 1994, the Mortgage Fund was known as the "Government Portfolio." Prior to May 28, 1994, the Cash Reserves Fund was known as the Money Market Portfolio, and the Short-Intermediate Government Fund was known as the Short-Intermediate Government Portfolio. Each Fund may issue an unlimited number of shares of beneficial interest in one or more series or "Portfolios," all having no par value, which may be divided by the Board of Trustees into classes of shares. While only shares of a single Portfolio are presently being offered by each Fund (other than those Funds that are Portfolios of Kemper Portfolios), the Board of Trustees of each Fund may authorize the issuance of additional classes and additional Portfolios if deemed desirable, each with its own investment objective, policies and restrictions. Since the Funds may offer multiple Portfolios, each is known as a "series company." Shares of a Portfolio have equal noncumulative voting rights and equal rights with respect to dividends, assets and liquidation of such Portfolio and are subject to any preferences, rights or privileges of any classes of shares of the Portfolio. Currently, each Fund offers four classes of shares. These are Class A, Class B and Class C shares, as well as Class I shares, which are available for purchase exclusively by the following investors: (a) tax-exempt retirement plans of KFS and its affiliates; and (b) the following investment advisory clients of KFS and its investment advisory affiliates that invest at least $1 million in a Fund: (1) unaffiliated benefit plans, such as qualified retirement plans (other than individual retirement accounts and self-directed retirement plans); (2) unaffiliated banks and insurance companies purchasing for their own accounts; and (3) endowment funds of unaffiliated non-profit organizations. Shares of each Fund have equal noncumulative voting rights except that Class B and Class C shares have separate and exclusive voting rights with respect to each Fund's Rule 12b-1 Plan. Shares of each class also have equal rights with respect to dividends, assets and liquidation of such Fund subject to any preferences (such as resulting from different Rule 12b-1 distribution fees), rights or privileges of any classes of shares of a Fund. Shares of each Fund are fully paid and nonassessable when issued, are transferable without restriction and have no preemptive or conversion rights. The Funds are not required to hold annual shareholder meetings and do not intend to do so. However, they will hold special meetings as required or deemed desirable for such purposes as electing trustees, changing fundamental policies or approving an investment management agreement. Subject to the Agreement and Declaration of Trust of each Fund, shareholders may remove trustees. If shares of more than one Portfolio for any Fund are outstanding, shareholders will vote by Portfolio and not in the aggregate or by class except when voting in the aggregate is required under the 1940 Act, such as for the election of trustees, or when voting by class is appropriate. 55 63 APPENDIX A--PORTFOLIO COMPOSITION OF HIGH YIELD BONDS The table below reflects the composition by quality rating of the portfolios of the Diversified and High Yield Funds. Percentages for each Fund reflect the net asset weighted average of the percentage for each category on the last day of each month in the twelve month period ended October 31, 1995. The table reflects the percentage of total net assets represented by fixed income securities rated by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), by unrated fixed income securities and by other assets. The percentage shown reflects the higher of the Moody's or S&P rating. U.S. Government securities, whether or not rated, are reflected as Aaa and AAA (highest quality). Cash equivalents include money market instruments, repurchase agreements, net payables and receivables, treasuries with a maturity of less than one year and cash. Other assets include options, financial futures contracts and equity securities. As noted under "Investment Objectives, Policies and Risk Factors" the Diversified and High Yield Funds invest in high yielding, fixed income securities without relying upon published ratings. The allocations in the table are not necessarily representative of the composition of the portfolios at other times. Portfolio composition will change over time. END OF THE MONTH COMPOSITION OF PORTFOLIO BY QUALITY AS AN AVERAGE PERCENTAGE OF NET ASSETS (NOVEMBER 1, 1994-OCTOBER 31, 1995)
HIGH MOODY'S/S&P RATING DIVERSIFIED YIELD GENERAL DEFINITION OF CATEGORY FUND FUND BOND QUALITY - ------------------------------- ---- ---- ----------------------------- Cash Equivalents............... 12% 6% Aaa/AAA........................ 44 2 Highest quality Aa/AA.......................... 1 0 High quality A/A............................ 0 0 Upper medium grade Baa/BBB........................ 3 0 Medium grade Ba/BB.......................... 11 21 Some speculative elements B/B............................ 18 60 Speculative Caa/CCC........................ 2 6 More speculative Ca/CC, C/C..................... 0 0 Very speculative D.............................. 0 0 In default Not Rated, Not in Default...... 6 1 Not Rated, In Default.......... 1 1 Other Assets................... 2 3 ---- ---- Net Assets..................... 100% 100%
The description of each bond quality category set forth in the table above is intended to be a general guide and not a definitive statement as to how Moody's and S&P define such rating category. A more complete description of the rating categories is set forth under "Appendix B--Ratings of Investments." The ratings of Moody's and S&P represent their opinions as to the quality of the securities that they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality. 56 64 APPENDIX B--RATINGS OF INVESTMENTS COMMERCIAL PAPER RATINGS Commercial paper rated by Standard & Poor's Corporation ("S&P") has the following characteristics: Liquidity ratios are adequate to meet cash requirements. Long-term senior debt is rated "A" or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow have an upward trend with allowance made for unusual circumstances. Typically, the issuer's industry is well established and the issuer has a strong position within the industry. The reliability and quality of management are unquestioned. Relative strength or weakness of the above factors determine whether the issuer's commercial paper is rated A-1 or A-2. The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings assigned by Moody's Investors Service, Inc. ("Moody's"). Among the factors considered by it in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Relative strength or weakness of the above factors determines whether the issuer's commercial paper is rated Prime-1 or 2. CORPORATE BONDS STANDARD & POOR'S CORPORATION BOND RATINGS AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. A. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. CI. The rating CI is reserved for income bonds on which no interest is being paid. D. Debt rated D is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. BOND RATINGS AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins 57 65 of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. BAA. Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. BA. Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B. Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. 58 66 PROSPECTUS KEMPER FIXED INCOME FUNDS DECEMBER 1, 1995 -------------- KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND KEMPER CASH RESERVES FUND KEMPER DIVERSIFIED INCOME FUND KEMPER U.S. GOVERNMENT SECURITIES FUND KEMPER HIGH YIELD FUND KEMPER INCOME AND CAPITAL PRESERVATION FUND KEMPER U.S. MORTGAGE FUND KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND -------------- KEMPER [KEMPER LOGO] [KEMPER LOGO] INVESTMENT MANAGER Kemper Financial Services, Inc. PRINCIPAL UNDERWRITER: Kemper Distributors, Inc. 120 South LaSalle Street Chicago, IL 60603 KFIF-1 (12/95) [RECYCLED PAPER LOGO] 67 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND CROSS-REFERENCE SHEET BETWEEN ITEMS ENUMERATED IN PART B OF FORM N-1A AND STATEMENT OF ADDITIONAL INFORMATION
ITEM NUMBER LOCATION IN STATEMENT OF OF FORM N-1A ADDITIONAL INFORMATION ------------ --------------------------------- 10. Cover Page............................... Cover Page 11. Table of Contents........................ Table of Contents 12. General Information and History.......... Inapplicable 13. Investment Objectives and Policies....... Investment Restrictions; Investment Policies and Techniques 14. Management of the Fund................... Investment Manager and Underwriter; Officers and Trustees 15. Control Persons and Principal Holders of Securities............................... Officers and Trustees 16. Investment Advisory and Other Services... Investment Manager and Underwriter 17. Brokerage Allocation and Other Practices................................ Portfolio Transactions 18. Capital Stock and Other Securities....... Dividends and Taxes; Shareholder Rights 19. Purchase, Redemption and Pricing of Securities Being Offered................. Purchase and Redemption of Shares 20. Tax Status............................... Dividends and Taxes 21. Underwriters............................. Investment Manager and Underwriter 22. Calculation of Performance Data.......... Performance 23. Financial Statements..................... Financial Statements
68 STATEMENT OF ADDITIONAL INFORMATION DECEMBER 1, 1995 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND (THE "ADJUSTABLE RATE FUND") KEMPER CASH RESERVES FUND (THE "CASH RESERVES FUND") KEMPER DIVERSIFIED INCOME FUND (THE "DIVERSIFIED FUND") KEMPER U.S. GOVERNMENT SECURITIES FUND (THE "GOVERNMENT FUND") KEMPER HIGH YIELD FUND (THE "HIGH YIELD FUND") KEMPER INCOME AND CAPITAL PRESERVATION FUND (THE "INCOME AND CAPITAL FUND") KEMPER U.S. MORTGAGE FUND (THE "MORTGAGE FUND") KEMPER SHORT-INTERMEDIATE GOVERNMENT FUND (THE "SHORT-INTERMEDIATE GOVERNMENT FUND") 120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603 1-800-621-1048 This Statement of Additional Information is not a prospectus. It is the combined Statement of Additional Information for each of the funds (the "Funds") listed above. It should be read in conjunction with the combined prospectus of the Funds dated December 1, 1995. The prospectus may be obtained without charge from the Funds. ------------------ TABLE OF CONTENTS
Page ----- Investment Restrictions................................................. B-1 Investment Policies and Techniques...................................... B-12 Portfolio Transactions.................................................. B-20 Investment Manager and Underwriter...................................... B-21 Purchase and Redemption of Shares....................................... B-28 Dividends and Taxes..................................................... B-29 Performance............................................................. B-31 Officers and Trustees................................................... B-47 Shareholder Rights...................................................... B-52
The financial statements appearing in each Fund's 1995 Annual Report to Shareholders (including for Kemper Portfolios, the period from August 1, 1995 to September 30, 1995) are incorporated herein by reference. The Annual Report for the Fund for which this Statement of Additional Information is requested accompanies this document. KFIF-13 12/95 (LOGO)printed on recycled paper 69 INVESTMENT RESTRICTIONS Each Fund has adopted certain fundamental investment restrictions which, together with the investment objective and fundamental policies of such Fund, cannot be changed without approval of a majority of its outstanding voting shares. As defined in the Investment Company Act of 1940, this means the lesser of the vote of (a) 67% of the shares of the Fund present at a meeting where more than 50% of the outstanding shares are present in person or by proxy or (b) more than 50% of the outstanding shares of the Fund. THE ADJUSTABLE RATE FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities) if, as a result, more than 5% of the total value of the Fund's assets would be invested in securities of that issuer. (2) Purchase more than 10% of any class of voting securities of any issuer. (3) Make loans to others provided that the Fund may purchase debt obligations or repurchase agreements and it may lend its securities in accordance with its investment objective and policies. (4) Borrow money except as a temporary measure for extraordinary or emergency purposes, and then only in an amount up to one-third of the value of its total assets, in order to meet redemption requests without immediately selling any portfolio securities. If, for any reason, the current value of the Fund's total assets falls below an amount equal to three times the amount of its indebtedness from money borrowed, the Fund will, within three days (not including Sundays and holidays), reduce its indebtedness to the extent necessary. The Fund will not borrow for leverage purposes and will not purchase securities or make investments while borrowings are outstanding. (5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its total assets and then only to secure borrowings permitted by restriction 4 above. (The collateral arrangements with respect to options, financial futures and delayed delivery transactions and any margin payments in connection therewith are not deemed to be pledges or other encumbrances.) (6) Purchase securities on margin, except to obtain such short-term credits as may be necessary for the clearance of transactions; however, the Fund may make margin deposits in connection with options and financial futures transactions. (7) Make short sales of securities or maintain a short position for the account of the Fund unless at all times when a short position is open it owns an equal amount of such securities or owns securities which, without payment of any further consideration, are convertible into or exchangeable for securities of the same issue as, and equal in amount to, the securities sold short and unless not more than 10% of the Fund's total assets is held as collateral for such sales at any one time. (8) Write or sell put or call options, combinations thereof or similar options on more than 25% of the Fund's net assets; nor may the Fund purchase put or call options if more than 5% of the Fund's net assets would be invested in premiums on put and call options, combinations thereof or similar options; however, the Fund may buy or sell options on financial futures contracts. (9) Purchase securities (other than securities of the U.S. Government, its agencies or instrumentalities including collateralized obligations thereof) if as a result of such purchase 25% or more of the Fund's total assets would be invested in any one industry. (10) Invest in commodities or commodity futures contracts, although it may buy or sell financial futures contracts and options on such contracts; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. (11) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. B-1 70 (12) Issue senior securities except as permitted under the Investment Company Act of 1940. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 4 in the latest fiscal year and it has no present intention of borrowing during the current year. The Fund has adopted the following non-fundamental restrictions, which may be changed by the Board of Trustees without shareholder approval. The Adjustable Rate Fund may not: (i) Invest more than 5% of the Fund's total assets in securities of issuers (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities including collateralized obligations thereof) which with their predecessors have a record of less than three years continuous operations. (ii) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of the Fund or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together own more than 5% of the securities of such issuer. (iii) Invest for the purpose of exercising control or management of another issuer. (iv) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (v) Invest more than 15% of its net assets in illiquid securities. (vi) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (vii) Invest in oil, gas, and other mineral leases. (viii) Purchase or sell real property (including limited partnership interests but excluding readily marketable interests in real estate investment trusts and readily marketable securities of companies which invest in real estate). (ix) Invest more than 5% of its total assets in restricted securities, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees, provided that the total amount of Fund assets invested in restricted securities and securities of issuers which with their predecessors have a record of less than three years continuous operation will not exceed 15% of total assets. (x) Invest more than 10% of its total assets in securities of real estate investment trusts. THE CASH RESERVES FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) Purchase securities or make investments other than in accordance with its investment objective and policies. (2) Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities) if, as a result, more than 5% of the value of the Fund's net assets would be invested in securities of that issuer. (3) Purchase more than 10% of any class of securities of any issuer. All debt securities and all preferred stocks are each considered as one class. (4) Invest more than 5% of the Fund's total assets in securities of issuers (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities) which with their predecessors have a record of less than three years continuous operation. (5) Enter into repurchase agreements if more than 10% of the Fund's net assets valued at the time of the transaction would be subject to repurchase agreements maturing in more than seven days. B-2 71 (6) Make loans to others (except through the purchase of debt obligations or repurchase agreements or by lending its portfolio securities in accordance with its investment objective and policies). (7) Borrow money except as a temporary measure for extraordinary or emergency purposes and then only in an amount up to one-third of the value of its total assets (any such borrowings under this section will not be collateralized). If, for any reason, the current value of the Fund's total assets falls below an amount equal to three times the amount of its indebtedness from money borrowed, the Fund will, within three business days, reduce its indebtedness to the extent necessary. [The Fund will not borrow for leverage purposes, and while borrowings are outstanding securities will not be purchased.] (8) Concentrate more than 25% of the Fund's net assets in any one industry; provided, however, that the Fund intends, under normal conditions, to invest more than 25% of its net assets in instruments issued by banks in accordance with its investment objective and policies. (9) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of Kemper Portfolios or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together they own more than 5% of the securities of such issuer. (10) Invest more than 5% of the Fund's total assets in securities restricted as to disposition under the federal securities laws (except commercial paper issued under Section 4(2) of the Securities Act of 1933) and no more than 10% of its assets will be invested in securities which are considered illiquid. [Repurchase agreements maturing in more than 7 days are considered illiquid for purposes of this restriction.] (11) Invest for the purpose of exercising control or management of another issuer. (12) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (13) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. (14) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. (15) Issue senior securities as defined in the Investment Company Act of 1940. (16) Make short sales of securities, or purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions. (17) Engage in put or call option transactions. (18) Invest in commodities or commodity futures contracts; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund has adopted the following non-fundamental restrictions, which may be changed by the Board of Trustees without shareholder approval. The Cash Reserves Fund may not: (i) Invest in oil, gas or other mineral exploration or development programs. (ii) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (iii) Invest in limited partnership interests in real estate. B-3 72 THE DIVERSIFIED FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) With respect to 75% of the Fund's total assets, purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, (a) more than 5% of the Fund's total assets would be invested in securities of that issuer, or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. (2) Lend money or securities, provided that the making of time or demand deposits with banks and the purchase of debt securities such as bonds, debentures, commercial paper, repurchase agreements and short-term obligations in accordance with its objective and policies are not prohibited and the Fund may lend its portfolio securities as described in the prospectus. (3) Borrow money except for temporary or emergency purposes (but not for the purpose of purchase of investments) and then only in an amount not to exceed 5% of the Fund's net assets; or pledge the Fund's securities or receivables or transfer or assign or otherwise encumber them in an amount exceeding the amount of the borrowing secured thereby. (4) Engage in margin purchases except to obtain such short-term credits as may be necessary for the clearance of transactions; however, the Fund may make margin deposits in connection with financial futures and options transactions; nor may the Fund make short sales of securities or maintain a short position unless, at all times when a short position is open, the Fund owns an equal amount of such securities or securities convertible into or exchangeable for securities, without payment of additional consideration, which are equal in amount to and of the same issue as the securities sold short and such securities are not subject to outstanding call options, and unless not more than 10% of the Fund's net assets is held as collateral for such sales at any one time. (Management does not intend to make such sales except for the purpose of deferring realization of gain or loss for federal income tax purposes.) (5) Write (sell) put or call options, combinations thereof or similar options; nor may it purchase put or call options if more than 5% of the Fund's net assets would be invested in premiums on the purchase of put and call options, combinations thereof or similar options; except that the Fund may write covered call options with respect to its portfolio securities or securities indices, or write secured put options; and the Fund may enter into closing transactions with respect to such options, and may buy or sell options on financial futures contracts. (6) Concentrate more than 25% of the value of its assets in any one industry. Water, communications, electric and gas utilities shall each be considered a separate industry. (7) Invest in commodities or commodity futures contracts, although it may buy or sell financial futures contracts and options of such contracts, and engage in foreign currency transactions; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. (8) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. (9) Issue senior securities except as permitted under the Investment Company Act of 1940. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 3 in the latest fiscal year, though it may borrow in the future as permitted by that investment restriction. The Fund has adopted the following non-fundamental restrictions, which may be changed by the Board of Trustees without shareholder approval. The Diversified Fund may not: (i) Invest more than 5% of the Fund's total assets in securities of issuers which with their predecessors have a record of less than three years continuous operation, and equity securities of issuers which are not readily marketable. B-4 73 (ii) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of the Fund or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together own more than 5% of the securities of such issuer. (iii) Invest for the purpose of exercising control or management of another issuer. (iv) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (v) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets, unless immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company would be owned by the Fund, (ii) 5% of the Fund's total assets would be invested in any one such company, and (iii) 10% of the Fund's total assets would be invested in such securities. (vi) Invest more than 15% of its net assets in illiquid securities. (vii) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (viii) Invest in oil, gas, and other mineral leases. (ix) Purchase or sell real property (including limited partnership interests but excluding readily marketable interests in real estate investment trusts and readily marketable securities of companies which invest in real estate). (x) Invest more than 5% of its total assets in restricted securities, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees, provided that the total amount of Fund assets invested in restricted securities and securities of issuers which with their predecessors have a record of less than three years continuous operation will not exceed 15% of total assets. (xi) Invest more than 10% of its total assets on securities of real estate investment assets. THE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) Purchase any securities other than obligations issued or guaranteed by the United States Government or its agencies, some of which may be subject to repurchase agreements, except that the Fund may engage in options and financial futures transactions. (2) Purchase securities of any issuer (other than obligations of, or guaranteed by, the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the Fund's total assets would be invested in securities of that issuer. (3) Write or sell put or call options, combinations thereof or similar options on more than 25% of the Fund's net assets; nor may it purchase put or call options if more than 5% of the Fund's net assets would be invested in premiums on put and call options, combinations thereof or similar options; however, the Fund may buy or sell options on financial futures contracts. (4) Invest in commodities or commodity futures contracts, although it may buy or sell financial futures contracts and options on such contracts; or in real estate (including real estate limited partnerships), although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate including real estate investment trusts. (5) Borrow money, except from banks for temporary purposes and then in amounts not in excess of 5% of the value of the Fund's assets at the time of such borrowing; or mortgage, pledge or hypothecate any assets except in connection with any such borrowing and in amounts not in excess of 7 1/2% of the value of the Fund's assets at the B-5 74 time of such borrowing. (This borrowing provision is not for investment leverage, but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests where the liquidation of portfolio securities is deemed to be disadvantageous or inconvenient.) Borrowings may take the form of a sale of portfolio securities accompanied by a simultaneous agreement as to their repurchase. (6) Make loans, except that the Fund may purchase or hold debt obligations in accordance with the investment restrictions set forth in paragraph 1 above and may enter into repurchase agreements for such securities, and may lend its portfolio securities against collateral consisting of cash, or securities issued or guaranteed by the U.S. Government or its agencies, which is equal at all times to at least 100% of the value of the securities loaned. (7) Act as an underwriter of securities, except to the extent the Fund may be deemed to be an underwriter in connection with the disposition of portfolio securities. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 5 in the latest fiscal year and it has no present intention of borrowing during the current year. The Government Fund has adopted the following non-fundamental restriction which may be changed by the Board of Trustees without shareholder approval. The Government Fund may not: (1) Invest more than 15% of its net assets in illiquid securities. THE HIGH YIELD FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) With respect to 75% of the Fund's total assets, purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, (a) more than 5% of the Fund's total assets would be invested in securities of that issuer, or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer. (2) Lend money or securities, provided that the making of time or demand deposits with banks and the purchase of debt securities such as bonds, debentures, commercial paper, repurchase agreements and short-term obligations in accordance with its objectives and policies are not prohibited and it may lend its securities as discussed under "Investment Objectives and Policies -- Additional Investment Information" in the prospectus. (3) Borrow money except for temporary or emergency purposes (but not for the purpose of purchase of investments) and then only in an amount not to exceed 5% of the Fund's net assets; or pledge the Fund's securities or receivables or transfer or assign or otherwise encumber them in an amount exceeding the amount of the borrowing secured thereby. (4) Invest more than 25% of the Fund's total assets in fixed income securities which are payable in currencies other than United States Dollars. (Investments in such securities may involve risks which differ from investments in securities of U.S. issuers, such as future political and economic developments, the possible imposition of governmental restrictions and taxes, as well as currency fluctuation.) (5) Engage in margin purchases except to obtain such short-term credits as may be necessary for the clearance of transactions; however, the Fund may make margin deposits in connection with financial futures and options transactions; nor may the Fund make short sales of securities or maintain a short position unless, at all times when a short position is open, the Fund owns an equal amount of such securities or securities convertible into or exchangeable for securities, without payment of additional consideration, which are equal in amount to and of the same issue as the securities sold short and such securities are not subject to outstanding call options, and unless not more than 10% of the Fund's net assets is held as collateral for such sales at any one time. (Management does not intend to make such sales except for the purpose of deferring realization of gain or loss for federal income tax purposes.) B-6 75 (6) Write or sell put or call options, combinations thereof or similar options on more than 25% of the Fund's net assets; nor may it purchase put or call options if more than 5% of the Fund's net assets would be invested in premiums on put and call options, combinations thereof or similar options; however, the Fund may buy or sell options on financial futures contracts. (7) Concentrate more than 25% of the value of its assets in any one industry. Water, communications, electric and gas utilities shall each be considered a separate industry. (8) Invest in commodities or commodity futures contracts, although it may buy or sell financial futures contracts and options on such contracts, and engage in foreign currency transactions; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. (9) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. (10) Issue senior securities except as permitted under the Investment Company Act of 1940. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 3 in the latest fiscal year; though it may borrow in the future as permitted by that investment restriction. The Fund has adopted the following non-fundamental restrictions, which may be changed by the Board of Trustees without shareholder approval. The High Yield Fund may not: (i) Invest more than 5% of the Fund's total assets in securities of issuers which with their predecessors have a record of less than three years continuous operation, and equity securities of issuers which are not readily marketable. (ii) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of the Fund or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together own more than 5% of the securities of such issuer. (iii) Invest for the purpose of exercising control or management of another issuer. (iv) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (v) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets, unless immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company would be owned by the Fund, (ii) 5% of the Fund's total assets would be invested in any one such company, and (iii) 10% of the Fund's total assets would be invested in such securities. (vi) Invest more than 15% of its net assets in illiquid securities. (vii) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (viii) Invest in oil, gas, and other mineral leases. (ix) Purchase or sell real property (including limited partnership interests, but excluding readily marketable interests in real estate investment trusts and readily marketable securities of companies which invest in real estate). (x) Invest more than 5% of its total assets in restricted securities, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees, provided that the total amount of Fund assets invested in restricted B-7 76 securities and securities of issuers which with their predecessors have a record of less than three years continuous operation will not exceed 15% of total assets. (xi) Invest more than 10% of its total assets in securities of real estate investment trusts. THE INCOME AND CAPITAL FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) Invest in securities other than those specified under "Investment Objectives and Policies" in the prospectus. This restriction does not prevent the Fund from holding common stocks or other corporate securities not qualifying as debt obligations if such securities are acquired through conversion provisions of debt securities or from corporate reorganizations. Nor does it prevent the holding of debt securities whose quality rating is reduced by the rating services below those specified under "Investment Objectives and Policies" after purchase by the Fund. (2) Purchase securities of any issuer (other than obligations of, or guaranteed by, the United States or Canadian governments, their agencies or instrumentalities) if, as a result, more than 5% of the Fund's total assets would be invested in securities of that issuer. (3) Purchase more than 10% of any class of securities of any issuer. All debt securities and all preferred stocks are each considered as one class. (4) Lend money or securities, provided that the making of time or demand deposits with banks and the purchase of debt securities such as bonds, debentures, commercial paper, repurchase agreements and short-term obligations in accordance with its objective and policies are not prohibited and the Fund may lend its portfolio securities as described under "Investment Objectives and Policies -- Additional Investment Information" in the prospectus. (5) Borrow money except for temporary or emergency purposes (but not for the purpose of purchase of investments) and then only in an amount not to exceed 5% of the Fund's net assets; or pledge the Fund's securities or receivables or transfer or assign or otherwise encumber them in an amount exceeding the amount of the borrowing secured thereby. (6) Make short sales of securities, or purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions; however, the Fund may make margin deposits in connection with financial futures and options transactions. (7) Write or sell put or call options, combinations thereof or similar options on more than 25% of the Fund's net assets; nor may it purchase put or call options if more than 5% of the Fund's net assets would be invested in premiums on put and call options, combinations thereof or similar options; however, the Fund may buy or sell options on financial futures contracts. (8) Concentrate more than 25% of the value of its assets in any one industry. Water, communications, electric and gas utilities shall each be considered a separate industry. (9) Invest in commodities or commodity futures contracts, although it may buy or sell financial futures contracts and options on such contracts, and engage in foreign currency transactions; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. (10) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. (11) Issue senior securities except as permitted under the Investment Company Act of 1940. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 5 in the latest fiscal year and it has no present intention of borrowing during the current year. The Fund has adopted the following non-fundamental restrictions, B-8 77 which may be changed by the Board of Trustees without shareholder approval. The Income and Capital Fund may not: (i) Invest more than 5% of the Fund's total assets in securities of issuers which with their predecessors have a record of less than three years continuous operation, and equity securities of issuers which are not readily marketable. (ii) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of the Fund or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together own more than 5% of the securities of such issuer. (iii) Invest for the purpose of exercising control or management of another issuer. (iv) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (v) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. (vi) Invest more than 15% of its net assets in illiquid securities. (vii) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (viii) Invest in oil, gas, and other mineral leases. (ix) Purchase or sell real property (including limited partnership interests but excluding readily marketable interests in real estate investment trusts and readily marketable securities of companies which invest in real estate). (x) Invest more than 5% of its total assets in restricted securities, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees, provided that the total amount of Fund assets invested in restricted securities and securities of issuers which with their predecessors have a record of less than three years continuous operation will not exceed 15% of total assets. (xi) Invest more than 10% of its total assets in securities of real estate investment assets. THE MORTGAGE FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) Purchase securities or make investments other than in accordance with its investment objective and policies. (2) Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities) if, as a result, more than 5% of the value of the Fund's net assets would be invested in securities of that issuer. (3) Purchase more than 10% of any class of securities of any issuer. All debt securities and all preferred stocks are each considered as one class. (4) Invest more than 5% of the Fund's total assets in securities of issuers (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities) which with their predecessors have a record of less than three years continuous operation. (5) Enter into repurchase agreements if more than 10% of the Fund's net assets valued at the time of the transaction would be subject to repurchase agreements maturing in more than seven days. B-9 78 (6) Make loans to others (except through the purchase of debt obligations or repurchase agreements or by lending its portfolio securities in accordance with its investment objective and policies). (7) Borrow money except as a temporary measure for extraordinary or emergency purposes and then only in an amount up to one-third of the value of its total assets (any such borrowings under this section will not be collateralized). If, for any reason, the current value of the Fund's total assets falls below an amount equal to three times the amount of its indebtedness from money borrowed, the Fund will, within three business days, reduce its indebtedness to the extent necessary. [The Fund will not borrow for leverage purposes, and while borrowings are outstanding securities will not be purchased.] (8) Concentrate more than 25% of the Fund's net assets in any one industry. (9) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of Kemper Portfolios or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together they own more than 5% of the securities of such issuer. (10) Invest more than 5% of the Fund's total assets in securities restricted as to disposition under the federal securities laws (except commercial paper issued under Section 4(2) of the Securities Act of 1933) and no more than 10% of its assets will be invested in securities which are considered illiquid. [Repurchase agreements maturing in more than 7 days are considered illiquid for purposes of this restriction.] (11) Invest for the purpose of exercising control or management of another issuer. (12) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (13) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. (14) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. (15) Issue senior securities as defined in the Investment Company Act of 1940. (16) Make short sales of securities, or purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions; however, the Fund may make margin deposits in connection with financial futures and option transactions. (17) Write (sell) put or call options, combinations thereof or similar options except that the Fund may write covered call options on up to 100% of the Fund's net assets and may write secured put options on up to 50% of the Fund's net assets; nor may the Fund purchase put or call options if more than 5% of the Fund's net assets would be invested in premiums on put and call options, combinations thereof or similar options; however, the Fund may buy or sell options on financial futures contracts. (18) Invest in commodities or commodity futures contracts although the Fund may buy or sell financial futures contracts and options on such contracts; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or total assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 7 in the latest fiscal year, and it has no present intention of borrowing during the current year. The Fund has adopted the following non-fundamental restrictions, which may be changed by the Board of Trustees without shareholder approval. The Mortgage Fund may not: (i) Invest in oil, gas or other mineral exploration or development programs. B-10 79 (ii) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (iii) Invest in limited partnership interests in real estate. THE SHORT-INTERMEDIATE GOVERNMENT FUND MAY NOT, AS A FUNDAMENTAL POLICY: (1) Purchase securities or make investments other than in accordance with its investment objective and policies. (2) Purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities) if, as a result, more than 5% of the value of the Fund's net assets would be invested in securities of that issuer. (3) Purchase more than 10% of any class of securities of any issuer. All debt securities and all preferred stocks are each considered as one class. (4) Make loans to others (except through the purchase of debt obligations or repurchase agreements or by lending its portfolio securities in accordance with its investment objective and policies). (5) Borrow money except as a temporary measure for extraordinary or emergency purposes and then only in an amount up to one-third of the value of its total assets (any such borrowings under this section will not be collateralized). If, for any reason, the current value of the Fund's total assets falls below an amount equal to three times the amount of its indebtedness from money borrowed, the Fund will, within three business days, reduce its indebtedness to the extent necessary. [The Fund will not borrow for leverage purposes, and while borrowings are outstanding securities will not be purchased.] (6) Concentrate more than 10% of the Fund's net assets in any one industry. (7) Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter, under the federal securities laws, in connection with the disposition of portfolio securities. (8) Issue senior securities except as permitted under the Investment Company Act of 1940. (9) Make short sales of securities, or purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions; however, the Fund may make margin deposits in connection with financial futures and option transactions. (10) Engage in put or call option transactions; however, the Fund may write (sell) put or call options on up to 25% of its net assets and may purchase put or call options if no more than 5% of its net assets would be invested in premiums on put and call options, combinations thereof or similar options; and the Fund may buy and sell options on financial futures contracts. (11) Invest in commodities or commodity futures contracts, although it may buy or sell financial futures contracts and options on such contracts; or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. If a percentage restriction is adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or net assets will not be considered a violation. The Fund did not borrow money as permitted by investment restriction number 5 in the latest fiscal year and it has no present intention of borrowing during the current year. The Fund has adopted the following non-fundamental restrictions, which may be changed by the Board of Trustees without shareholder approval. The Short-Intermediate Government Fund may not: (i) Invest more than 5% of the Fund's total assets in securities of issuers (other than obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities, including collateralized obligations thereof) which with their predecessors have a record of less than three years continuous operation. B-11 80 (ii) Purchase or retain the securities of any issuer if any of the officers, trustees or directors of Kemper Portfolios or its investment adviser owns beneficially more than 1/2 of 1% of the securities of such issuer and together they own more than 5% of the securities of such issuer. (iii) Invest for the purpose of exercising control or management of another issuer. (iv) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (v) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. This restriction does not apply to the Fund to the extent that certain collateralized obligations may be considered to be issued by an "investment company" (see "Investment Policies and Techniques --Collateralized Obligations"). (vi) Invest more than 15% of its net assets in illiquid securities. (vii) Invest in oil, gas or other mineral exploration or development programs. (viii) Invest in warrants if more than 5% of the Fund's net assets would be invested in warrants. Included within that amount, but not to exceed 2% of the Fund's net assets, may be warrants not listed on the New York or American Stock Exchanges. Warrants acquired in units or attached to securities may be deemed to be without value for such purposes. (ix) Invest in limited partnership interests in real estate. (x) Invest more than 5% of its total assets in restricted securities, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that have been determined to be liquid pursuant to procedures adopted by the Board of Trustees, provided that the total amount of Fund assets invested in restricted securities and securities of issuers which with their predecessors have a record of less than three years continuous operation will not exceed 15% of total assets. (xi) Invest more than 10% of its total assets in securities of real estate investment trusts. INVESTMENT POLICIES AND TECHNIQUES GENERAL. Each Fund may engage in options and financial futures and other derivatives transactions in accordance with its respective investment objectives and policies. Each such Fund intends to engage in such transactions if it appears to the investment manager to be advantageous to do so in order to pursue its investment objective and also to hedge against the effects of market risks but not for speculative purposes. The Cash Reserves Fund does not engage in options and futures transactions. The use of futures and options, and possible benefits and attendant risks, are discussed below along with information concerning other investment policies and techniques. OPTIONS ON SECURITIES. A Fund (other than the Cash Reserves Fund) may write (sell) "covered" call options on securities as long as it owns the underlying securities subject to the option or an option to purchase the same underlying securities, having an exercise price equal to or less than the exercise price of the "covered" option, or will establish and maintain for the term of the option a segregated account consisting of cash, U.S. Government Securities or other liquid high-grade debt obligations ("eligible securities") having a value at least equal to the fluctuating market value of the optioned securities. A Fund may write "covered" put options provided that, as long as the Fund is obligated as a writer of a put option, the Fund will own an option to sell the underlying securities subject to the option, having an exercise price equal to or greater than the exercise price of the "covered" option, or it will deposit and maintain in a segregated account eligible securities having a value equal to or greater than the exercise price of the option. A call option gives the purchaser the right to buy, and the writer the obligation to sell, the underlying security at the exercise price during 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 B-12 81 security, the relationship of the exercise price to such market price, the price volatility of the underlying security, the option period, supply and demand and interest rates. The Funds may write or purchase spread options, which are options for which the exercise price may be a fixed dollar spread or yield spread between the security underlying the option and another security that is used as a bench mark. The exercise price of an option may be below, equal to or above the current market value of the underlying security at the time the option is written. The buyer of a put who also owns the related security is protected by ownership of a put option against any decline in that security's price below the exercise price less the amount paid for the option. The ability to purchase put options allows a Fund to protect capital gains in an appreciated security it owns, without being required to actually sell that security. At times a Fund would like to establish a position in a security upon which call options are available. By purchasing a call option, a Fund is able to fix the cost of acquiring the security, this being the cost of the call plus the exercise price of the option. This procedure also provides some protection from an unexpected downturn in the market, because a Fund is only at risk for the amount of the premium paid for the call option which it can, if it chooses, permit to expire. During the option period the covered call writer gives up the potential for capital appreciation above the exercise price should the underlying security rise in value, and the secured put writer retains the risk of loss should the underlying security decline in value. For the covered call writer, substantial appreciation in the value of the underlying security would result in the security being "called away." For the secured put writer, substantial depreciation in the value of the underlying security would result in the security being "put to" the writer. If a covered call option expires unexercised, the writer realizes a gain in the amount of the premium received. If the covered call option writer has to sell the underlying security because of the exercise of a call option, it realizes a gain or loss from the sale of the underlying security, with the proceeds being increased by the amount of the premium. If a secured put option expires unexercised, the writer realizes a gain from the amount of the premium. If the secured put writer has to buy the underlying security because of the exercise of the put option, the secured put writer incurs an unrealized loss to the extent that the current market value of the underlying security is less than the exercise price of the put option. However, this would be offset in whole or in part by gain from the premium received. OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment Objectives and Policies"), the Funds (other than the Cash Reserves Fund) may deal in over-the-counter traded options ("OTC options"). OTC options differ from exchange traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and there is a risk of nonperformance by the dealer as a result of the insolvency of such dealer or otherwise, in which event a Fund may experience material losses. However, in writing options the premium is paid in advance by the dealer. OTC options are available for a greater variety of securities, and a wider range of expiration dates and exercise prices, than are exchange traded options. Since there is no exchange, pricing is normally done by reference to information from market makers, which information is carefully monitored by the investment manager and verified in appropriate cases. A writer or purchaser of a put or call option can terminate it voluntarily only by entering into a closing transaction. In the case of OTC options, there can be no assurance that a continuous liquid secondary market will exist for any particular option at any specific time. Consequently, a Fund may be able to realize the value of an OTC option it has purchased only by exercising it or entering into a closing sale transaction with the dealer that issued it. Similarly, when a Fund writes an OTC option, it generally can close out that option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Fund originally wrote it. If a covered call option writer cannot effect a closing transaction, it cannot sell the underlying security until the option expires or the option is exercised. Therefore, a covered call option writer of an OTC option may not be able to sell an underlying security even though it might otherwise be advantageous to do so. Likewise, a secured put writer of an OTC option may be unable to sell the securities pledged to secure the put for other investment purposes while it is obligated as a put writer. Similarly, a purchaser of such put or call option might also find it difficult to terminate its position on a timely basis in the absence of a secondary market. B-13 82 The Funds understand the position of the staff of the Securities and Exchange Commission ("SEC") to be that purchased OTC options and the assets used as "cover" for written OTC options are illiquid securities. The investment manager disagrees with this position and has found the dealers with which it engages in OTC options transactions generally agreeable to and capable of entering into closing transactions. The Funds have adopted procedures for engaging in OTC options for the purpose of reducing any potential adverse effect of such transactions upon the liquidity of the Funds' portfolios. A brief description of such procedures is set forth below. A Fund will only engage in OTC options transactions with dealers that have been specifically approved by the investment manager pursuant to procedures adopted by the Fund's Board of Trustees. The investment manager believes that the approved dealers should be able to enter into closing transactions if necessary and, therefore, present minimal credit risks to a Fund. The investment manager will monitor the creditworthiness of the approved dealers on an ongoing basis. A Fund currently will not engage in OTC options transactions if the amount invested by the Fund in OTC options, plus a "liquidity charge" related to OTC options written by the Fund, plus the amount invested by the Fund in illiquid securities, would exceed 15% of the Fund's net assets (10% of total assets for the Mortgage Fund). The "liquidity charge" referred to above is computed as described below. The Funds anticipate entering into agreements with dealers to which a Fund sells OTC options. Under these agreements a Fund would have the absolute right to repurchase the OTC options from the dealer at any time at a price no greater than a price established under the agreements (the "Repurchase Price"). The "liquidity charge" referred to above for a specific OTC option transaction will be the Repurchase Price related to the OTC option less the intrinsic value of the OTC option. The intrinsic value of an OTC call option for such purposes will be the amount by which the current market value of the underlying security exceeds the exercise price. In the case of an OTC put option, intrinsic value will be the amount by which the exercise price exceeds the current market value of the underlying security. If there is no such agreement requiring a dealer to allow the Fund to repurchase a specific OTC option written by the Fund, the "liquidity charge" will be the current market value of the assets serving as "cover" for such OTC option. OPTIONS ON SECURITIES INDICES. A Fund (other than the Cash Reserves Fund) also may purchase and write call and put options on securities indices in an attempt to hedge against market conditions affecting the value of securities that the Fund owns or intends to purchase, and not for speculation. Through the writing or purchase of index options, a Fund can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. This amount of cash is equal to such difference between the closing price of the index and the exercise price of the option. The writer of the option is obligated, in return for the premium received, to make delivery of this amount. Unlike security options, all settlements are in cash and gain or loss depends upon price movements in the market generally (or in a particular industry or segment of the market), rather than upon price movements in individual securities. Price movements in securities that the Fund owns or intends to purchase will probably not correlate perfectly with movements in the level of an index since the prices of such securities may be affected by somewhat different factors and, therefore, the Fund bears the risk that a loss on an index option would not be completely offset by movements in the price of such securities. When a Fund writes an option on a securities index, it will segregate, and mark-to-market, eligible securities equal in value to 100% of the exercise price in the case of a put, or the contract 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 and mark-to-market, until the option expires or is closed out, cash or cash equivalents equal in value to such excess. B-14 83 A Fund may also purchase and sell options on other appropriate indices, as available, such as foreign currency indices. Options on a securities index involve risks similar to those risks relating to transactions in financial futures contracts described below. Also, an option purchased by a Fund may expire worthless, in which case the Fund would lose the premium paid therefor. FINANCIAL FUTURES CONTRACTS. The Funds (except the Cash Reserves Fund) may enter into financial futures contracts for the future delivery of a financial instrument, such as a security, or an amount of foreign currency or the cash value of a securities index. This investment technique is designed primarily to hedge (i.e., protect) against anticipated future changes in market conditions or foreign exchange rates which otherwise might affect adversely the value of securities or other assets which the Fund holds or intends to purchase. A "sale" of a futures contract means the undertaking of a contractual obligation to deliver the securities or the cash value of an index or foreign currency called for by the contract at a specified price during a specified delivery period. A "purchase" of a futures contract means the undertaking of a contractual obligation to acquire the securities or cash value of an index or foreign currency at a specified price during a specified delivery period. At the time of delivery, in the case of fixed income securities pursuant to the contract, adjustments are made to recognize differences in value arising from the delivery of securities with a different interest rate than that specified in the contract. In some cases, securities called for by a futures contract may not have been issued at the time the contract was written. Although some futures contracts by their terms call for the actual delivery or acquisition of securities or other assets, in most cases a party will close out the contractual commitment before delivery of the underlying assets by purchasing (or selling, as the case may be) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, if effected through a member of an exchange, cancels the obligation to make or take delivery of the underlying securities or other assets. All transactions in the futures market are made, offset or fulfilled through a clearing house associated with the exchange on which the contracts are traded. A Fund will incur brokerage fees when it purchases or sells contracts, and will be required to maintain margin deposits. At the time a Fund enters into a futures contract, it is required to deposit with its custodian, on behalf of the broker, a specified amount of cash or eligible securities, called "initial margin." The initial margin required for a futures contract is set by the exchange on which the contract is traded. Subsequent payments, called "variation margin," to and from the broker are made on a daily basis as the market price of the futures contract fluctuates. The costs incurred in connection with futures transactions could reduce a Fund's return. Futures contracts entail risks. If the investment manager's judgment about the general direction of markets or exchange rates is wrong, the overall performance may be poorer than if no such contracts had been entered into. There may be an imperfect correlation between movements in prices of futures contracts and portfolio assets being hedged. In addition, the market prices of futures contracts may be affected by certain factors. If participants in the futures market elect to close out their contracts through offsetting transactions rather than meet margin requirements, distortions in the normal relationship between the assets and futures markets could result. Price distortions could also result if investors in futures contracts decide to make or take delivery of underlying securities or other assets rather than engage in closing transactions because of the resultant reduction in the liquidity of the futures market. In addition, because, from the point of view of speculators, the margin requirements in the futures markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities or other assets and movements in the prices of futures contracts, a correct forecast of market trends by the investment manager may still not result in a successful hedging transaction. If any of these events should occur, the Fund could lose money on the financial futures contracts and also on the value of its portfolio assets. OPTIONS ON FINANCIAL FUTURES CONTRACTS. A Fund (other than the Cash Reserves Fund) may purchase and write call and put options on financial futures contracts. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise, the writer of the option delivers the futures contract to the holder at the exercise price. A Fund would be required to deposit with its custodian initial margin and maintenance margin B-15 84 with respect to put and call options on futures contracts written by it. A Fund will establish segregated accounts or will provide cover with respect to written options on financial futures contracts in a manner similar to that described under "Options on Securities." Options on futures contracts involve risks similar to those risks relating to transactions in financial futures contracts described above. Also, an option purchased by a Fund may expire worthless, in which case the Fund would lose the premium paid therefor. DELAYED DELIVERY TRANSACTIONS. The Funds (other than the Cash Reserves Fund) may purchase or sell portfolio securities on a when-issued or delayed delivery basis. When-issued or delayed delivery transactions involve a commitment by a Fund to purchase or sell securities with payment and delivery to take place in the future in order to secure what is considered to be an advantageous price or yield to the Fund at the time of entering into the transaction. When the Fund enters into a delayed delivery transaction, it becomes obligated to purchase securities and it has all of the rights and risks attendant to ownership of a security, although delivery and payment occur at a later date. The value of fixed income securities to be delivered in the future will fluctuate as interest rates vary. At the time a Fund makes the commitment to purchase a security on a when-issued or delayed delivery basis, it will record the transaction and reflect the liability for the purchase and the value of the security in determining its net asset value. Likewise, at the time a Fund makes the commitment to sell a security on a delayed delivery basis, it will record the transaction and include the proceeds to be received in determining its net asset value; accordingly, any fluctuations in the value of the security sold pursuant to a delayed delivery commitment are ignored in calculating net asset value so long as the commitment remains in effect. The Fund generally has the ability to close out a purchase obligation on or before the settlement date, rather than take delivery of the security. To the extent a Fund engages in when-issued or delayed delivery purchases, it will do so for the purpose of acquiring portfolio securities consistent with the Fund's investment objective and policies. A Fund reserves the right to sell these securities before the settlement date if deemed advisable. REGULATORY RESTRICTIONS. To the extent required to comply with SEC Release No. IC-10666, when purchasing a futures contract, writing a put option or entering into a delayed delivery purchase or a forward currency exchange purchase, a Fund will maintain in a segregated account cash, U.S. Government securities or liquid high-grade debt obligations equal to the value of such contracts. A Fund will use cover in connection with selling a futures contract. A Fund will not engage in transactions in financial futures contracts or options thereon for speculation, but only in an attempt to hedge against changes in interest rates or market conditions affecting the value of securities which the Fund holds or intends to purchase. FOREIGN CURRENCY OPTIONS. The Diversified, High Yield and Income and Capital Funds may engage in foreign currency options transactions. A foreign currency option provides the option buyer with the right to buy or sell a stated amount of foreign currency at the exercise price at a specified date or during the option period. A call option gives its owner the right, but not the obligation, to buy the currency, while a put option gives its owner the right, but not the obligation, to sell the currency. The option seller (writer) is obligated to fulfill the terms of the option sold if it is exercised. However, either seller or buyer may close its position during the option period in the secondary market for such options any time prior to expiration. A call rises in value if the underlying currency appreciates. Conversely, a put rises in value if the underlying currency depreciates. While purchasing a foreign currency option can protect the Fund against an adverse movement in the value of a foreign currency, it does not limit the gain which might result from a favorable movement in the value of such currency. For example, if a Fund were holding securities denominated in an appreciating foreign currency and had purchased a foreign currency put to hedge against a decline in the value of the currency, it would not have to exercise its put. Similarly, if the Fund had entered into a contract to purchase a security denominated in a foreign currency and had purchased a foreign currency call to hedge against a rise in value of the currency but instead the currency had depreciated in value between the date of purchase and the settlement date, the Fund would not have to exercise its call but could acquire in the spot market the amount of foreign currency needed for settlement. B-16 85 FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of their financial futures transactions (see "Financial Futures Contracts" and "Options on Financial Futures Contracts" above), the Diversified, High Yield and Income and Capital Funds may use foreign currency futures contracts and options on such futures contracts. Through the purchase or sale of such contracts, a Fund may be able to achieve many of the same objectives as through forward foreign currency exchange contracts more effectively and possibly at a lower cost. Unlike forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currency futures contracts are standardized as to amount and delivery period and are traded on boards of trade and commodities exchanges. It is anticipated that such contracts may provide greater liquidity and lower cost than forward foreign currency exchange contracts. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Diversified, High Yield and Income and Capital Funds may engage in forward foreign currency transactions. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days ("term") from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded directly between currency traders (usually large commercial banks) and their customers. The investment manager believes that it is important to have the flexibility to enter into such forward contracts when it determines that to do so is in the best interests of a Fund. A Fund will not speculate in foreign currency exchange. If a Fund retains the portfolio security and engages in an offsetting transaction with respect to a forward contract, the Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between a Fund's entering into a forward contract for the sale of foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund would realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund would suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain that might result should the value of such currency increase. A Fund may have to convert its holdings of foreign currencies into U.S. Dollars from time to time in order to meet such needs as Fund expenses and redemption requests. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies. A Fund will not enter into forward contracts or maintain a net exposure in such contracts when the Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's securities or other assets denominated in that currency. See "Foreign Currency Transactions" under "Investment Objectives and Policies-- Additional Investment Information" in the prospectus. A Fund segregates cash or liquid high-grade securities in an amount not less than the value of the Fund's total assets committed to forward foreign currency exchange contracts entered into for the purchase of foreign currency. If the value of the securities segregated declines, additional cash or securities are added so that the segregated amount is not less than the amount of the Fund's commitments with respect to such contracts. The Diversified, High Yield and Income and Capital Funds do not intend to enter into forward contracts for the purchase of a foreign currency if they would have more than 5% of the value of their total assets committed to such contracts. A Fund generally will not enter into a forward contract with a term longer than one year. COLLATERALIZED OBLIGATIONS. A Fund will currently invest in only those collateralized obligations that are fully collateralized and that meet the quality standards otherwise applicable to the Fund's investments. Fully collateralized means that the collateral will generate cash flows sufficient to meet obligations to holders of the collateralized obligations under even the most conservative prepayment and interest rate projections. Thus, the collateralized obligations are structured to anticipate a worst case prepayment condition and to minimize the reinvestment rate risk for cash flows between coupon dates for the collateralized obligations. A worst case prepayment condition B-17 86 generally assumes immediate prepayment of all securities purchased at a premium and zero prepayment of all securities purchased at a discount. Reinvestment rate risk may be minimized by assuming very conservative reinvestment rates and by other means such as by maintaining the flexibility to increase principal distributions in a low interest rate environment. The effective credit quality of the collateralized obligations in such instances is the credit quality of the issuer of the collateral. The requirements as to collateralization are determined by the issuer or sponsor of the collateralized obligation in order to satisfy rating agencies, if rated. No Fund currently intends to invest more than 5% of its total assets in collateralized obligations that are collateralized by a pool of credit card or automobile receivables or other types of assets rather than a pool of mortgages, Mortgage-Backed Securities or U.S. Government Securities. Currently, none of the Funds intends to invest more than 10% of its total assets in inverse floaters. The Cash Reserves Fund does not invest in inverse floaters. Payments of principal and interest on the underlying collateral securities are not passed through directly to the holders of the collateralized obligations as such. Collateralized obligations often are issued in two or more classes with varying maturities and stated rates of interest. Because interest and principal payments on the underlying securities are not passed through directly to holders of collateralized obligations, such obligations of varying maturities may be secured by a single portfolio or pool of securities, the payments on which are used to pay interest on each class and to retire successive maturities in sequence. These relationships may in effect "strip" the interest payments from principal payments of the underlying securities and allow for the separate purchase of either the interest or the principal payments, sometimes called interest only (IO) and principal only (PO) securities. Collateralized obligations are designed to be retired as the underlying securities are repaid. In the event of prepayment on or call of such securities, the class of collateralized obligation first to mature generally will be paid down first. Therefore, although in most cases the issuer of collateralized obligations will not supply additional collateral in the event of such prepayment, there will be sufficient collateral to secure collateralized obligations that remain outstanding. It is anticipated that no more than 10% of a Fund's total assets will be invested in IO and PO securities. Governmentally-issued and privately-issued IO's and PO's will be considered illiquid for purposes of a Fund's limitation on illiquid securities, however, the Board of Trustees of a Fund may adopt guidelines under which governmentally-issued IO's and PO's may be determined to be liquid. ZERO COUPON GOVERNMENT SECURITIES. Subject to its investment objective and policies, a Fund may invest in zero coupon U.S. Government Securities. Zero coupon bonds are purchased at a discount from the face amount. The buyer receives only the right to receive a fixed payment on a certain date in the future and does not receive any periodic interest payments. These securities may include those created directly by the U.S. Treasury and those created as collateralized obligations through various proprietary custodial, trust or other relationships (see "Investment Objectives and Policies--Additional Investment Information--Collateralized Obligations" in the prospectus). The effect of owning instruments which do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligation. This implicit reinvestment of earnings at the same rate eliminates the risk of being unable to reinvest distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates any opportunity to reinvest earnings at higher rates. For this reason, zero coupon bonds are subject to substantially greater price fluctuations during periods of changing market interest rates than those of comparable securities that pay interest currently, which fluctuation is greater as the period to maturity is longer. Zero coupon bonds created as collateralized obligations are similar to those created through the U.S. Treasury, but the former investments do not provide absolute certainty of maturity or of cash flows after prior classes of the collateralized obligations are retired. No Fund currently intends to invest more than 5% of its net assets in zero coupon U.S. Government Securities during the current year. SHORT SALES AGAINST-THE-BOX. The Adjustable Rate, Diversified and Mortgage Funds may each make short sales against-the-box for the purpose of deferring realization of gain or loss for federal income tax purposes. A short sale "against-the-box" is a short sale in which the Fund owns at least an equal amount of the securities sold short or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issue as, and at least equal in amount to, the securities sold short. A Fund may engage in such short sales only to the B-18 87 extent that not more than 10% of the Fund's total assets (determined at the time of the short sale) is held as collateral for such sales. No Fund currently intends, however, to engage in such short sales to the extent that more than 5% of its net assets will be held as collateral therefor during the current year. ADDITIONAL INFORMATION--ADJUSTABLE RATE FUND. The interest rates paid on the adjustable rate securities in which the Adjustable Rate Fund invests generally are readjusted at intervals of one year or less to an increment over some predetermined interest rate index. There are three main categories of indices: those based on U.S. Treasury securities, those derived from a calculated measure such as a cost of funds index or those based on a moving average of mortgage rates. Commonly used indices include the one-year, three-year and five-year constant maturity Treasury rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-month, six-month or one-year London Interbank Offered Rate ("LIBOR"), the prime rate of a specific bank or commercial paper rates. Some indices, such as the one-year constant maturity Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels and tend to be somewhat less volatile. The Mortgage-Backed Securities either issued or guaranteed by GNMA, FHLMC or FNMA ("Certificates") are called pass-through Certificates because a pro rata share of both regular interest and principal payments (less GNMA's FHLMC's or FNMA's fees and any applicable loan servicing fees), as well as unscheduled early prepayments on the underlying mortgage pool, are passed through monthly to the holder of the Certificate (i.e., the Fund). The principal and interest on GNMA securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FNMA guarantees full and timely payment of all interest and principal, while FHLMC guarantees timely payment of interest and ultimate collection of principal. Mortgage-Backed Securities from FNMA and FHLMC are not backed by the full faith and credit of the United States; however, they are generally considered to offer minimal credit risks. The yields provided by these Mortgage-Backed Securities have historically exceeded the yields on other types of U.S. Government Securities with comparable maturities in large measure due to the prepayment risk discussed below. If prepayments of principal are made on the underlying mortgages during periods of rising interest rates, the Adjustable Rate Fund generally will be able to reinvest such amounts in securities with a higher current rate of return. However, the Adjustable Rate Fund will not benefit from increases in interest rates to the extent that interest rates rise to the point where they cause the current coupon of adjustable rate mortgages held as investments by the Adjustable Rate Fund to exceed the maximum allowable annual or lifetime reset limits (or "cap rates") for a particular mortgage. Also, the Adjustable Rate Fund's net asset value could vary to the extent that current yields on Mortgage-Backed Securities are different than market yields during interim periods between coupon reset dates. During periods of declining interest rates, of course, the coupon rates may readjust downward, resulting in lower yields to the Adjustable Rate Fund. Further, because of this feature, the value of adjustable rate mortgages is unlikely to rise during periods of declining interest rates to the same extent as fixed-rate instruments. As with other Mortgage-Backed Securities, interest rate declines may result in accelerated prepayment of mortgages, and the proceeds from such prepayments must be reinvested at lower prevailing interest rates. One additional difference between adjustable rate mortgages and fixed rate mortgages is that for certain types of adjustable rate mortgage securities, the rate of amortization of principal, as well as interest payments, can and does change in accordance with movements in a specified, published interest rate index. The amount of interest due to an adjustable rate mortgage security holder is calculated by adding a specified additional amount, the "margin," to the index, subject to limitations or "caps" on the maximum and minimum interest that is charged to the mortgagor during the life of the mortgage or to maximum and minimum changes to that interest rate during a given period. It is these special characteristics that are unique to adjustable rate mortgages that the Fund believes make them attractive investments in seeking to accomplish the Adjustable Rate Fund's objective. The Fund usually will enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amounts of the two payments. The net amount of the B-19 88 excess, if any, of the Fund's obligations over its entitlement with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or high grade liquid debt securities having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Fund's custodian. To the extent that the Fund enters into interest rate swaps on other than a net basis, the amount maintained in a segregated account will be the full amount of the Fund's obligations, if any, with respect to such interest rate swaps, accrued on a daily basis. The Adjustable Rate Fund will not enter into any interest rate swap, cap or floor transaction unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category by at least one nationally recognized rating organization at the time of entering into such transaction. If there is a default by the other party to such a transaction, the Adjustable Rate Fund will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents using standardized swap documents. As a result, the swap market has become relatively liquid. Caps and floors are more recent innovations for which standardized documents have not yet been developed and, accordingly, they are less liquid than swaps. It is anticipated that the Adjustable Rate Fund will not invest more than 5% of its total assets in interest rate caps and floors and that the aggregate notional (agreed upon) principal amount of interest rate swaps entered into by the Fund and the aggregate contract value of outstanding futures contracts of the Fund and futures contracts subject to outstanding options written by the Fund will not exceed 50% of the Fund's total assets. Because interest rate swaps and the purchase of interest rate caps and floors will be entered into for hedging purposes, the investment manager believes such obligations will not constitute senior securities and, accordingly, will not treat them as being subject to the Fund's borrowing restrictions. PORTFOLIO TRANSACTIONS KFS is the investment manager for the Kemper Funds and KFS and its affiliates also furnish investment management services to other clients including Kemper Corporation and the Kemper insurance companies. KFS is the sole shareholder of Kemper Asset Management Company and Kemper Investment Management Company Limited. These three entities share some common research and trading facilities. Dreman Value Advisors, Inc. ("DVA"), a subsidiary of KFS, is investment manager for Kemper-Dreman Fund, Inc. and sub-adviser for another Kemper Fund. At times investment decisions may be made to purchase or sell the same investment securities for a Fund and for one or more of the other clients managed by KFS or its affiliates. When two or more of such clients are simultaneously engaged in the purchase or sale of the same security through the same trading facility, the transactions are allocated as to amount and price in a manner considered equitable to each. National securities exchanges have established limitations governing the maximum number of options in each class which may be written by a single investor or group of investors acting in concert. An exchange may order the liquidation of positions found to be in violation of these limits, and it may impose certain other sanctions. These position limits may restrict the number of options a Fund will be able to write on a particular security. The above mentioned factors may have a detrimental effect on the quantities or prices of securities, options or futures contracts available to a Fund. On the other hand, the ability of a Fund to participate in volume transactions may produce better executions for a Fund in some cases. The Board of Trustees of each Fund believes that the benefits of KFS's organization outweigh any limitations that may arise from simultaneous transactions or position limitations. KFS, in effecting purchases and sales of portfolio securities for the account of a Fund, will implement each Fund's policy of seeking best execution of orders, which includes best net prices, except to the extent that KFS may be permitted to pay higher brokerage commissions for research services as described below. Consistent with this policy, orders for portfolio transactions are placed with broker-dealer firms giving consideration to the quality, quantity and nature of each firm's professional services, which include execution, clearance procedures, wire service quotations and statistical and other research information provided to a Fund and KFS. Any research benefits derived B-20 89 are available for all clients including clients of affiliated companies. Since it is only supplementary to KFS's own research efforts and must be analyzed and reviewed by KFS' staff, the receipt of research information is not expected to materially reduce expenses. In selecting among firms believed to meet the criteria for handling a particular transaction, KFS may give consideration to those firms that have sold or are selling shares of the Funds and of other funds managed by KFS or its affiliates, as well as to those firms that provide market, statistical and other research information to a Fund and KFS, although KFS is not authorized to pay higher commissions or, in the case of principal trades, higher prices to firms that provide such services, except as described below. KFS may in certain instances be permitted to pay higher brokerage commissions (not including principal trades) solely for receipt of market, statistical and other research services. Subject to Section 28(e) of the Securities Exchange Act of 1934 and procedures that may be adopted by the Board of Trustees of each Fund, a Fund (except the Cash Reserves, Mortgage and Short-Intermediate Government Funds) could pay a firm that provides research services to KFS a commission for effecting a securities transaction for the Fund in excess of the amount other firms would have charged for the transaction if KFS determines in good faith that the greater commission is reasonable in relation to the value of the research services provided by the executing firm viewed in terms either of a particular transaction or KFS's overall responsibilities to the Fund or other clients. Not all of such research services may be useful or of value in advising a particular Fund. Research benefits will be available for all clients of KFS and its subsidiaries. The investment management fee paid by a Fund to KFS is not reduced because KFS receives these research services. The table below shows total brokerage commissions paid by each Fund for the last three fiscal years and for the most recent fiscal year, the percentage thereof that was allocated to firms based upon research information provided or sales of Kemper Mutual Fund Shares.
ALLOCATED TO FIRMS BASED ON RESEARCH/SALES OF KEMPER FUND SHARES FUND FISCAL 1995 IN FISCAL 1995 FISCAL 1994 FISCAL 1993 - ---------------------------------------- ----------- ------------------ ----------- ----------- Adjustable Rate......................... $ 99,000 0% $ 0 $ 0 Cash Reserves........................... $ 0+ 0% $ 0 $ 0 Diversified............................. $ 1,323,000 3% $ 2,938,000 $ 2,363,000 Government.............................. $ 823,000 0% $ 1,071,000 $ 1,000 High Yield.............................. $21,136,000 0% $20,105,000 $12,347,000 Income and Capital...................... $ 1,576,000 0% $ 1,168,000 $ 1,131,000 Mortgage................................ $ 1,598,000+ 1% $ 835,000 $ 873,000 Short-Intermediate Government........... $ 125,000+ 1% $ 15,000 $ 27,000
- --------------- + Includes amounts paid during the fiscal year ended July 31, 1995 and the fiscal period from August 1, 1995 to September 30, 1995. The changes in portfolio turnover rates during the last three fiscal years for the Adjustable Rate Fund, Government Fund, Mortgage Fund and Short-Intermediate Government Fund were due primarily to strategies related to delayed delivery transactions. The increase in portfolio turnover rates during the last three fiscal years for the Diversified Fund were due primarily to the reallocation of portfolio assets across various market sectors. INVESTMENT MANAGER AND UNDERWRITER INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS"), 120 South LaSalle Street, Chicago, Illinois 60603, is each Fund's investment manager. Pursuant to investment management agreements, KFS acts as each Fund's investment adviser, manages its investments, administers its business affairs, furnishes office facilities and equipment, provides clerical, bookkeeping and administrative services, and permits any of its officers or employees B-21 90 to serve without compensation as trustees or officers of a Fund if elected to such positions. Each investment management agreement provides that each Fund pays the charges and expenses of its operations, including the fees and expenses of the trustees (except those who are officers or employees of KFS), independent auditors, counsel, custodian and transfer agent and the cost of share certificates, reports and notices to shareholders, brokerage commissions or transaction costs, costs of calculating net asset value, taxes and membership dues. Each Fund bears the expenses of registration of its shares with the Securities and Exchange Commission, while Kemper Distributors, Inc. ("KDI"), as principal underwriter, pays the cost of qualifying and maintaining the qualification of each Fund's shares for sale under the securities laws of the various states. KFS has agreed to reimburse each Fund (except the Government Fund) to the extent required by applicable state expense limitations should all operating expenses of each Fund, including the investment management fees of KFS but excluding taxes, interest, distribution fees, extraordinary expenses, brokerage commissions or transaction costs and any other properly excludable expenses, exceed the applicable state expense limitations. The Funds believe that the most restrictive state expense limitation currently in effect would require that such operating expenses not exceed 2.5% of the first $30 million of average daily net assets, 2% of the next $70 million and 1.5% of average daily net assets over $100 million. Under such state expense limitation, custodian costs attributable to foreign securities that are in excess of similar domestic custodian costs are excluded from operating expenses. KFS has agreed to reimburse the Government Fund should all operating expenses of the Fund, including the compensation of KFS, but excluding taxes, interest, distribution services fees, extraordinary expenses and brokerage commissions or transaction costs, exceed 1% of average daily net assets of the Fund on an annual basis. The investment management agreements provide that KFS shall not be liable for any error of judgment or of law, or for any loss suffered by a Fund in connection with the matters to which the agreements relate, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of KFS in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under each agreement. Each Fund's investment management agreement continues in effect from year to year so long as its continuation is approved at least annually by (a) a majority of the trustees who are not parties to such agreement or interested persons of any such party except in their capacity as trustees of the Fund and (b) by the shareholders or the Board of Trustees of the Fund. Each Fund's investment management agreement may be terminated at any time upon 60 days' notice by either party, or by a majority vote of the outstanding shares of the Fund, and will terminate automatically upon assignment. If additional Funds become subject to an investment management agreement, the provisions concerning continuation, amendment and termination shall be on a Fund by Fund basis. Additional Funds may be subject to a different agreement. The current investment management fee rates paid by the Funds are in the prospectus, see "Investment Manager and Underwriter." The investment management fees paid by each Fund for its last three fiscal years are shown in the table below.
FUND 1995 1994 1993 - ----------------------------------------------------------- ----------- ---------- ---------- Adjustable Rate............................................ $ 887,000 1,022,000* 10,000* Cash Reserves.............................................. $ 1,346,000+* 1,464,000* 1,029,000* Diversified................................................ $ 4,152,000 3,226,000 2,010,000 Government................................................. $19,681,000 22,103,000 24,613,000 High Yield................................................. $17,917,000 13,201,000 10,293,000 Income and Capital......................................... $ 2,923,000 2,734,000 2,555,000 Mortgage................................................... $21,526,000+ 28,093,000 32,501,000 Short-Intermediate Government.............................. $ 1,626,000+ 1,617,000 1,390,000
- --------------- + Includes amounts paid during the fiscal year ended July 31, 1995 and the fiscal period from August 1, 1995 to September 30, 1995. * Fee waivers and/or expense absorptions in effect during the period, see below. B-22 91 KFS agreed temporarily to absorb operating expenses for the Cash Reserves Fund from October 1, 1992 to May 28, 1994. During the fiscal year ended July 31, 1994 and the period October 1, 1992 to July 31, 1993, KFS absorbed or paid $631,000 and $457,000, respectively, of operating expenses for the Cash Reserves Fund. Prior to May 31, 1994, the Cash Reserves, Mortgage and Short-Intermediate Government Funds paid KFS an annual investment management fee, payable monthly, on a graduated basis of .60% of the first $5 billion of average daily net assets of all Portfolios of Kemper Portfolios, .55% of the next $5 billion and .50% of average daily net assets of all Portfolios subject to the agreement over $10 billion. Beginning January 17, 1992, KFS agreed to waive its full management fee and to absorb all other operating expenses of the Adjustable Rate Fund through December 31, 1992. For this purpose, "operating expenses" does not include taxes, interest, extraordinary expenses, brokerage commissions or transaction costs. Commencing on January 1, 1993, the investment management fee and other operating expenses were gradually reinstated at the aggregate rate (as a percentage of average daily net assets) of .07% each month. All expenses were reinstated by January 31, 1994. If the fee waiver had not been in effect during the fiscal years ended August 31, 1994 and 1993, KFS would have received management fees of $1,161,000 and $1,015,000, respectively, from the Fund. Prior to May 31, 1994, the Adjustable Rate Fund paid KFS an investment management fee, payable monthly, at the annual rate of .50% of average daily net assets. Prior to January 1, 1992, the Adjustable Rate Fund paid KFS an annual investment management fee, payable monthly, on a graduated basis of .60% of the first $2 billion of average daily net assets of the Fund, .55% of the next $2 billion and .50% of average daily net assets of the Fund over $4 billion. Prior to May 31, 1994, the Diversified Fund paid KFS an investment management fee, payable monthly, at the annual rate of .70% of average daily net assets. Prior to May 31, 1994, the Government Fund paid KFS an investment management fee, payable monthly, at the annual rate of .55% of the first $200 million of average daily net assets, .45% of the next $300 million of average daily net assets, and .35% of average daily net assets over $500 million. Prior to May 31, 1994, the High Yield Fund paid KFS an investment management fee, payable monthly, at the annual rate of .65% of the first $75 million of average daily net assets, .55% of the next $75 million of average daily net assets, and .50% of average daily net assets over $150 million. Prior to May 31, 1994, the Income and Capital Fund paid KFS an investment management fee, payable monthly, at the annual rate of .55% of the first $200 million of average daily net assets, .45% of the next $300 million of average daily net assets and .35% of average daily net assets over $500 million. PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution services agreements ("distribution agreements"), KDI, a wholly owned subsidiary of KFS, is the principal underwriter and distributor for the shares of each Fund and acts as agent of each Fund in the continuous offering of its shares. KDI bears all its expenses of providing services pursuant to the distribution agreement, including the payment of any commissions. Each Fund pays the cost for the prospectus and shareholder reports to be set in type and printed for existing shareholders, and KDI, as principal underwriter, pays for the printing and distribution of copies thereof used in connection with the offering of shares to prospective investors. KDI also pays for supplementary sales literature and advertising costs. Before February 1, 1995, KFS was the Funds' principal underwriter and distributor. Each distribution agreement continues in effect from year to year so long as such continuance is approved for each class at least annually by a vote of the Board of Trustees of the Fund, including the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the agreement. Each agreement automatically terminates in the event of its assignment and may be terminated for a class at any time without penalty by a Fund or by KDI upon 60 days notice. Termination by a Fund with respect to a class may be by vote of a majority of the Board of Trustees, or a majority of the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the agreement, or a "majority of the outstanding voting securities" of the class of the Fund, as defined under the Investment Company Act of 1940. The agreement may not be amended for a class to increase the fee to be paid by a Fund with respect to such class without approval by a majority of the B-23 92 outstanding voting securities of such class of the Fund and all material amendments must in any event be approved by the Board of Trustees in the manner described above with respect to the continuation of the agreement. The provisions concerning the continuation, amendment and termination of the distribution agreement are on a Fund by Fund basis and for each Fund on a class by class basis. CLASS A SHARES. The following information concerns the underwriting commissions paid in connection with the distribution of each Fund's Class A shares for the fiscal years noted.
COMMISSIONS COMMISSIONS COMMISSIONS PAID TO CLASS A SHARES FISCAL YEAR RETAINED BY KDI KDI PAID TO ALL FIRMS KDI AFFILIATED FIRMS - -------------------------------------- ----------- --------------- --------------------- -------------------- Adjustable Rate....................... 1995 $ 22,000 $ 161,000 $ 40,000 1994 $ 64,000 676,000 218,000 1993 $ 109,000 1,530,000 304,000 Cash Reserves......................... 1995+ $ 0 0 0 1994* $ 0 0 0 Diversified........................... 1995 $ 75,000 462,000 68,000 1994 $ 115,000 694,000 125,000 1993 $ 156,000 1,017,000 178,000 Government............................ 1995 $ 380,000 2,427,000 325,000 1994 $ 820,000 5,602,000 693,000 1993 $ 3,322,000 24,107,000 3,484,000 High Yield............................ 1995 $ 476,000 3,430,000 435,000 1994 $ 665,000 4,420,000 679,000 1993 $ 1,070,000 7,469,000 1,088,000 Income and Capital.................... 1995 $ 96,000 767,000 110,000 1994 $ 261,000 1,055,000 179,000 1993 $ 223,000 1,767,000 175,000 Mortgage.............................. 1995+ $ 20,000 183,000 29,000 1994* $ 6,000 0 0 Short-Intermediate Government......... 1995+ $ 23,000 220,000 77,000 1994* $ 1,000 6,000 1,000
- --------------- + Includes amounts paid during fiscal year ended July 31, 1995 and fiscal period from August 1, 1995 to September 30, 1995. * Class A shares of the Cash Reserves, Mortgage and Short-Intermediate Government Funds were not available for purchase (except upon conversion of Class B shares) prior to May 31, 1994. CLASS B SHARES AND CLASS C SHARES. Class B and Class C shares of each Fund (other than the Cash Reserves, Mortgage and Short-Intermediate Government Funds) were not available for purchase prior to May 31, 1994. Prior to December 1, 1991, KFS (as predecessor to KDI) paid each firm, including affiliated brokers, a service fee with respect to Class B shares (then called "Initial Shares") of all Kemper Portfolios, including the Cash Reserves, Mortgage and Short-Intermediate Government Funds, from the distribution services fee at the annual rate of .25% on assets maintained and serviced for more than one year in Fund accounts. Effective December 1, 1991, KDI (and KFS as predecessor) as administrator pays each firm a service fee as described under "Investment Manager and Underwriter--Administrative Services." Prior to December 1, 1991, the distribution services fee was paid at the annual rate of 1.25% of average daily net assets of Kemper Portfolios. Effective December 1, 1991, the distribution services fee is paid at the annual rate of .75% of average daily net assets of each such Fund. During the fiscal year ended July 31, 1993, Kemper Portfolios incurred expenses of and paid KFS a distribution services fee of B-24 93 $1,223,000 in the Cash Reserves Fund, $35,859,000 in the Mortgage Fund and $1,774,000 in the Short-Intermediate Government Fund. The fee payable to KDI under the Plan is not reduced or offset by the amount of any contingent deferred sales charges received by KDI. A portion of the aforesaid marketing, sales and operating expenses could be considered overhead expense. Since the distribution agreement provides for fees charged to Class B and Class C shares that are used by KDI to pay for distribution services (see the prospectus under "Investment Manager and Underwriter"), the agreement (the "Plan"), is approved and renewed separately for the Class B and Class C shares in accordance with Rule 12b-1 under the Investment Company Act of 1940, which regulates the manner in which an investment company may, directly or indirectly, bear expenses of distributing its shares. Expenses of the Funds and of KDI (and KFS as predecessor) in connection with the Rule 12b-1 plans for the Class B and Class C shares are set forth below. A portion of the marketing, sales and operating expenses shown below could be considered overhead expense.
CONTINGENT COMMISSIONS OTHER DISTRIBUTION EXPENSES PAID BY KDI DISTRIBUTION DEFERRED TOTAL PAID BY KDI ------------------------------------------------------- FEES PAID SALES COMMISSIONS TO KDI ADVERTISING MARKETING MISC. FISCAL BY FUND CHARGES PAID BY KDI AFFILIATED AND PROSPECTUS AND SALES OPERATING INTEREST CLASS B SHARES YEAR TO KDI TO KDI TO FIRMS FIRMS LITERATURE PRINTING EXPENSES EXPENSES EXPENSE ------ ------------ ---------- ----------- ------------ ----------- ---------- --------- --------- --------- Adjustable Rate......... 1995 $ 35,000 30,000 116,000 41,000 13,000 3,000 69,000 22,000 18,000 1994* $ 3,000 1,000 27,000 9,000 2,000 1,000 7,000 2,000 1,000 Cash Reserves....... 1995+ $ 2,125,000 1,629,000 2,810,000 86,000 249,000 63,000 1,607,000 285,000 775,000 1994 $ 1,790,000 1,336,000 3,015,000 81,000 148,000 8,000 1,158,000 81,000 311,000 Diversified.... 1995 $ 1,925,000 688,000 1,155,000 133,000 115,000 16,000 586,000 97,000 452,000 1994* $ 922,000 322,000 479,000 73,000 35,000 15,000 250,000 41,000 168,000 Government..... 1995 $ 254,000 91,000 1,495,000 200,000 131,000 8,000 681,000 86,000 136,000 1994* $ 19,000 12,000 187,000 52,000 11,000 5,000 80,000 10,000 7,000 High Yield.......... 1995 $ 7,344,000 1,785,000 3,986,000 574,000 335,000 45,000 2,075,000 281,000 461,000 1994* $ 2,493,000 657,000 1,343,000 254,000 85,000 33,000 692,000 108,000 115,000 Income and Capital...... 1995 $ 289,000 86,000 876,000 113,000 70,000 7,000 354,000 59,000 104,000 1994* $ 31,000 12,000 164,000 35,000 14,000 5,000 79,000 12,000 10,000 Mortgage....... 1995+ $ 15,132,000 4,977,000 1,496,000 156,000 165,000 72,000 979,000 147,000 1,911,000 1994 $ 23,535,000 7,287,000 6,814,000 1,041,000 326,000 20,000 2,240,000 128,000 2,696,000 Short-Intermediate Government... 1995+ $ 1,979,000 1,011,000 699,000 64,000 78,000 21,000 416,000 73,000 14,000 1994 $ 2,044,000 810,000 1,946,000 263,000 97,000 4,000 644,000 37,000 105,000
- --------------- + Includes amounts paid during the fiscal year ended July 31, 1995 and the fiscal period from August 1, 1995 to September 30, 1995. * Class B shares were first offered on May 31, 1994. B-25 94
DISTRIBUTION FEES PAID OTHER DISTRIBUTION EXPENSES PAID BY KDI DISTRIBUTION TOTAL BY KDI ----------------------------------------------------------- FEES PAID DISTRIBUTION TO KDI ADVERTISING MARKETING MISC. CLASS C BY FUND FEES PAID BY AFFILIATED AND PROSPECTUS AND SALES OPERATING INTEREST SHARES** FISCAL YEAR TO KDI KDI TO FIRMS FIRMS LITERATURE PRINTING EXPENSES EXPENSES EXPENSES ----------- ------------ ------------ ------------ ----------- ---------- --------- --------- -------- Adjustable Rate....... 1995 $ 8,000 11,000 4,000 6,000 2,000 32,000 14,000 4,000 1994 $ 1,000 0 0 3,000 1,000 9,000 3,000 0 Cash Reserves..... 1995+ $ 33,000 30,000 2,000 36,000 5,000 223,000 42,000 18,000 1994 $ 0 0 0 1,000 0 9,000 2,000 0 Diversified.. 1995 $ 14,000 14,000 1,000 8,000 1,000 42,000 14,000 5,000 1994 $ 1,000 1,000 1,000 1,000 1,000 11,000 2,000 0 Government... 1995 $ 19,000 19,000 2,000 11,000 1,000 60,000 14,000 4,000 1994 $ 1,000 1,000 1,000 1,000 1,000 8,000 2,000 0 High Yield....... 1995 $ 68,000 67,000 8,000 41,000 4,000 250,000 44,000 18,000 1994 $ 3,000 3,000 3,000 6,000 3,000 51,000 9,000 1,000 Income and Capital.... 1995 $ 12,000 12,000 1,000 7,000 1,000 34,000 11,000 2,000 1994 $ 1,000 1,000 1,000 1,000 0 5,000 1,000 0 Mortgage..... 1995+ $ 5,000 5,000 1,000 4,000 1,000 23,000 12,000 2,000 1994 $ 0 0 0 0 0 1,000 0 0 Short-Inter- mediate Government. 1995+ $ 19,000 42,000 3,000 15,000 4,000 79,000 21,000 8,000 1994 $ 0 0 0 2,000 0 6,000 1,000 0
- --------------- + Includes amounts paid during the fiscal year ended July 31, 1995 and the fiscal period from August 1, 1995 to September 30, 1995. ** Class C shares were first offered on May 31, 1994. ADMINISTRATIVE SERVICES. Administrative services are provided to each Fund under an administrative services agreement ("administrative agreement") with KDI. KDI bears all its expenses of providing services pursuant to the administrative agreement between KDI and the Fund, including the payment of service fees. For the services under the administrative agreement, each Fund pays KDI an administrative services fee, payable monthly, at the annual rate of up to .25% of average daily net assets of Class A, B and C shares of the Fund. Before February 1, 1995, KFS was the administrator. KDI has entered into related arrangements with various financial services firms, such as broker-dealers or banks ("firms"), that provide services and facilities for their customers or clients who are shareholders of the Fund. The firms provide such office space and equipment, telephone facilities and personnel as is necessary or beneficial for providing information and services to their clients. Such services and assistance may include, but are not limited to, establishing and maintaining shareholder accounts and records, processing purchase and redemption transactions, answering routine inquiries regarding the Fund, assistance to clients in changing dividend and investment options, account designations and addresses and such other services as may be agreed upon from time to time and permitted by applicable statute, rule or regulation. With respect to Class A shares, KDI pays each firm a service fee, payable quarterly, at an annual rate of (a) up to .15% (.25% for the Cash Reserves, Mortgage and Short-Intermediate Government Funds) of the net assets in Fund accounts that it maintains and services attributable to Class A shares acquired prior to October 1, 1993, and (b) up to .25% of net assets of those accounts that it maintains and services attributable to Class A shares acquired on or after October 1, 1993, in each case commencing with the month after investment. With respect to Class B shares and Class C shares, KDI pays each firm a service fee, payable quarterly, at an annual rate of up to .25% of the net assets in Fund accounts that it maintains and services attributable to Class B shares and Class C shares, respectively, in each case commencing with the month after investment (month of investment for Class C shares); provided, however, KDI may for Class B shares advance the first year service fee as described in the prospectus under "Investment Manager and Underwriter." Firms to which service fees may be paid include broker-dealers affiliated with KDI. B-26 95 The following information concerns the administrative services fee paid by each Fund to KDI (or KFS as predecessor).
ADMINISTRATIVE SERVICE FEES TOTAL SERVICE FEES PAID BY SERVICE FEES PAID BY KDI PAID BY FUND KDI TO FIRMS TO KDI AFFILIATED FIRMS ------------------------------ --------------------------- ------------------------ FUND FISCAL YEAR CLASS A CLASS B CLASS C - ---- ------------ ----------- --------- ------- Adjustable Rate...... 1995 $ 299,000 11,000 2,000 320,000 76,000 1994* $ 377,000 1,000 1,000 378,000 78,000 1993 $ 0 N/A N/A 290,000 53,000 Cash Reserves........ 1995+ $ 113,000 664,000 10,000 854,000 59,000 1994** $ 83,000 491,000 0 778,000 45,000 1993 $ 413,000 N/A N/A 413,000 45,000 Diversified.......... 1995 $ 952,000 620,000 5,000 1,582,000 203,000 1994* $ 696,000 283,000 0 1,050,000 162,000 1993 $ 396,000 N/A N/A 396,000 73,000 Government........... 1995 $ 7,831,000 84,000 6,000 7,965,000 1,161,000 1994* $ 8,756,000 6,000 0 8,767,000 1,514,000 1993 $ 9,729,000 N/A N/A 9,729,000 2,135,000 High Yield........... 1995 $ 4,323,000 2,400,000 22,000 6,730,000 783,000 1994* $ 3,405,000 759,000 1,000 3,961,000 569,000 1993 $ 2,850,000 N/A N/A 2,850,000 379,000 Income and Capital... 1995 $ 856,000 95,000 4,000 980,000 108,000 1994* $ 810,000 11,000 0 833,000 106,000 1993 $ 730,000 N/A N/A 730,000 113,000 Mortgage............. 1995+ $ 5,402,000 4,811,000 2,000 10,164,000 1,280,000 1994** $ 4,291,000 7,373,000 0 11,426,000 1,602,000 1993 $13,496,000 N/A N/A 13,496,000 1,978,000 Short-Intermediate Government......... 1995+ $ 69,000 640,000 6,000 698,000 60,000 1994** $ 26,000 671,000 0 670,000 67,000 1993 $ 589,000 N/A N/A 589,000 52,000
- --------------- + Includes amounts paid during fiscal year ended July 31, 1995 and the fiscal period from August 1, 1995 to September 30, 1995. * Class B and Class C shares were first offered on May 31, 1994. ** Class C shares were first offered on May 31, 1994. KDI also may provide some of the above services and may retain any portion of the fee under the administrative agreement not paid to firms to compensate itself for administrative functions performed for a Fund. Currently, however, the administrative services fee payable to KDI is based only upon Fund assets in accounts for which there is a firm listed on the Fund's records and it is intended that KDI will pay all the administrative services fee that it receives from a Fund to firms in the form of service fees. The effective administrative services fee rate to be charged against all assets of a Fund while this procedure is in effect will depend upon the proportion of Fund assets that is in accounts for which there is a firm of record, as well as (except for the Cash Reserves, Mortgage and Short-Intermediate Government Funds), with respect to Class A shares, the date when shares representing such assets were purchased. The Board of Trustees of a Fund, in its discretion, may approve basing the fee to KDI on all Fund assets in the future. Certain trustees or officers of the Funds are also directors or officers of KFS or KDI as indicated under "Officers and Trustees." B-27 96 CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as sub-custodian, have custody of all securities and cash of each Fund maintained in the United States. The Chase Manhattan Bank, N.A., Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of all securities and cash of each Fund held outside of the United States. They attend to the collection of principal and income, and payment for and collection of proceeds of securities bought and sold by each Fund. IFTC is also each Fund's transfer agent and dividend-paying agent. Pursuant to a services agreement with IFTC, Kemper Service Company ("KSvC"), an affiliate of KFS, serves as "Shareholder Service Agent." IFTC receives an annual fee as custodian for each Fund, payable monthly, at a rate of $.10 per $1,000 of average monthly net assets of each Fund (in the case of the Cash Reserves Fund, at a rate of $.05 per $1,000) plus certain transaction charges and out-of-pocket expense reimbursement. IFTC receives as transfer agent, and pays to KSvC, annual account fees of $6 (a maximum of $8 for the Cash Reserves Fund accounts) per account plus account set up, transaction and maintenance charges, annual fees associated with the contingent deferred sales charge (Class B only) and out-of-pocket expense reimbursement. IFTC's fee is reduced by certain earnings credits in favor of the Fund. The following shows for each Fund's 1995 fiscal year the shareholder service fees IFTC remitted to KSvC. Prior to February 1, 1995, IFTC was 50% owned by KFS.
FUND FEES TO KSvC - ---- ------------ Adjustable Rate................................................................... 396,000 Cash Reserves+.................................................................... 1,241,000 Diversified....................................................................... 1,650,000 Government........................................................................ 4,925,000 High Yield........................................................................ 4,248,000 Income and Capital................................................................ 840,000 Mortgage+......................................................................... 7,000,000 Short-Intermediate Government+.................................................... 824,000
- --------------- + Includes amounts paid during the fiscal year ended July 31, 1995 and the fiscal period from August 1, 1995 to September 30, 1995. INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606, audit and report on the Funds' annual financial statements, review certain regulatory reports and the Funds' federal income tax returns, and perform other professional accounting, auditing, tax and advisory services when engaged to do so by the Funds. Shareholders will receive annual audited financial statements and semi-annual unaudited financial statements. PURCHASE AND REDEMPTION OF SHARES As described in the Funds' prospectus, shares of a Fund are sold at their public offering price, which is the net asset value per share of the Fund next determined after an order is received in proper form plus, with respect to Class A shares of each Fund other than the Cash Reserves Fund, an initial sales charge. The applicable sales charge applies for exchanges from Class A shares of Cash Reserves Fund to Class A shares of other Kemper Mutual Funds. The minimum initial investment is $1,000 and the minimum subsequent investment is $100 but such minimum amounts may be changed at any time. See the prospectus for certain exceptions to these minimums. An order for the purchase of shares that is accompanied by a check drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in proper form and will not be processed unless and until the Fund determines that it has received payment of the proceeds of the check. The time required for such a determination will vary and cannot be determined in advance. B-28 97 Upon receipt by the Shareholder Service Agent of a request for redemption, shares of a Fund will be redeemed by the Fund at the applicable net asset value per share of such Fund as described in the Funds' prospectus. The redemption within one year of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege described in the prospectus may be subject to a 1% contingent deferred sales charge (see "Purchase of Shares" in the prospectus). Redemption of Class B shares may be subject to a contingent deferred sales charge. When a Fund is asked to redeem shares for which it may not yet have received good payment, it may delay the mailing of a redemption check until it has determined that collected funds have been received for the purchase of such shares, which will be up to 15 days. Scheduled variations in or the elimination of the initial sales charge for purchases of Class A shares or the contingent deferred sales charge for redemption of Class B shares by certain classes of persons or through certain types of transactions as described in the prospectus is provided because of anticipated economies in sales and sales related efforts. A Fund may suspend the right of redemption or delay payment more than seven days (a) during any period when the New York Stock Exchange ("Exchange") is closed other than customary weekend and holiday closings or during any period in which trading on the Exchange is restricted, (b) during any period when an emergency exists as a result of which (i) disposal of a Fund's investments is not reasonably practicable, or (ii) it is not reasonably practicable for the Fund to determine the value of its net assets, or (c) for such other periods as the Securities and Exchange Commission may by order permit for the protection of a Fund's shareholders. The conversion of Class B shares to Class A shares may be subject to the continuing availability of an opinion of counsel, ruling by the Internal Revenue Service or other assurance acceptable to each Fund to the effect that (a) the assessment of the distribution services fee with respect to Class B shares and not Class A shares does not result in the Fund's dividends constituting "preferential dividends" under the Internal Revenue Code, and (b) that the conversion of Class B shares to Class A shares does not constitute a taxable event under the Internal Revenue Code. The conversion of Class B shares to Class A shares may be suspended if such assurance is not available. In that event, no further conversions of Class B shares would occur, and shares might continue to be subject to the distribution services fee for an indefinite period that may extend beyond the proposed conversion date as described in the prospectus. DIVIDENDS AND TAXES DIVIDENDS. Each Fund normally declares and distributes monthly dividends of net investment income and distributes any net realized short-term and long-term capital gains at least annually, except that the Cash Reserves Fund declares daily dividends of its net investment income. Cash Reserves Fund. Dividends will be reinvested or paid in cash monthly. If a shareholder redeems his or her entire account, all dividends accrued to the time of redemption will be paid at that time. The Fund calculates its dividends based on its daily net investment income. For this purpose, the net investment income of the Cash Reserves Fund consists of (a) accrued interest income plus or minus amortized discount or premium, (b) plus or minus all short-term realized gains and losses on investments and (c) minus accrued expenses allocated to the Fund. Expenses are accrued each day. While the Fund's investments are valued at amortized cost (see "Net Asset Value" in the prospectus), there will be no unrealized gains or losses on such investments. However, should the net asset value deviate significantly from market value, the Board of Trustees could decide to value the investments at market value and then unrealized gains and losses would be included in net investment income above. All Funds. A Fund may at any time vary its foregoing dividend practices and, therefore, reserves the right from time to time to either distribute or retain for reinvestment such of its net investment income and its net short-term and long-term capital gains as the Board of Trustees of the Fund determines appropriate under the then current circumstances. In particular, and without limiting the foregoing, a Fund may make additional distributions of net investment income or capital gain net income in order to satisfy the minimum distribution requirements contained B-29 98 in the Internal Revenue Code (the "Code"). Dividends will be reinvested in shares of the Fund paying such dividends unless shareholders indicate in writing that they wish to receive them in cash or in shares of other Kemper Funds as described in the prospectus. The level of income dividends per share (as a percentage of net asset value) will be lower for Class B and Class C shares than for Class A shares primarily as a result of the distribution services fee applicable to Class B and Class C shares. Distributions of capital gains, if any, will be paid in the same amount for each class. TAXES. Each Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Code and, if so qualified, will not be liable for federal income taxes to the extent its earnings are distributed. One of the Subchapter M requirements to be satisfied is that less than 30% of a Fund's gross income during its fiscal year must be derived from gains (not reduced by losses) from the sale or other disposition of securities and certain other investments held for less than three months. A Fund may be limited in its options, futures and foreign currency transactions in order to prevent recognition of such gains. A Fund's options, futures and foreign currency transactions are subject to special tax provisions that may accelerate or defer recognition of certain gains or losses, change the character of certain gains or losses, or alter the holding periods of certain of the Fund's securities. The mark-to-market rules of the Code may require a Fund to recognize unrealized gains and losses on certain options and futures held by the Fund at the end of the fiscal year. Under these provisions, 60% of any capital gain or loss recognized will generally be treated as long-term and 40% as short-term. However, although certain forward contracts and futures contracts on foreign currency are marked-to-market, the gain or loss is generally ordinary under Section 988 of the Code. In addition, the straddle rules of the Code would require deferral of certain losses realized on positions of a straddle to the extent that the Fund had unrealized gains in offsetting positions at year end. Gains and losses attributable to fluctuations in the value of foreign currencies will be characterized generally as ordinary gain or loss under Section 988 of the Code. For example, if a Fund sold a foreign bond and part of the gain or loss on the sale was attributable to an increase or decrease in the value of a foreign currency, then the currency gain or loss may be treated as ordinary income or loss. If such transactions result in greater net ordinary income, the dividends paid by the Fund will be increased; if the result of such transactions is lower net ordinary income, a portion of dividends paid could be classified as a return of capital. At August 31, 1995 the Adjustable Rate Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $11,586,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 1997 through 2004. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. At October 31, 1995 the Diversified Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $255,985,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 1996 through 2003. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. At October 31, 1995, the Government Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $628,047,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 1998 through 2003. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. At October 31, 1995, the Income and Capital Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $21,025,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 2002 through 2003. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. B-30 99 At September 30, 1995, the High Yield Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $192,130,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 1998 through 2004. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. At September 30, 1995, the Mortgage Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $1,230,769,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 1996 through 2003. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. At September 30, 1995, the Short-Intermediate Government Fund had an accumulated net realized capital loss for federal income tax purposes of approximately $18,057,000, which is available to offset future taxable capital gains. If not applied, the carryover expires during the period 2002 through 2003. The Fund does not intend to distribute realized capital gains until the capital loss carryover is exhausted. A 4% excise tax is imposed on the excess of the required distribution for a calendar year over the distributed amount for such calendar year. The required distribution is the sum of 98% of a Fund's net investment income for the calendar year plus 98% of its capital gain net income for the one-year period ending October 31, plus any undistributed net investment income from the prior calendar year, plus any undistributed capital gain net income from the one year period ended October 31 in the prior calendar year, minus any overdistribution in the prior calendar year. For purposes of calculating the required distribution, foreign currency gains or losses occurring after October 31 are taken into account in the following calendar year. Each Fund intends to declare or distribute dividends during the appropriate periods of an amount sufficient to prevent imposition of the 4% excise tax. A shareholder who redeems shares of a Fund will recognize capital gain or loss for federal income tax purposes measured by the difference between the value of the shares redeemed and the adjusted cost basis of the shares. Any loss recognized on the redemption of Fund shares held six months or less will be treated as long-term capital loss to the extent that the shareholder has received any long-term capital gain dividends on such shares. A shareholder who has redeemed shares of a Fund (other than shares of the Cash Reserves Fund not acquired by exchange from another Kemper Mutual Fund) or other Kemper Mutual Fund listed in the prospectus under "Special Features-- Class A Shares--Combined Purchases" may reinvest the amount redeemed at net asset value at the time of the reinvestment in shares of any Fund or in shares of a Kemper Mutual Fund within six months of the redemption as described in the prospectus under "Redemption or Repurchase of Shares--Reinvestment Privilege." If a shareholder realized a loss on the redemption or exchange of a Fund's shares and reinvests in shares of the same Fund within 30 days before or after the redemption or exchange, the transactions may be subject to the wash sale rules resulting in a postponement of the recognition of such loss for federal income tax purposes. An exchange of a Fund's shares for shares of another fund is treated as a redemption and reinvestment for federal income tax purposes upon which gain or loss may be recognized. A Fund's investment income derived from foreign securities may be subject to foreign income taxes withheld at the source. Because the amount of a Fund's investments in various countries will change from time to time, it is not possible to determine the effective rate of such taxes in advance. Shareholders who are non-resident aliens are subject to U.S. withholding tax on ordinary income dividends (whether received in cash or shares) at a rate of 30% or such lower rate as prescribed by any applicable tax treaty. PERFORMANCE As described in the prospectus, each Fund's historical performance or return for a class of shares may be shown in the form of "yield" and, for each Fund except the Cash Reserves Fund, "average annual total return" and "total return" figures. The Cash Reserves Fund also may advertise its "effective yield." These various measures of performance are described below. Performance information will be computed separately for each class. KFS agreed to waive its management fee and to absorb certain operating expenses for the Adjustable Rate Fund and to absorb B-31 100 certain operating expenses for the Cash Reserves Fund for the periods and to the extent specified in this Statement of Additional Information. See "Investment Manager and Underwriter." Because of this waiver and expense absorption, the performance results for the Adjustable Rate Fund and Cash Reserves Fund may be shown with and without the effect of this waiver and expense absorption. Performance results not giving effect to waivers and expense absorptions will be lower. Yield is a measure of the net investment income per share earned over a specific one month or 30-day period expressed as a percentage of the maximum offering price of a Fund's shares at the end of the period. Average annual total return and total return measure both the net investment income generated by, and the effect of any realized or unrealized appreciation or depreciation of, the underlying investments in the Fund's portfolio. A Fund's yield is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. Each Fund's yield shown below is based on the one month (7 days for Cash Reserves Fund) period ended as noted.
CLASS A CLASS B CLASS C FUND (PERIOD ENDED) SHARES SHARES SHARES - -------------------------------------------------------------------------- ------- ------- ------- Adjustable Rate (8/31/95)................................................. 5.25% 4.77% 4.97% Cash Reserves (9/30/95)................................................... 4.98 4.12 4.15 Diversified (10/31/95).................................................... 7.10 6.50 6.59 Government (10/31/95)..................................................... 6.16 5.46 5.50 High Yield (9/30/95)...................................................... 9.59 9.02 9.06 Income and Capital (10/31/95)............................................. 5.75 5.10 5.12 Mortgage (9/30/95)........................................................ 5.85 5.24 5.43 Short-Intermediate Government (9/30/95)................................... 4.75 4.00 4.20
Each Fund's yield is computed by dividing the net investment income per share earned during the specified one month or 30-day period by the maximum offering price per share (which is net asset value for Class B and Class C shares) on the last day of the period, according to the following formula: a - b ----- 6 YIELD = 2 [ ( cd +1) - 1] Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period (which is net asset value for Class B and Class C shares). In computing the foregoing yield, each Fund follows certain standardized accounting practices specified by Securities and Exchange Commission rules. These practices are not necessarily consistent with those that each Fund uses to prepare its annual and interim financial statements in conformity with generally accepted accounting principles. The Cash Reserve Fund's yield is also computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. Under that method, the current yield quotation is based on a seven-day period and is computed as follows. The first calculation is net investment income per share; which is accrued interest on portfolio securities, plus or minus amortized discount or premium, less accrued expenses. This number is then divided by the price per share (expected to remain constant at $1.00) at the beginning of the period ("base period return"). The result is then divided by 7 and multiplied by 365 and the resulting yield figure is carried to the nearest one-hundredth of one percent. Realized capital gains or losses and unrealized appreciation or depreciation of investments are not included in the calculation. B-32 101 The Cash Reserve Fund's effective yield is determined by taking the base period return (computed as described above) and calculating the effect of assumed compounding. The formula for the effective yield is: 365/7 (base period return + 1) - 1. The Cash Reserve Fund's effective yield for its Class A, Class B and Class C shares for the seven-day period ended September 30, 1995 was 5.11%, 4.21% and 4.24%. Each Fund's average annual total return quotation is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The average annual total return for a Fund for a specific period is found by first taking a hypothetical $1,000 investment ("initial investment") in the Fund's shares on the first day of the period, adjusting to deduct the maximum sales charge (in the case of Class A shares), and computing the "redeemable value" of that investment at the end of the period. The redeemable value in the case of Class B shares includes the effect of the applicable contingent deferred sales charge that may be imposed at the end of the period. The redeemable value is then divided by the initial investment, and this quotient is taken to the Nth root (N representing the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage. The calculation assumes that all income and capital gains dividends paid by the Fund have been reinvested at net asset value on the reinvestment dates during the period. Average annual total return may also be calculated without deducting the maximum sales charge. Calculation of a Fund's total return is not subject to a standardized formula, except when calculated for purposes of the Fund's "Financial Highlights" table in the Fund's financial statements. Total return performance for a specific period is calculated by first taking an investment (assumed below to be $10,000) ("initial investment") in a Fund's shares on the first day of the period, either adjusting or not adjusting to deduct the maximum sales charge (in the case of Class A shares), and computing the "ending value" of that investment at the end of the period. The total return percentage is then determined by subtracting the initial investment from the ending value and dividing the remainder by the initial investment and expressing the result as a percentage. The ending value in the case of Class B shares may or may not include the effect of the applicable contingent deferred sales charge that may be imposed at the end of the period. The calculation assumes that all income and capital gains dividends paid by the Fund have been reinvested at net asset value on the reinvestment dates during the period. Total return may also be shown as the increased dollar value of the hypothetical investment over the period. Total return calculations that do not include the effect of the sales charge would be reduced if such charge were included. A Fund's performance figures are based upon historical results and are not representative of future performance. Each Fund's Class A shares are sold at net asset value plus a maximum sales charge of 4.5% of the offering price (3.5% for the Adjustable Rate and Short-Intermediate Government Funds). Class B and Class C shares are sold at net asset value. Redemptions of Class B shares may be subject to a contingent deferred sales charge that is 4% in the first year following the purchase, declines by a specified percentage each year thereafter and becomes zero after six years. Returns and net asset value will fluctuate. Factors affecting each Fund's performance include general market conditions, operating expenses and investment management. Any additional fees charged by a dealer or other financial services firm would reduce the returns described in this section. Shares of each Fund are redeemable at the then current net asset value, which may be more or less than original cost. The figures below show performance information for the Funds for various periods. Comparative information with respect to certain indices is also included. Please note the differences and similarities between the investments which a Fund may purchase and the investments measured by the applicable indices. The Consumer Price Index is generally considered to be a measure of inflation. The Lehman Brothers Adjustable Rate Index generally represents the performance of adjustable rate mortgages during various market conditions. The Lehman Brothers Aggregate Bond Index generally represents the performance of intermediate and long-term government bonds and investment grade corporate debt securities and mortgage-backed securities during various market conditions. The Lehman Brothers Government/Corporate Bond Index generally represents the performance of intermediate and long-term government and investment grade corporate debt securities during various market conditions. The Merrill Lynch Market Weighted Index generally represents the performance of short- and intermediate-term Treasury and GNMA securities during various market conditions. The Salomon Brothers High Grade Corporate Bond Index generally represents the performance of high grade long-term corporate bonds during various market conditions. The Salomon Brothers Long-Term High Yield Index generally represents the performance of high yield debt securities during various B-33 102 market conditions. The Salomon Brothers 30 Year GNMA Index generally represents the performance of GNMA 30-year pass-through mortgages. The foregoing bond indices are unmanaged. The market prices and yields of corporate and government bonds will fluctuate. The net asset values and returns of each class of shares of the Funds will also fluctuate. No adjustment has been made for taxes payable on dividends. The period indicated was one of fluctuating securities prices and interest rates. ADJUSTABLE RATE FUND--AUGUST 31, 1995
--------------------------------------------------------------------------------------------------------- TOTAL INITIAL CAPITAL GAIN INCOME ENDING PERCENTAGE RETURN $10,000 DIVIDENDS DIVIDENDS VALUE INCREASE TABLE Investment(*) REINVESTED REINVESTED(**) (ADJUSTED)(*) (ADJUSTED)(*) --------- ----------------- ----------------- ----------------- ----------------- ----------------- CLASS A SHARES Life of Fund(+) $8,896 9 7,520 16,425 64.3 Five Years 9,976 0 3,809 13,785 37.9 One Year 9,617 0 568 10,185 1.9 CLASS B SHARES Life of Fund(++) 9,928 0 592 10,222 2.2 One Year 9,988 0 496 10,184 1.8 CLASS C SHARES Life of Fund(++) 9,940 0 598 DNA DNA One Year 9,988 0 501 DNA DNA --------------------------------------- TOTAL ENDING PERCENTAGE RETURN VALUE INCREASE TABLE (UNADJUSTED)(*) (UNADJUSTED)(*) ------ ----------------- ----------------- Life of Fund(+) 17,027 70.3 Five Years 14,283 42.8 One Year 10,552 5.5 Life of Fund(++) 10,520 5.2 One Year 10,484 4.8 Life of Fund(++) 10,538 5.4 One Year 10,489 4.9
COMPARED TO ------------------------------------------------------ CONSUMER SALOMON LEHMAN LEHMAN TOTAL PRICE BROS. HIGH BROS. BROS. RETURN INDEX GRADE CORP. GOVT./CORP. ADJ. RATE TABLE (1) INDEX(2) INDEX(3) INDEX(4) ------ -------- ----------- ----------- --------- Life of Fund(+) 33.7 132.1 111.1 DNA Life of Fund(++) Five Years 16.2 73.5 62.3 DNA One Year 2.6 15.7 11.9 8.7
SALOMON BROS. LEHMAN FUND FUND FUND HIGH LEHMAN BROS. AVERAGE ANNUAL CLASS CLASS CLASS CONSUMER GRADE BROS. ADJ. TOTAL RETURN A B C PRICE CORP. GOVT./CORP. RATE TABLE SHARES SHARES SHARES INDEX(1) INDEX(2) INDEX(3) INDEX(4) -------------- ------ ------ ------ -------- -------- ----------- ----- Life of Fund(+) 6.4 -- -- 3.7 11.1 9.8 DNA Life of Fund(++) -- 1.8 4.3 2.9 14.1 11.0 7.1 Five Years 6.6 DNA DNA 3.1 11.7 10.2 DNA One Year 1.9 1.9 4.9 2.6 15.7 11.9 8.7
- --------------- DNA--Data not available. (+) Since September 1, 1987 for Class A Shares. (++) Since May 31, 1994 for Class B and Class C Shares. B-34 103 DIVERSIFIED FUND--OCTOBER 31, 1995
------------------------------------------------------------------------------------------- TOTAL Initial Capital Gain Income Ending RETURN $10,000 Dividends Dividends Value TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) - -------------------- ------------------- ------------------- ------------------- ------------------- CLASS A SHARES Life of Fund(+) $ 5,610 715 56,430 62,755 Fifteen Years 5,538 420 36,724 42,682 Ten Years 7,145 235 17,953 25,333 Since 2/1/89(+++) 9,315 0 11,251 20,566 Five Years 13,811 0 9,389 23,200 One Year 9,901 0 885 10,786 CLASS B SHARES Life of Fund(++) 10,068 0 1,159 10,927 One Year 10,364 0 823 10,887 CLASS C SHARES Life of Fund(++) 10,084 0 1,173 DNA One Year 10,362 0 833 DNA TOTAL Percentage Ending Percentage RETURN Increase Value Increase TABLE (adjusted)(*) (unadjusted)(***) (unadjusted)(***) - -------------------- ------------------- ------------------- ------------------- CLASS A SHARES Life of Fund(+) 527.6 65,702 557.0 Fifteen Years 326.8 44,687 346.9 Ten Years 153.3 26,524 165.2 Since 2/1/89(+++) 105.7 21,529 115.3 Five Years 132.0 24,320 143.2 One Year 7.9 11,290 12.9 CLASS B SHARES Life of Fund(++) 9.3 11,227 12.3 One Year 8.9 11,187 11.9 CLASS C SHARES Life of Fund(++) DNA 11,257 12.6 One Year DNA 11,195 12.0
COMPARED TO ------------------------------------------------------------------------------------------- Salomon Salomon Lehman Bros. TOTAL Consumer Bros. Bros. Long-Term RETURN Price High Grade Govt./Corp. High Yield TABLE Index(1) Corp. Index(2) Index(3) Index(5) - -------------------- ------------------- ------------------- ------------------- ------------------- Life of Fund(+) 152.4 483.1 462.8 DNA Life of Fund(++) Fifteen Years 80.7 541.4 436.9 610.7 Ten Years 40.9 198.2 160.6 228.3 Since 2/1/89(+++) 26.5 103.5 91.6 115.6 Five Years 14.8 74.9 62.8 156.7 One Year 2.5 23.2 16.6 24.3
Salomon AVERAGE ANNUAL Fund Fund Fund Consumer Bros. Lehman Bros. TOTAL RETURN Class A Class B Class C Price High Grade Govt./Corp. TABLE Shares Shares Shares Index(1) Corp. Index(2) Index(3) - --------------- -------------- -------------- -------------- -------------- -------------- -------------- Life of Fund(+) 10.5 -- -- 5.2 10.1 9.9 Life of Fund(++) -- 6.4 8.7 2.7 14.8 11.6 Fifteen Years 10.2 DNA DNA 4.0 13.2 11.9 Ten Years 9.7 DNA DNA 3.5 11.6 10.1 Five Years 18.3 DNA DNA 2.8 11.8 10.2 One Year 7.9 8.9 12.0 2.5 23.2 16.6 Salomon Bros. AVERAGE ANNUAL Long-Term TOTAL RETURN High Yield TABLE Index(5) - --------------- -------------- Life of Fund(+) DNA Life of Fund(++) 17.5 Fifteen Years 14.0 Ten Years 12.6 Five Years 20.8 One Year 24.3
- --------------- DNA--Data not available. (+) Since June 23, 1977 for Class A Shares. (++) Since May 31, 1994 for Class B and Class C Shares. (+++) The Fund's current objective became effective February 1, 1989. B-35 104 GOVERNMENT FUND--OCTOBER 31, 1995
----------------------------------------------------------------------------------------------------------- TOTAL Initial Capital Gain Income Ending Percentage Ending RETURN $10,000 Dividends Dividends Value Increase Value TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*) ------------- ------------ -------------- ------------- ------------- ----------------- CLASS A SHARES Life of Fund(+) $ 8,000 0 33,530 41,530 315.3 43,480 Fifteen Years 9,409 0 34,431 43,840 338.4 45,923 Ten Years 9,321 0 13,901 23,222 132.2 24,314 Five Year 9,781 0 4,789 14,570 45.7 15,256 One Year 10,206 0 804 11,010 10.1 11,524 CLASS B SHARES Life of Fund(++) 10,276 0 1,010 10,986 9.9 11,286 One Year 10,684 0 734 11,118 11.2 11,418 CLASS C SHARES Life of Fund(++) 10,300 0 1,017 DNA DNA 11,317 One Year 10,695 0 738 DNA DNA 11,433 TOTAL Percentage RETURN Increase TABLE (unadjusted)(*) ----------------- CLASS A SHARES Life of Fund(+) 334.8 Fifteen Years 359.2 Ten Years 143.1 Five Year 52.6 One Year 15.2 CLASS B SHARES Life of Fund(++) 12.9 One Year 14.2 CLASS C SHARES Life of Fund(++) 13.2 One Year 14.3
COMPARED TO --------------------------------------------------------- Consumer Salomon Lehman Salomon TOTAL Price Bros. High Bros. Bros. 30 Yr. RETURN Index Grade Corp. Govt./Corp. GNMA TABLE (1) Index(2) Index(3) Index(6) -------- ----------- ----------- ------------ Life of Fund(+) 105.4 459.6 423.3 DNA Life of Fund(++) Fifteen Years 80.7 541.4 436.9 470.8 Ten Years 40.9 198.2 160.6 159.7 Five Year 14.8 74.9 62.8 56.2 One Year 2.5 23.2 16.6 15.0
Salomon Lehman Salomon AVERAGE ANNUAL Fund Fund Fund Consumer Bros. High Bros. Bros. 30 Yr. TOTAL RETURN Class A Class B Class C Price Grade Corp. Govt./Corp. GNMA TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(6) ------- ------- ------- -------- ----------- ----------- ------------ Life of Fund(+) 9.3 -- -- 4.6 11.3 10.8 DNA Life of Fund(++) -- 6.9 9.1 2.7 14.8 11.6 10.7 Fifteen Years 10.4 DNA DNA 4.0 13.2 11.9 12.3 Ten Years 8.8 DNA DNA 3.5 11.6 10.1 10.0 Five Year 7.8 DNA DNA 2.8 11.8 10.2 9.3 One Year 10.1 11.2 14.3 2.5 23.2 16.6 15.0
- --------------- DNA--Data not available. (+) Since October 1, 1979 for Class A Shares (when KFS assumed investment advisory responsibilities for the Fund; prior to that date, the Fund was managed by another investment adviser that was not affiliated with KFS) (++) Since May 31, 1994 for Class B and Class C Shares. B-36 105 HIGH YIELD FUND--SEPTEMBER 30, 1995
-------------------------------------------------------------------------------------------------- TOTAL Initial Capital Gain Income Ending Percentage Ending RETURN $10,000 Dividends Dividends Value Increase Value TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*) - ------------------ ------------- ------------ -------------- ------------- ------------- ----------------- CLASS A SHARES Life of Fund(+) $ 7,938 1,097 61,185 70,220 602.2 73,524 Fifteen Years 10,177 1,053 56,175 67,405 574.1 70,580 Ten Years 8,831 463 20,358 29,652 196.5 31,048 Five Years 12,285 0 9,048 21,333 113.3 22,324 One Year 9,889 0 1,014 10,903 9.0 11,410 CLASS B SHARES Life of Fund(++) 10,051 0 1,259 11,010 10.1 11,310 One Year 10,349 0 960 11,009 10.1 11,309 CLASS C SHARES Life of Fund(++) 10,075 0 1,268 DNA DNA 11,343 One Year 10,348 0 965 DNA DNA 11,313 TOTAL Percentage RETURN Increase TABLE (unadjusted) - ------------------ ----------------- CLASS A SHARES Life of Fund(+) 635.2 Fifteen Years 605.8 Ten Years 210.5 Five Years 123.2 One Year 14.1 CLASS B SHARES Life of Fund(++) 13.1 One Year 13.1 CLASS C SHARES Life of Fund(++) 13.4 One Year 13.1
COMPARED TO ----------------------------------------------------- Salomon Salomon Bros. Consumer Bros. Lehman Long-Term TOTAL Price High Grade Bros. High RETURN Index Corp. Govt./Corp. Yield TABLE (1) Index(2) Index(3) Index(5) - ----------------- -------- ---------- ----------- --------- Life of Fund(+) 145.1 478.2 451.3 DNA Life of Fund(++) Fifteen Years 82.4 521.8 423.8 608.4 Ten Years 41.5 203.5 161.9 224.9 Five Years 15.5 74.6 62.6 144.1 One Year 2.5 20.7 14.8 23.1
Salomon Salomon Bros. Bros. Long-Term AVERAGE ANNUAL Fund Fund Fund Consumer High Grade Lehman Bros. High TOTAL RETURN Class A Class B Class C Price Corp. Govt./Corp. Yield TABLE Shares Shares Shares Index(1) Index(2) Index(3) Index(5) - --------------- ------- ------- ------- -------- ---------- ------------ --------- Life of Fund(+) 11.7 -- -- 5.2 10.4 10.1 DNA Life of Fund (++) -- 7.4 9.9 2.9 14.4 11.1 17.7 Fifteen Years 13.6 DNA DNA 4.1 13.0 11.7 13.9 Ten Years 11.5 DNA DNA 3.5 11.7 10.1 12.5 Five Years 16.4 DNA DNA 2.9 11.8 10.2 19.5 One Year 9.0 10.1 13.1 2.5 20.7 14.8 23.1
- --------------- DNA--Data not available. (+) Since January 26, 1978 for Class A Shares. (++) Since May 31, 1994 for Class B and Class C Shares. B-37 106 INCOME AND CAPITAL FUND--OCTOBER 31, 1995
----------------------------------------------------------------------------------------------------------- TOTAL Initial Capital Gain Income Ending Percentage Ending RETURN $10,000 Dividends Dividends Value Increase Value TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*) --------------- ------------- ------------ -------------- ------------- ------------- ----------------- CLASS A SHARES Life of Fund(+) $ 8,282 470 62,044 70,796 608.0 74,124 Fifteen Years 10,524 249 39,464 50,237 402.4 52,599 Ten Years 9,667 120 14,400 24,187 141.9 25,316 Five Years 10,759 79 5,041 15,879 58.8 16,621 One Year 10,473 0 749 11,222 12.2 11,747 CLASS B SHARES Life of Fund(++) 10,582 0 979 11,261 12.6 11,561 One Year 10,930 0 683 11,313 13.1 11,613 CLASS C SHARES Life of Fund(++) 10,607 0 987 DNA DNA 11,594 One Year 10,956 0 689 DNA DNA 11,645 TOTAL Percentage RETURN Increase TABLE (unadjusted)(*) --------------- ----------------- Life of Fund(+) 641.2 Fifteen Years 426.0 Ten Years 153.2 Five Years 66.2 One Year 17.5 Life of Fund(++) 15.6 One Year 16.1 Life of Fund(++) 15.9 One Year 16.5
COMPARED TO ----------------------------------------------------- Salomon Lehman Bros. Bros. Lehman TOTAL Consumer High Grade Aggregate Bros. RETURN Price Corp. Bond Bond Govt./Corp. TABLE Index(1) Index(2) Index(7) Index(3) --------------- -------- ---------- --------- ----------- Life of Fund(+) 220.5 708.4 DNA 661.4 Life of Fund(++) Fifteen Years 80.7 541.4 436.4 436.9 Ten Years 40.9 198.2 157.2 160.6 Five Years 14.8 74.9 58.5 62.8 One Year 2.5 23.2 15.7 16.6
Lehman Salomon Bros. Bros. Aggregate Lehman AVERAGE ANNUAL Fund Fund Fund Consumer High Grade Bond Bros. TOTAL RETURN Class A Class B Class C Price Corp. Bond Index Govt./Corp. TABLE Shares Shares Shares Index(1) Index(2) (7) Index(3) - --------------- ------- ------- ------- -------- ---------- --------- ----------- Life of Fund(+) 9.5 -- -- 5.6 10.2 DNA 9.9 Life of Fund(++) -- 8.7 11.0 2.7 14.8 11.0 11.6 Fifteen Years 11.4 DNA DNA 4.0 13.2 11.9 11.9 Ten Years 9.2 DNA DNA 3.5 11.6 9.9 10.1 Five Years 9.7 DNA DNA 2.8 11.8 9.7 10.2 One Year 12.2 13.1 16.5 2.5 23.2 15.7 16.6
- --------------- DNA--Data not available. (+) Since April 15, 1974 for Class A Shares. (++) Since May 31, 1994 for Class B and Class C Shares. B-38 107 MORTGAGE FUND--SEPTEMBER 30, 1995
----------------------------------------------------------------------------------------------------------- TOTAL Initial Capital Gain Income Ending Percentage Ending RETURN $10,000 Dividends Dividends Value Increase Value TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(***) (adjusted)(*) (unadjusted)(*) - ------------------ ------------- ------------ -------------- --------------- ------------- --------------- CLASS A SHARES Life of Fund(+) $ 8,716 0 2,953 11,669 16.7 12,222 One Year 10,014 0 792 10,806 8.1 11,315 CLASS B SHARES Life of Fund(++) 8,376 0 13,316 21,692 116.9 21,692 Ten Years 8,567 0 11,931 20,498 105.0 20,498 Five Years 10,085 0 4,555 14,540 45.4 14,640 One Year 10,486 0 738 10,924 9.2 11,224 CLASS C SHARES Life of Fund(+++) 10,186 0 960 DNA DNA 11,146 One Year 10,501 0 746 DNA DNA 11,247 TOTAL Percentage RETURN Increase TABLE (unadjusted)(*) - ------------------ --------------- CLASS A SHARES Life of Fund(+) 22.2 One Year 13.2 CLASS B SHARES Life of Fund(++) 116.9 Ten Years 105.0 Five Years 46.4 One Year 12.2 CLASS C SHARES Life of Fund(+++) 11.5 One Year 12.5
COMPARED TO ------------------------------------------------- Salomon Merrill Bros. Lehman Lynch TOTAL Consumer 30 Yr. Brothers Market RETURN Price GNMA Govt./Corp. Weighted TABLE Index(1) Index(6) Index(3) Index(8) - ----------------- -------- ------- ----------- -------- Life of Fund(+) 11.1 28.2 33.2 25.1 Life of Fund(++) 45.5 218.3 204.7 DNA Life of Fund(+++) Ten Years 41.5 164.3 161.9 DNA Five Years 15.5 56.6 62.6 48.2 One Year 2.5 13.9 14.8 10.4
Salomon AVERAGE Bros. Lehman Merrill Lynch ANNUAL Fund Fund Fund Consumer 30 Yr. Brothers Market TOTAL RETURN Class A Class B Class C Price GNMA Govt./Corp. Weighted TABLE Shares Shares Shares Index(1) Index(6) Index(3) Index(8) - ------------ -------- -------- -------- -------- ------- ----------- ------------- Life of Fund(+) 4.2 -- -- 2.9 6.9 8.0 6.1 Life of Fund(++) -- 7.3 -- 3.5 11.2 10.7 DNA Life of Fund(+++) -- -- 8.4 2.9 10.7 11.1 8.4 Ten Years DNA 7.4 DNA 3.5 10.2 10.1 DNA Five Years DNA 7.8 DNA 2.9 9.4 10.2 8.2 One Year 8.1 9.2 12.5 2.5 13.9 14.8 10.4
- --------------- DNA--Data not available. (+) Since January 10, 1992 for Class A Shares. (++) Since October 26, 1984 for Class B Shares. (+++) Since May 31, 1994 for Class C Shares. B-39 108 SHORT-INTERMEDIATE GOVERNMENT FUND--SEPTEMBER 30, 1995
---------------------------------------------------------------------------------------------------------- TOTAL Initial Capital Gain Income Ending Percentage Ending RETURN $10,000 Distributions Dividends Value Increase Value TABLE Investment(*) Reinvested Reinvested(**) (adjusted)(*) (adjusted)(*) (unadjusted)(*) - ------------------ ------------- ------------- -------------- ------------- ------------- --------------- CLASS A SHARES Life of Fund(+) $ 9,078 73 2,446 11,597 16.0 12,016 One Year 9,735 0 671 10,406 4.1 10,783 CLASS B SHARES Life of Fund(++) 9,471 95 5,329 14,895 49.0 14,895 Five Years 9,746 86 3,550 13,285 31.8 13,382 One Year 10,088 0 606 10,394 3.9 10,694 CLASS C SHARES Life of Fund(+++) 9,963 0 799 DNA DNA 10,762 One Year 10,100 0 613 DNA DNA 10,713 TOTAL Percentage RETURN Increase TABLE (unadjusted)(*) - ------------------ --------------- Life of Fund(+) 20.2 One Year 7.8 Life of Fund(++) 49.0 Five Years 33.8 One Year 6.9 Life of Fund(+++) 7.6 One Year 7.1
COMPARED TO ----------------------------------------------------------------------------------------------- Salomon Consumer Bros. Lehman Merrill Lynch TOTAL Price 30 Yr. Bros. Market RETURN Index GNMA Govt./Corp. Weighted TABLE (1) Index(6) Index(3) Index(8) - --------------------- -------------------- -------------------- -------------------- -------------------- Life of Fund(+) 11.1 28.2 33.2 25.1 Life of Fund(++) 26.5 87.6 88.9 74.7 Life of Fund(+++) Five Years 15.5 56.6 62.6 48.2 One Year 2.5 13.9 14.8 10.4
Salomon Bros. Lehman AVERAGE ANNUAL Fund Fund Fund Consumer 30 Yr. Bros. TOTAL RETURN Class A Class B Class C Price GNMA Govt./Corp. TABLE Shares Shares Shares Index(1) Index(6) Index(3) - ----------------- -------------- -------------- -------------- -------------- -------------- -------------- Life of Fund(+) 4.1 -- -- 3.6 9.9 10.0 Life of Fund(++) -- 6.2 -- 2.9 6.9 8.0 Life of Fund(+++) -- -- 5.6 2.9 10.7 11.1 Five Years DNA 5.8 DNA 2.9 9.4 10.2 One Year 4.1 3.9 7.1 2.5 13.9 14.8 Merrill Lynch AVERAGE ANNUAL Market TOTAL RETURN Weighted TABLE Index(8) - ----------------- -------------- Life of Fund(+) 8.7 Life of Fund(++) 6.1 Life of Fund(+++) 8.4 Five Years 8.2 One Year 10.4
- --------------- (+) Since January 10, 1992 for Class A Shares. (++) Since February 1, 1989 for Class B Shares. (+++) Since May 31, 1994 for Class C Shares. FOOTNOTES FOR ALL FUNDS * The Initial Investment and adjusted amounts for Class A shares were adjusted for the maximum initial sales charge at the beginning of the period, which is 4.5% for the Diversified Fund, Government Fund, High Yield Fund, Income and Capital Fund and Mortgage Fund and 3.5% for the Adjustable Rate Fund and Short-Intermediate Government Fund. The Initial Investment for Class B and Class C shares was not adjusted. Amounts were adjusted for Class B shares for the contingent deferred sales charge that may be imposed at the end of the period based upon the schedule for shares sold currently, see "Redemption or Repurchase of Shares" in the prospectus. No adjustments were made to Class C shares since they do not have an initial or contingent deferred sales charge. ** Includes short-term capital gain dividends. (1) The Consumer Price Index is a statistical measure of change, over time, in the prices of goods and services in major expenditure groups for all urban consumers. Source is Towers Data Systems. (2) Salomon Brothers High Grade Corporate Bond Index is on a total return basis with all dividends reinvested and is comprised of high grade long-term industrial and utility bonds rated in the top two rating categories. This index is unmanaged. Source is Towers Data Systems. (3) The Lehman Brothers Government/Corporate Bond Index is on a total return basis and is comprised of all publicly issued, non-convertible, domestic debt of the U.S. Government or any agency thereof, quasi-federal corporation, or corporate debt guaranteed by the U.S. Government and all publicly issued, fixed-rate, non-convertible, domestic debt of the three major corporate classifications: industrial, utility, and financial. Only notes and bonds with a minimum outstanding principal amount of $1,000,000 and a minimum of one year to maturity are included. Bonds included must have a rating of at least Baa by Moody's Investors Service, Inc., BBB by Standard & Poor's Corporation or in the case of bank bonds not rated by either Moody's or S&P, BBB by Fitch Investors Service. This index is unmanaged. Source is Towers Data Systems. (4) The Lehman Brothers Adjustable Rate Index is a broad market capitalization index of the U.S. Government agency adjustable rate mortgage market. All securities in the index have coupons that periodically adjust based on a spread over a published index, and all are guaranteed by an agency of the U.S. Government. This index is unmanaged. Source is Lehman Brothers Inc. (5) The Salomon Brothers Long-Term High Yield Bond Index is on a total return basis with all dividends reinvested and is comprised of high yield bonds with a par value of $50 million or higher and a remaining maturity of 10 years or longer rated BB+ or lower by Standard & Poor's Corporation or Ba1 or lower by Moody's Investors Service, Inc. This index is unmanaged. Source is Salomon Brothers Inc. (6) The Salomon Brothers 30 Year GNMA Index is on a total return basis with all dividends reinvested and is comprised of GNMA 30-year pass throughs of single family and graduated payment mortgages. In order for a GNMA coupon to be included in the index, it must have at least $200 million of outstanding coupon product. This index is unmanaged. Source is Salomon Brothers Inc. (7) The Lehman Brothers Aggregate Bond Index is on a total return basis and is comprised of intermediate and long-term government bonds, investment grade corporate debt securities and mortgage-backed securities. This index is unmanaged. Source is Lipper Analytical Services, Inc. (8) The Merrill Lynch Market Weighted Index is an unmanaged index comprised of the universe of 1-5 year Treasuries plus the Merrill Lynch GNMA Index. The two components are market value weighted, currently 76% in 1-5 year Treasuries and 24% in GNMAs. Source is Merrill Lynch. B-40 109 Investors may want to compare the performance of a Fund to that of certificates of deposit issued by banks and other depository institutions. Certificates of deposit represent an alternative income producing product. Certificates of deposit may offer fixed or variable interest rates and principal is guaranteed and may be insured. Withdrawal of deposits prior to maturity will normally be subject to a penalty. Rates offered by banks and other depository institutions are subject to change at any time specified by the issuing institution. The shares of a Fund are not insured and net asset value as well as yield will fluctuate, except that the Cash Reserves Fund seeks to maintain a stable net asset value of $1.00. Shares of a Fund are redeemable at net asset value which may be more or less than original cost. The bonds in which the Funds (other than the Cash Reserves Fund) invest are generally of longer term than most certificates of deposit and may reflect longer term market interest rate fluctuations. Investors also may want to compare the performance of a Fund to that of U.S. Treasury bills, notes or bonds because such instruments represent alternative income producing products. Treasury obligations are issued in selected denominations. Rates of Treasury obligations are fixed at the time of issuance and payment of principal and interest is backed by the full faith and credit of the U.S. Treasury. The market value of such instruments will generally fluctuate inversely with interest rates prior to maturity and will equal par value at maturity. As noted in the prospectus, the government guarantee of the bonds in the Adjustable Rate, Government, Mortgage and Short-Intermediate Government Funds does not guarantee the market value of their respective shares. The net asset value of a Fund other than the Cash Reserves Fund will fluctuate. Shares of a Fund are redeemable at net asset value which may be more or less than original cost (except that the Cash Reserves Fund seeks to maintain a net asset value of $1.00 per share). Each Fund's yield will also fluctuate. From time to time, the Adjustable Rate Fund may compare its yield or price volatility to various securities, such as U.S. Government Securities, or to certain indices including, but not limited to, the J.P. Morgan one-, three-, and five-year constant maturity Treasury yield indices, which are based on estimated Treasury security yields adjusted to constant maturity and the Federal Home Loan Bank Board 11th District Cost of Funds Index (COFI), which represents the weighted average cost of funds for savings institutions in Arizona, California and Nevada and is based on the one month annualized yield of savings deposits, Federal Home Loan Advances and other borrowings, such as repurchase agreements. The following tables illustrate an assumed $10,000 investment in Class A shares of each Fund other than the Cash Reserves, Mortgage and Short-Intermediate Government Funds, which includes the current maximum sales charge of 4.5% (3.5% for the Adjustable Rate Fund), with income and capital gain dividends reinvested in additional shares. The tables for the Mortgage and Short-Intermediate Government Funds illustrate an assumed $10,000 investment in Class B shares of these Funds, with income and capital gain dividends reinvested in additional shares, and do not include the effect of the contingent deferred sales charge. Each table covers the period from commencement of operations of the Fund to December 31, 1994. ADJUSTABLE RATE FUND (9/1/87)
----------DIVIDENDS---------- ---------CUMULATIVE VALUE OF SHARES ACQUIRED-------- ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE ----------------------------------------------------------------------------------------------- 1987 $ 96 $ 0 $9,722 $ 96 $ 0 $ 9,818 1988 1,098 0 9,132 1,159 0 10,291 1989 1,122 10 9,185 2,294 10 11,489 1990 1,137 0 8,918 3,388 9 12,315 1991 1,222 0 9,207 4,756 10 13,973 1992 824 0 9,217 5,592 10 14,819 1993 767 0 9,196 6,341 10 15,547 1994 747 0 8,724 6,745 9 15,478
- -------------------------------------------------------------------------------- B-41 110 - -------------------------------------------------------------------------------- DIVERSIFIED FUND (6/23/77)
---------DIVIDENDS------------ -------------CUMULATIVE VALUE OF SHARES ACQUIRED------------ ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE - ------------------------------------------------------------------------------------------------------------------- 1977 $ 427 $ 0 $9,141 $ 427 $ 0 $ 9,567 1978 1,006 132 8,591 1,367 132 10,090 1979 1,350 18 8,898 2,787 154 11,839 1980 1,672 30 9,774 4,830 201 14,805 1981 2,052 0 8,738 6,297 179 15,214 1982 2,420 27 8,592 8,771 204 17,567 1983 2,941 0 8,577 11,697 204 20,478 1984 3,449 0 7,667 13,803 182 21,652 1985 3,604 66 7,534 17,181 248 24,963 1986 3,163 307 6,748 18,381 522 25,651 1987 3,379 367 5,412 17,484 690 23,586 1988 3,847 0 5,475 21,566 698 27,739 1989 4,603 0 5,064 24,238 646 29,948 1990 4,215 0 3,819 21,868 487 26,174 1991 4,665 0 5,050 34,010 644 39,704 1992 4,604 0 5,363 40,723 684 46,770 1993 5,096 0 5,879 49,906 749 56,534 1994 4,438 0 5,217 48,486 665 54,368
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GOVERNMENT FUND (10/1/79)
----------DIVIDENDS------------- --------CUMULATIVE VALUE OF SHARES ACQUIRED---------------- ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE - ------------------------------------------------------------------------------------------------------------------- 1979 $ 203 $ 0 $9,192 $ 207 $ 0 $ 9,399 1980 1,009 0 8,164 1,145 0 9,309 1981 1,197 0 7,180 2,181 0 9,361 1982 1,314 0 8,119 3,912 0 12,031 1983 1,442 0 7,878 5,225 0 13,103 1984 1,686 0 7,806 6,903 0 14,709 1985 1,925 0 8,468 9,523 0 17,991 1986 2,076 0 8,853 12,061 0 20,913 1987 2,228 0 8,173 13,301 0 21,473 1988 2,265 0 7,851 14,985 0 22,836 1989 2,454 0 8,092 17,941 0 26,033 1990 2,526 0 8,066 20,486 0 28,552 1991 2,762 0 8,629 24,849 0 33,478 1992 2,781 0 8,341 26,780 0 35,125 1993 2,662 0 8,242 29,094 0 37,336 1994 2,684 0 7,422 28,770 0 36,192
- -------------------------------------------------------------------------------- B-42 111 - -------------------------------------------------------------------------------- HIGH YIELD FUND (1/26/78)
---------DIVIDENDS---------- ---------------CUMULATIVE VALUE OF SHARES ACQUIRED--------------- ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE ------------------------------------------------------------------------------------------------------------------- 1978 $ 826 $ 0 $8,950 $ 786 $ 0 $ 9,736 1979 1,098 0 8,227 1,744 0 9,971 1980 1,306 0 7,140 2,737 0 9,877 1981 1,515 0 6,678 4,057 0 10,735 1982 1,793 0 8,041 6,935 0 14,976 1983 2,048 0 8,365 9,254 0 17,620 1984 2,359 0 8,090 11,327 0 19,417 1985 2,684 0 8,787 15,108 0 23,895 1986 2,929 0 9,290 18,968 0 28,258 1987 3,375 1,196 8,690 20,917 1,200 30,807 1988 4,142 0 8,787 25,246 1,215 35,248 1989 4,632 0 7,635 26,155 1,055 34,845 1990 5,116 0 5,688 23,849 786 30,322 1991 5,417 0 7,262 36,262 1,003 44,527 1992 5,075 0 7,678 43,409 1,061 52,148 1993 5,492 0 8,393 53,178 1,159 62,730 1994 5,892 0 7,493 53,104 1,035 61,632
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INCOME AND CAPITAL FUND (4/15/74)
---------DIVIDENDS----------- ---------------CUMULATIVE VALUE OF SHARES ACQUIRED------------------ ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE - -------------------------------------------------------------------------------------------------------------------------- 1974 $ 425 $ 0 $ 9,819 $ 436 $ 0 $ 10,255 1975 939 0 10,077 1,421 0 11,498 1976 955 69 10,535 2,481 72 13,088 1977 1,052 75 10,077 3,415 144 13,636 1978 1,133 0 9,580 4,365 137 14,082 1979 1,397 0 8,873 5,393 127 13,393 1980 1,701 0 7,632 6,229 109 13,970 1981 1,861 0 6,858 7,438 98 14,394 1982 2,183 0 7,994 11,122 115 19,231 1983 2,478 0 7,889 13,422 113 21,424 1984 2,892 0 7,775 16,175 111 24,061 1985 3,191 0 8,396 20,803 120 29,319 1986 3,273 0 8,673 24,793 124 33,590 1987 3,590 0 8,042 26,474 115 34,631 1988 3,933 0 7,975 30,152 114 38,241 1989 4,207 0 7,794 33,607 112 41,513 1990 4,209 0 7,507 36,590 108 44,205 1991 4,313 0 8,080 43,926 116 52,122 1992 4,168 0 8,061 48,039 115 56,215 1993 4,029 355 8,376 53,946 476 62,798 1994 4,578 0 7,507 52,743 426 60,676
- -------------------------------------------------------------------------------- B-43 112 - -------------------------------------------------------------------------------- MORTGAGE FUND (10/26/84)
----------DIVIDENDS--------- ----------CUMULATIVE VALUE OF SHARES ACQUIRED------------------ ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE - -------------------------------------------------------------------------------------------------------------------- 1984 $ 0 $ 0 $ 10,024 $ 0 $ 0 $ 10,024 1985 1,028 0 10,035 1,051 0 11,086 1986 1,286 0 10,036 2,344 0 12,380 1987 1,270 0 9,212 3,389 0 12,600 1988 1,315 0 8,694 4,474 0 13,168 1989 1,326 0 8,800 5,867 0 14,667 1990 1,325 0 8,612 7,098 0 15,710 1991 1,442 0 9,235 9,149 0 18,384 1992 1,457 0 8,917 10,285 0 19,202 1993 1,381 0 8,718 11,410 0 20,128 1994 1,259 0 7,835 11,461 0 19,296
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SHORT-INTERMEDIATE GOVERNMENT FUND (2/1/89)
--------DIVIDENDS----------- -------------CUMULATIVE VALUE OF SHARES ACQUIRED----------------- ANNUAL ANNUAL CAPITAL REINVESTED YEAR INCOME GAIN REINVESTED CAPITAL ENDED DIVIDENDS DIVIDENDS INITIAL INCOME GAIN TOTAL 12/31 REINVESTED* REINVESTED INVESTMENT DIVIDENDS* DIVIDENDS VALUE - --------------------------------------------------------------------------------------------------------------------- 1989 $ 741 $ 0 $ 10,024 $ 737 $ 0 $ 10,761 1990 946 0 9,847 1,679 0 11,526 1991 934 0 10,118 2,690 0 12,808 1992 795 0 10,024 3,461 0 13,485 1993 769 100 9,859 4,157 99 14,115 1994 697 0 9,197 4,555 93 13,845
- -------------------------------------------------------------------------------- * Includes short-term capital gain dividends The following tables compare the performance of the Class A shares of the Funds (other than the Mortgage and Short-Intermediate Government Funds, for which the performance is of the Class B shares) over various periods with that of other mutual funds within the categories described below according to data reported by Lipper Analytical Services, Inc. ("Lipper"), New York, New York, which is a mutual fund reporting service. Lipper performance figures are based on changes in net asset value, with all income and capital gain dividends reinvested. Such calculations do not include the effect of any sales charges. Future performance cannot be guaranteed. Lipper publishes performance analyses on a regular basis. Each category includes funds with a variety of objectives, policies and market and credit risks that should be considered in reviewing these rankings. B-44 113 ADJUSTABLE RATE FUND A SHARES
Lipper-Fixed Income Fund Performance Analysis ---------------- Adjustable Rate Mortgage Funds ---------------- One Year (Period ended 9/30/95)................................................. 31 of 62
The Lipper Adjustable Rate Mortgage Funds category includes funds that invest at least 65% of assets in adjustable rate mortgage securities or other securities collateralized by or representing an interest in mortgages. DIVERSIFIED FUND A SHARES
Lipper-Fixed Income Fund Performance Analysis ------------ General Bond Funds ------------ One Year (Period ended 9/30/95)..................................................... 20 of 58 Five Years (Period ended 9/30/95)................................................... 1 of 15 Ten Years (Period ended 9/30/95).................................................... 3 of 8
The Lipper Fixed Income category reported in the Lipper Mutual Fund Performance Analysis includes funds which normally have more than 75% of their assets in fixed income issues. The Fund was ranked 20 out of 58 and 1 out of 15 funds in the General Bond category for the one and five year periods ended September 30, 1995 according to the Lipper Mutual Fund Performance Analysis. The Lipper General Bond Funds Category includes funds that intend to keep the bulk of their assets in corporate and government debt issues. GOVERNMENT FUND A SHARES
Lipper-Fixed Income Fund Performance Analysis Certificate Edition ------------ GNMA Funds ------------ One Year (Period ended 9/30/95).................................................... 17 of 49 Five Years (Period ended 9/30/95).................................................. 7 of 27 Ten Years (Period ended 9/30/95)................................................... 2 of 14
The Lipper GNMA Funds category includes funds that invest a minimum of 65% of their portfolio in Government National Mortgage Association securities. B-45 114 HIGH YIELD FUND A SHARES
Lipper-Fixed Income Fund Performance Analysis ------------ High Current Yield Funds ------------ One Year (Period ended 9/30/95)...................................................... 20 of 108 Five Years (Period ended 9/30/95).................................................... 10 of 61 Ten Years (Period ended 9/30/95)..................................................... 2 of 33
The Lipper High Current Yield Funds category includes funds which are managed with an emphasis on high current (relative) yield. There are no quality or maturity restrictions. The Fund was ranked number 10 out of 1,601 funds in the Fixed Income category for the five year period ended September 30, 1995 according to data reported by Lipper in the Lipper Mutual Fund Performance Analysis. For the nine month period ended September 30, 1995, the Fund was ranked number 48 out of 4,432 funds in the Fixed Income category. The Lipper Fixed Income category reported in the Lipper Mutual Fund Performance Analysis includes funds which normally have more than 75% of their assets in fixed income issues. INCOME AND CAPITAL FUND A SHARES
Lipper-Fixed Income Fund Performance Analysis ------------ Corporate Bond Funds: "A" Rated ------------ One Year (Period ended 9/30/95)..................................................... 18 of 109 Five Years (Period ended 9/30/95)................................................... 11 of 47 Ten Years (Period ended 9/30/95).................................................... 8 of 25
The Lipper Corporate Bond Funds "A" Rated category includes funds which invest 65% of their corporate holdings in the top three grades. MORTGAGE FUND B SHARES
Lipper Performance Analysis ------------ U.S. Mortgage Funds ------------ One Year (Period ended 9/30/95)..................................................... 20 of 57 Five Years (Period ended 9/30/95)................................................... 11 of 21 Ten Years (Period ended 9/30/95).................................................... 10 of 12
The Lipper U.S. Mortgage Funds category includes funds that invest at least 65% of their assets in U.S. Mortgages/Securities issued or guaranteed as to principal and interest by the U.S. government and certain federal agencies. SHORT-INTERMEDIATE GOVERNMENT FUND B SHARES
Lipper Performance Analysis ------------ Short U.S. Gov't Funds ------------ One Year (Period ended 9/30/95)..................................................... 115 of 135
The Lipper Short (1-5 year) U.S. Government Funds category includes funds that invest at least 65% of their assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities with average maturities of five years or less. B-46 115 OFFICERS AND TRUSTEES The officers and trustees of the Funds, their birthdates, their principal occupations and their affiliations, if any, with KFS, the investment manager and KDI, the principal underwriter, are as follows (the number following each person's title is the number of investment companies managed by KFS and its affiliates, for which he or she holds similar positions): ALL FUNDS: DAVID W. BELIN (6/20/28), Trustee (22), 2000 Financial Center, 7th and Walnut, Des Moines, Iowa; Member, Belin Harris Lamson McCormick, P.C. (attorneys). LEWIS A. BURNHAM (1/8/33), Trustee (22), 16410 Avila Boulevard, Tampa, Florida; Director, Management Consulting Services, McNulty & Company; formerly Executive Vice President, Anchor Glass Container Corporation. DONALD L. DUNAWAY (3/8/37), Trustee (22), 7515 Pelican Bay Blvd., Naples, Florida; Retired; formerly, Executive Vice President, A. O. Smith Corporation (diversified manufacturer). ROBERT B. HOFFMAN (12/11/36), Trustee (22), 800 N. Lindbergh Boulevard, St. Louis, Missouri; Senior Vice President and Chief Financial Officer, Monsanto Company (chemical products); prior thereto, Vice President, FMC Corporation (manufacturer of machinery and chemicals); prior thereto, Director, Executive Vice President and Chief Financial Officer, Staley Continental, Inc. (food products). DONALD R. JONES (1/17/30), Trustee (22), 1776 Beaver Pond Road, Inverness, Illinois; Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and components); formerly, Executive Vice President and Chief Financial Officer, Motorola, Inc. DAVID B. MATHIS (4/13/38), Trustee (33), Kemper Center, Long Grove, Illinois; Chairman, Chief Executive Officer and Director, Kemper Corporation; Director, KFS and Kemper Financial Companies, Inc.; Chairman of the Board, Lumbermens Mutual Casualty Company; Director, IMC Global Inc. SHIRLEY D. PETERSON (9/3/41), Trustee (22), 401 Rosemont Avenue, Frederick, Maryland; President, Hood College, Maryland; prior thereto, Partner, Steptoe & Johnson (attorneys); prior thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant Attorney General, U.S. Department of Justice. WILLIAM P. SOMMERS (7/22/33), Trustee (22), 333 Ravenswood Avenue, Menlo Park, California; President and Chief Executive Officer, SRI International (research and development); prior thereto, Executive Vice President, Iameter (medical information and educational service provider); prior thereto, Senior Vice President and Director, Booz, Allen & Hamilton, Inc. (management consulting firm) (retired), Director, Rohr, Inc., Therapeutic Discovery Corp. and Litton Industries. STEPHEN B. TIMBERS (8/8/44), President and Trustee* (33), 120 South LaSalle Street, Chicago, Illinois; President, Chief Operating Officer and Director, Kemper Corporation; Chairman, Chief Executive Officer, Chief Investment Officer and Director, KFS; Director, KDI, Dreman Value Advisors, Inc., Kemper Financial Companies, Inc. and LTV Corporation. JOHN E. PETERS (11/4/47), Vice President* (33), 120 South LaSalle Street, Chicago, Illinois; Senior Executive Vice President and Director, KFS; President and Director, KDI; Director, Dreman Value Advisors, Inc. J. PATRICK BEIMFORD, JR. (5/25/50), Vice President* (24), 120 South LaSalle Street, Chicago, Illinois; Executive Vice President/Chief Investment Officer--Fixed Income Investments, KFS. CHARLES F. CUSTER (8/19/28), Vice President and Assistant Secretary* (33), 222 North LaSalle Street, Chicago, Illinois; Partner, Vedder, Price, Kaufman & Kammholz (attorneys), Legal Counsel to the Fund. B-47 116 JEROME L. DUFFY (6/29/36), Treasurer* (33), 120 South LaSalle Street, Chicago, Illinois; Senior Vice President, KFS. PHILIP J. COLLORA (11/15/45), Vice President and Secretary* (33), 120 South LaSalle Street, Chicago, Illinois; Attorney, Senior Vice President and Assistant Secretary, KFS. ELIZABETH C. WERTH (10/1/47), Assistant Secretary* (25), 120 South LaSalle Street, Chicago, Illinois; Vice President, KFS; Vice President and Director of State Registrations, KDI. ADJUSTABLE RATE FUND: ELIZABETH A. BYRNES (2/8/57), Vice President* (2), 120 South LaSalle Street, Chicago, Illinois; First Vice President, KFS. DIVERSIFIED FUND: ROBERT S. CESSINE (1/5/50), Vice President* (3), 120 South LaSalle Street, Chicago, Illinois; Senior Vice President, KFS; formerly, Vice President, Wellington Management Company. GORDON K. JOHNS (1/25/48), Vice President* (2), 1 Fleet Place, London EC4M 7RQ, Director and Managing Director, Kemper Investment Management Company Limited; Executive Vice President, KFS; formerly, Director and Head of Fixed Investment Management, Lazard Investors, Ltd., a London based investment manager. MICHAEL A. McNAMARA (12/28/44), Vice President* (6), 120 South LaSalle Street, Chicago, Illinois; Senior Vice President, KFS. HARRY E. RESIS, JR. (11/24/45), Vice President* (6), 120 South LaSalle Street, Chicago, Illinois; Senior Vice President, KFS; formerly, First Vice President, PaineWebber Incorporated. JONATHAN W. TRUTTER (11/29/57), Vice President* (3), 120 South LaSalle Street, Chicago, Illinois; First Vice President, KFS. HIGH YIELD FUND: MICHAEL A. McNAMARA, see above. HARRY E. RESIS, JR., see above. INCOME AND CAPITAL FUND: ROBERT S. CESSINE, see above. CASH RESERVES, MORTGAGE AND SHORT-INTERMEDIATE GOVERNMENT FUNDS (KEMPER PORTFOLIOS): MICHELLE M. KEELEY (4/24/64), Vice President* (2), 120 South LaSalle Street, Chicago; First Vice President, KFS. FRANK J. RACHWALSKI, JR. (3/26/45),Vice President* (9), 120 South LaSalle Street, Chicago, Illinois; Senior Vice President, KFS. * Interested persons of the Fund as defined in the Investment Company Act of 1940. B-48 117 The trustees and officers who are "interested persons" as designated above receive no compensation from the Fund, except that Mr. Custer's law firm receives fees from the Fund as counsel to the Fund. The table below shows amounts paid or accrued to those trustees who are not designated "interested persons" during the Fund's 1995 fiscal year except that the information in the last column is for calendar year 1994.
AGGREGATE COMPENSATION FROM ---------------------------------------------------------------------------- PENSION OR INCOME & RETIREMENT BENEFITS TOTAL COMPENSATION NAME OF ADJUSTABLE DIVERSIFIED GOVERNMENT HIGH YIELD CAPITAL KEMPER ACCRUED AS PART KEMPER FUNDS TRUSTEE RATE FUND FUND FUND FUND FUND PORTFOLIOS+ OF FUND EXPENSES PAID TO TRUSTEES** - -------------------- ----------- ---------- ---------- --------- ----------- ------------------- ------------------ David W. Belin*... $2,600 5,800 12,300 8,900 4,600 18,100 0 112,200 Lewis A. Burnham... $2,300 4,100 9,100 6,900 3,400 15,800 0 90,100 Donald L. Dunaway*... $2,800 5,500 12,600 9,000 4,600 19,000 0 115,400 Robert B. Hoffman... $2,200 3,800 8,600 6,400 3,200 15,100 0 87,400 Donald R. Jones... $2,300 4,000 9,000 6,700 3,400 15,700 0 94,300 Shirley D. Peterson***... $ 400 1,300 2,500 1,600 1,100 2,900 0 0 William P. Sommers... $2,000 3,600 8,100 6,200 3,100 13,900 0 84,100
- --------------- + Includes Cash Reserves Fund, Mortgage Fund and Short-Intermediate Government Fund and includes amounts paid during fiscal year ended July 31, 1995 and fiscal period from August 1, 1995 to September 30, 1995. * Includes deferred fees and interest thereon pursuant to deferred compensation agreements with the Funds. Deferred amounts accrue interest monthly at a rate equal to the yield of Kemper Money Market Fund--Money Market Portfolio. Total deferred amounts and interest accrued through each Fund's fiscal year+ are $11,600, $43,100, $82,400, $57,900, $30,300 and $65,200 for Mr. Belin and $12,900, $30,800, $71,700, $50,700, $25,300 and $59,000 for Mr. Dunaway for the Adjustable Rate Fund, Diversified Fund, Government Fund, High Yield Fund, Income and Capital Fund and Kemper Portfolios+, respectively. ** Includes compensation for service on the boards of twenty-four Kemper funds (including two funds no longer in existence). Also includes amounts for new funds estimated as if they had existed at the beginning of the year. *** Appointed to Board in July, 1995. Compensation for each Fund is from July, 1995 to Fund's 1995+ fiscal year end. As of October 31, 1995, the officers and trustees of the Funds, as a group, owned less than 1% of the then outstanding shares of each Fund and no person owned of record 5% or more of the outstanding shares of any class of any Fund, except that the following owned of record shares of the following Funds.
FUND NAME AND ADDRESS CLASS PERCENTAGE - ------------------------------- ------------------------------------------------------------ ------ ----------
Adjustable Rate IFTC Cust FBO Fundminder Inc. A 9.33% Attn. Trust Operations 127 W. 10th St. 11th Fl. Kansas City, MO 64105 Builders Prime Window & Supply B 9.01 Russell Lyons/Donald O'Connor PS 401K FBO Forfeiture Account 2nd & Merion Bridgeport, PA 19405 EVEREN Clearing Corp. B 5.51 111 East Kilbourn Avenue Milwaukee, WI 53202-6609 Charles Mosser & C 35.26 Annabelle Mosser JTWROS 308 Jesse Street San Francisco, CA 94103-3002 Reggie Sanders C 19.75 718 Brunson St. Florence, SC 29506-6128 Income & Capital Anne Weinberg TTEE C 9.75 FBO Gertrude H. Weil TR DTD 10/08/90 982 Chestnut Run Gates Mills, OH 44040-9761
B-49 118
FUND NAME AND ADDRESS CLASS PERCENTAGE - ------------------------------- ------------------------------------------------------------ ------ ---------- Paul K. Christoff TTEE C 7.72 Lindsay Concrete Prod Inc. PSP DTD 10-1-89 Paul K. Christoff, Attorney 1 Cascade Plaza Akron, OH 44308-1136 Independent Trust Corp. C 7.28 15255 S. 94th Ave. Ste. 303 Orland Park, IL 60462-3817 Kemper Financial Services, Inc. I 61.70 Profit Sharing Plan 811 Main Street Kansas City, MO 64105 Economy Employee SVG I 7.97 Kemper Corporation TTEE 120 S. LaSalle St. Chicago, IL 60603 Kemper Group Plans I 6.65 120 S. LaSalle St. Chicago, IL 60603 High Yield R. Duffield & C.R. Player, Jr. TTEE C 5.03 Char Rem Unit for Lives of Donor Ruth McCormick Tankersley & Kristie Miller U/A 12/08/1993 P.O. Box 401 Barnesville, MD 20838-0401 Kemper Financial Services, Inc. I 47.63 Profit Sharing Plan 811 Main Street Kansas City, MO 64105 Patterson & Co. I 28.28 PNB Personal Trust Acctg P.O. Box 7829 Philadelphia, PA 19101-7829 Kemper Group Plans I 5.21 120 S. LaSalle St. Chicago, IL 60603 Diversified First Trust Corp. C 10.61 444 Sherman St. Denver, CO 80203-3521 National Financial Corp. C 7.34 One World Financial Center 200 Liberty Street, 4th Floor New York, NY 10281-1003 Government Donaldson, Lufkin & Jenrette C 9.15 Securities Corporation, Inc. P.O. Box 2052 Jersey City, NJ 07303-2052 Micaela Delgado C 5.09 720 President St. Brooklyn, NY 11215-1208 Kemper Financial Services, Inc. I 62.06 Profit Sharing Plan 811 Main Street Kansas City, MO 64105
B-50 119
FUND NAME AND ADDRESS CLASS PERCENTAGE - ------------------------------- ------------------------------------------------------------ ------ ---------- Economy Employee SVG I 14.60 Kemper Corporation TTEE 120 S. LaSalle St. Chicago, IL 60603 Kemper Group Plans I 9.73 120 S. LaSalle St. Chicago, IL 60603 Mortgage PaineWebber C 55.34 1000 Harbor Blvd. # 6FLR Weehawken, NJ 07087-6727 PaineWebber for the Benefit of C 6.35 William A. Billiot 5829 Louis I Avenue Marrero, LA 70072-5201 PaineWebber for the Benefit of C 6.08 John J. Kain & Marguerrite R. Kain Ten. In Common 432 Beverly Garden Dr. Metairie, LA 70001-2108 Cash Reserves R.A. Giaquinta DDS P/S C 7.84 Robert Giaquinta & Others TTEE PS FBO R.A. Giaquinta DDS Account-Conver 57 Whippany Rd. Whippany, NJ 07981-1509 Davis Iron Works, Inc. P/S Plan. C 7.19 3885 Lakefront St. Waterford, MI 48328-4334 Short-Intermediate Government EVEREN Clearing Corp. A 8.96 111 East Kilbourn Avenue Milwaukee, WI 53202-6609 National Financial Service Corp. A 6.11 One World Financial Center B 7.14 200 Liberty Street, 4th Floor New York, NY 10281-1003 FENNA Construction, Inc. C 15.04 13631 Balsam Ln N Dayton, MN 55327-9616 PaineWebber C 8.48 1000 Harbor Blvd. # 6FLR Weehawken, NJ 07087-6727 National Financial Corp. C 5.64 One World Financial Center 200 Liberty Street, 4th Floor New York, NY 10281-1003 Muriel P. Shaffer TTEE C 5.49 Muriel P. Shaffer Inter Vivos Char Remainder UNITRS U/A 4/29/94 6061980 Superfine Ln. Wilmington, DE 19802
B-51 120 SHAREHOLDER RIGHTS The Funds generally are not required to hold meetings of their shareholders. Under the Agreement and Declaration of Trust of each Fund ("Declaration of Trust"), however, shareholder meetings will be held in connection with the following matters: (a) the election or removal of trustees if a meeting is called for such purpose; (b) the adoption of any contract for which shareholder approval is required by the Investment Company Act of 1940 ("1940 Act"); (c) any termination of the Fund or a class to the extent and as provided in the Declaration of Trust; (d) any amendment of the Declaration of Trust (other than amendments changing the name of the Fund, supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision thereof); (e) (with respect to the Cash Reserves, Mortgage and Short-Intermediate Government Funds only) as to whether a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class on behalf of the Fund or the shareholders, to the same extent as the stockholders of a Massachusetts business corporation; and (f) such additional matters as may be required by law, the Declaration of Trust, the By- laws of the Fund, or any registration of the Fund with the Securities and Exchange Commission or any state, or as the trustees may consider necessary or desirable. The shareholders also would vote upon changes in fundamental investment objectives, policies or restrictions. Each trustee serves until the next meeting of shareholders, if any, called for the purpose of electing trustees and until the election and qualification of a successor or until such trustee sooner dies, resigns, retires or is removed by a majority vote of the shares entitled to vote (as described below) or a majority of the trustees. In accordance with the 1940 Act (a) each Fund will hold a shareholder meeting for the election of trustees at such time as less than a majority of the trustees have been elected by shareholders, and (b) if, as a result of a vacancy in the Board of Trustees, less than two-thirds of the trustees have been elected by the shareholders, that vacancy will be filled only by a vote of the shareholders. Trustees may be removed from office by a vote of the holders of a majority of the outstanding shares at a meeting called for that purpose, which meeting shall be held upon the written request of the holders of not less than 10% of the outstanding shares. Upon the written request of ten or more shareholders who have been such for at least six months and who hold shares constituting at least 1% of the outstanding shares of a Fund stating that such shareholders wish to communicate with the other shareholders for the purpose of obtaining the signatures necessary to demand a meeting to consider removal of a trustee, each Fund has undertaken to disseminate appropriate materials at the expense of the requesting shareholders. Each Fund's Declaration of Trust provides that the presence at a shareholder meeting in person or by proxy of at least 30% of the shares entitled to vote on a matter shall constitute a quorum. Thus, a meeting of shareholders of a Fund could take place even if less than a majority of the shareholders were represented on its scheduled date. Shareholders would in such a case be permitted to take action which does not require a larger vote than a majority of a quorum, such as the election of trustees and ratification of the selection of auditors. Some matters requiring a larger vote under the Declaration of Trust, such as termination or reorganization of a Fund and certain amendments of the Declaration of Trust, would not be affected by this provision; nor would matters which under the 1940 Act require the vote of a "majority of the outstanding voting securities" as defined in the 1940 Act. Each Fund's Declaration of Trust specifically authorizes the Board of Trustees to terminate the Fund or any Portfolio or class by notice to the shareholders without shareholder approval. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for obligations of a Fund. The Declaration of Trust, however, disclaims shareholder liability for acts or obligations of each Fund and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by a Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for indemnification out of Fund property for all losses and expenses of any shareholder held personally liable for the obligations of a Fund and each Fund will be covered by insurance which the trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is considered by KFS remote and not material, since it is limited to circumstances in which a disclaimer is inoperative and such Fund itself is unable to meet its obligations. B-52 121 Report of Independent Auditors and Financial Statements 122 Portfolio of Investments KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND August 31, 1995 (Dollars in thousands)
Coupon Principal U.S. government obligations Type rate Maturity amount Value ================================================================================================================ FEDERAL HOME LOAN Adjustable Rate MORTGAGE CORPORATION -- Mortgages 7.31% 2019 $ 8,926 $ 9,221 51.8% 7.626 2020 3,729 3,831 (Cost: $66,782) 8.176-8.50 2022 10,218 10,517 6.16 2023 3,512 3,584 6.234 2024 9,070 9,294 6.125-7.00 2025 29,232 29,970 Fixed Rate Collateralized Mortgage Obligations 11.25 2010 499 547 11.00 2014 230 253 -------------------------------------------------------------------------------- 67,217 ================================================================================================================ GOVERNMENT Adjustable Rate NATIONAL MORTGAGE Mortgages 7.50 2024 9,505 9,745 ASSOCIATION -- 5.50-8.00 2025 22,526 22,773 25.5% Pass-through (Cost: $32,656) Certificates 11.00 2018 523 572 -------------------------------------------------------------------------------- 33,090 ================================================================================================================ FEDERAL NATIONAL Adjustable Rate MORTGAGE ASSOCIATION -- Mortgages 7.915 2021 2,727 2,805 15.3% 7.592-7.823 2023 11,752 12,040 (Cost: $19,749) 7.127 2025 4,847 4,974 -------------------------------------------------------------------------------- 19,819 ================================================================================================================ U.S. TREASURY Notes 9.25 1996 8,000 8,103 SECURITIES -- 8.25 1998 1,000 1,060 10.0% 9.125 1999 3,500 3,853 (Cost: $13,121) -------------------------------------------------------------------------------- 13,016 ================================================================================================================ MONEY MARKET Yield-5.90% and 5.96%, INSTRUMENTS -- Due-September 1995 7.2% Bridgestone/Firestone Inc. 4,400 4,400 (Cost: $9,396) ENSERCH Corporation 5,000 4,996 -------------------------------------------------------------------------------- 9,396 -------------------------------------------------------------------------------- TOTAL INVESTMENTS--109.8% (Cost: $141,704) 142,538 -------------------------------------------------------------------------------- LIABILITIES, LESS CASH AND OTHER ASSETS--(9.8)% (12,781) -------------------------------------------------------------------------------- NET ASSETS--100% $129,757 --------------------------------------------------------------------------------
Notes to Portfolio of Investments Adjustable rate securities make up 90% of total investments at August 31, 1995. The coupon rates vary with a selected index at specified intervals and the rates shown are the effective rates on August 31, 1995. The dates shown represent the final maturity of the obligations. Based on the cost of investments of $141,704,000 for federal income tax purposes at August 31, 1995 the aggregate gross unrealized appreciation was $979,000, the aggregate gross unrealized depreciation was $145,000 and the net unrealized appreciation of securities was $834,000. See accompanying Notes to Financial Statements. 11 123 Report of Independent Auditors THE BOARD OF TRUSTEES AND SHAREHOLDERS KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Kemper Adjustable Rate U.S. Government Fund as of August 31, 1995, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1991. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of August 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper Adjustable Rate U.S. Government Fund at August 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1991, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois October 13, 1995 12 124 Financial Statements STATEMENT OF ASSETS AND LIABILITIES August 31, 1995 (in thousands) ASSETS Investments, at value (Cost: $141,704) $ 142,538 - ------------------------------------------------------------ Cash 93 - ------------------------------------------------------------ Receivable for: Fund shares sold 60 - ------------------------------------------------------------ Investments sold 1,358 - ------------------------------------------------------------ Interest 1,260 - ------------------------------------------------------------ TOTAL ASSETS 145,309 ============================================================ LIABILITIES AND NET ASSETS Payable for: Dividends 206 - ------------------------------------------------------------ Fund shares redeemed 122 - ------------------------------------------------------------ Investments purchased 15,050 - ------------------------------------------------------------ Management fee 60 - ------------------------------------------------------------ Administrative services fee 23 - ------------------------------------------------------------ Custodian and transfer agent fees and related expenses 50 - ------------------------------------------------------------ Other 41 - ------------------------------------------------------------ Total liabilities 15,552 - ------------------------------------------------------------ NET ASSETS $129,757 ============================================================ ANALYSIS OF NET ASSETS Paid-in capital $139,617 - ------------------------------------------------------------ Accumulated net realized loss on sales of investments (11,598) - ------------------------------------------------------------ Net unrealized appreciation of investments 834 - ------------------------------------------------------------ Undistributed net investment income 904 - ------------------------------------------------------------ NET ASSETS APPLICABLE TO SHARES OUTSTANDING $129,757 ============================================================ THE PRICING OF SHARES CLASS A SHARES Net asset value and redemption price per share ($123,808 / 14,911 shares outstanding) $8.30 - ------------------------------------------------------------ Maximum offering price per share (net asset value, plus 3.63% of net asset value or 3.50% of offering price) $8.60 ============================================================ CLASS B SHARES Net asset value and redemption price (subject to contingent deferred sales charge) per share ($4,836 / 582 shares outstanding) $8.31 - ------------------------------------------------------------ CLASS C SHARES Net asset value and redemption price per share ($1,113 / 133.7 shares outstanding) $8.32 ============================================================
See accompanying Notes to Financial Statements. 13 125 Financial Statements STATEMENT OF OPERATIONS Year ended August 31, 1995 (in thousands) NET INVESTMENT INCOME Interest income $ 11,056 - ------------------------------------------------------------------ Expenses: Management fee 887 - ------------------------------------------------------------------ Administrative services fee 312 - ------------------------------------------------------------------ Distribution services fee 43 - ------------------------------------------------------------------ Custodian and transfer agent fees and related expenses 451 - ------------------------------------------------------------------ Reports to shareholders 65 - ------------------------------------------------------------------ Professional fees 35 - ------------------------------------------------------------------ Trustees' fees and other 18 - ------------------------------------------------------------------ Total expenses 1,811 - ------------------------------------------------------------------ NET INVESTMENT INCOME 9,245 ================================================================== NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on sales of investments (including options purchased) (2,981) - ------------------------------------------------------------------ Net realized loss from futures transactions (320) - ------------------------------------------------------------------ Net realized loss (3,301) - ------------------------------------------------------------------ Change in net unrealized depreciation on investments 2,153 - ------------------------------------------------------------------ Net loss on investments (1,148) - ------------------------------------------------------------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,097 ==================================================================
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
YEAR ENDED AUGUST 31, 1995 1994 OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY Net investment income $ 9,245 8,947 - ------------------------------------------------------------------------ Net realized loss (3,301) (4,926) - ------------------------------------------------------------------------ Change in net unrealized depreciation 2,153 (2,831) - ------------------------------------------------------------------------ Net increase in net assets resulting from operations 8,097 1,190 - ------------------------------------------------------------------------ Net equalization (charges) credits (591) 36 - ------------------------------------------------------------------------ Distribution from net investment income (9,118) (10,570) - ------------------------------------------------------------------------ Net decrease from capital share transactions (71,446) (535) - ------------------------------------------------------------------------ TOTAL DECREASE IN NET ASSETS (73,058) (9,879) ======================================================================== NET ASSETS Beginning of year 202,815 212,694 END OF YEAR (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $904 FOR 1995 AND $1,363 FOR 1994) $129,757 202,815 ========================================================================
14 126 Notes to Financial Statements 1 DESCRIPTION OF THE FUND Kemper Adjustable Rate U.S. Government Fund is an open-end management investment company organized as a business trust under the laws of Massachusetts. The Fund currently offers three classes of shares. Class A shares are sold to investors subject to an initial sales charge. Class B shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares six years after issuance. Class C shares are sold without an initial or a contingent deferred sales charge but are subject to higher ongoing expenses than Class A shares and do not convert into another class. The Fund may offer, to a limited group of investors, Class I shares (none sold through August 31, 1995) which are not subject to initial or contingent deferred sales charges and have lower ongoing expenses than other classes. Each share represents an identical interest in the investments of the Fund and has the same rights. 2 SIGNIFICANT ACCOUNTING POLICIES INVESTMENT VALUATION. Investments are stated at value. Fixed income securities are valued by using market quotations, or independent pricing services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Exchange traded fixed income options are valued at the last sale price unless there is no sale price, in which event prices provided by market makers are used. Over-the-counter traded fixed income options are valued based upon prices provided by market makers. Financial futures and options thereon are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Other securities and assets are valued at fair value as determined in good faith by the Board of Trustees. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis and includes premium and discount amortization on money market instruments and mortgage-backed securities; it also includes original issue and market discount amortization on long-term fixed income securities. Realized gains and losses from investment transactions are reported on an identified cost basis. Realized and unrealized gains and losses on financial futures and options are included in net realized and unrealized gain (loss) on investments, as appropriate. The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations. No interest accrues to the Fund until payment takes place. At the time the Fund enters into this type of transaction it is required to designate cash or other liquid assets equal to the value of the securities purchased. At August 31, 1995 the Fund had $15,034,000 in purchase commitments outstanding (12% of net assets), with a corresponding amount of assets designated. 15 127 Notes to Financial Statements FUND SHARE VALUATION. Fund shares are sold and redeemed on a continuous basis at net asset value (plus an initial sales charge on most sales of Class A shares). Proceeds payable on redemption of Class B shares will be reduced by the amount of any applicable contingent deferred sales charge. On each day the New York Stock Exchange is open for trading, the net asset value per share is determined as of the earlier of 3:00 p.m. Chicago time or the close of the Exchange. The net asset value per share is determined separately for each class by dividing the Fund's net assets attributable to that class by the number of shares of the class outstanding. FEDERAL INCOME TAXES AND DIVIDENDS TO SHAREHOLDERS. The Fund has complied with the special provisions of the Internal Revenue Code available to investment companies and therefore no federal income tax provision is required. The accumulated net realized loss on sales of investments for federal income tax purposes at August 31, 1995, amounting to approximately $11,586,000, is available to offset future taxable gains. If not applied, the loss carryover expires during the period 1997 through 2004. Differences in dividends per share are due to different class expenses. Dividends payable to its shareholders are recorded by the Fund on the ex-dividend date. Distributions are determined in accordance with income tax principles which may treat certain transactions differently than generally accepted accounting principles. EQUALIZATION ACCOUNTING. A portion of proceeds from sales and cost of redemptions of Fund shares is credited or charged to undistributed net investment income so that income per share available for distribution is not affected by sales or redemptions of shares. 3 TRANSACTIONS WITH AFFILIATES MANAGEMENT AGREEMENT. The Fund has a management agreement with Kemper Financial Services, Inc. (KFS) and pays a management fee at an annual rate of .55% of the first $250 million of average daily net assets declining gradually to .40% of average daily net assets in excess of $12.5 billion. The Fund incurred a management fee of $887,000 for the year ended August 31, 1995. UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT. The Fund has an underwriting and distribution services agreement with Kemper Distributors, Inc.(KDI). As principal underwriter for the Fund, KDI retained commissions of $22,000 for the year ended August 31, 1995, for sales of Class A shares, after allowing $161,000 as commissions to retail firms, of which $40,000 was paid to firms affiliated with KDI. For services under the distribution services agreement, the Fund pays KDI a fee of .75% of average daily net assets of the Class B and Class C shares. Pursuant to the agreement, KDI enters into related selling group agreements with various firms that provide distribution services to investors. KDI compensates these 16 128 Notes to Financial Statements firms at various rates for sales of Class B and Class C shares. During the year ended August 31, 1995, the Fund incurred a distribution services fee for Class B and Class C shares of $43,000 and KDI paid $127,000 for commissions and distribution fees to firms, including $45,000 to firms affiliated with KDI. In addition, KDI received $30,000 of contingent deferred sales charges. ADMINISTRATIVE SERVICES AGREEMENT. The Fund has an administrative services agreement with KDI. For providing information and administrative services to shareholders, the Fund pays KDI a fee at an annual rate of up to .25% of average daily net assets. KDI in turn has various arrangements with financial services firms that provide these services and pays these firms based on assets of Fund accounts the firms service. For the year ended August 31, 1995, the Fund incurred an administrative services fee of $312,000 and KDI paid $320,000 to firms, including $76,000 that was paid to firms affiliated with KDI. SHAREHOLDER SERVICES AGREEMENT. Pursuant to a services agreement with the Fund's custodian and transfer agent, Kemper Service Company (KSvC) is the shareholder service agent of the Fund. For the year ended August 31, 1995, the custodian remitted shareholder service fees of $396,000 to KSvC. OFFICERS AND TRUSTEES. Certain officers or trustees of the Fund are also officers or directors of KFS. For the year ended August 31, 1995, the Fund made no payments to its officers and incurred trustees' fees of $14,000 to independent trustees. 4 INVESTMENT TRANSACTIONS For the year ended August 31, 1995, investment transactions (excluding short-term instruments) are as follows (in thousands): Purchases $526,942 Proceeds from sales 595,890 17 129 Notes to Financial Statements 5 CAPITAL SHARE TRANSACTIONS The following table summarizes the activity in capital shares of the Fund (in thousands):
YEAR ENDED AUGUST 31, 1995 1994 SHARES AMOUNT SHARES AMOUNT ------- --------- --------- ---------- SHARES SOLD - -------------------------------------------------------------------------------------- Class A 4,898 $ 39,971 13,585 $114,850 - -------------------------------------------------------------------------------------- Class B 605 4,993 492 4,113 - -------------------------------------------------------------------------------------- Class C 169 1,399 116 973 - -------------------------------------------------------------------------------------- SHARES ISSUED IN REINVESTMENT OF DIVIDENDS - -------------------------------------------------------------------------------------- Class A 737 6,072 892 7,682 - -------------------------------------------------------------------------------------- Class B 24 195 1 14 - -------------------------------------------------------------------------------------- Class C 6 49 -- -- - -------------------------------------------------------------------------------------- SHARES REDEEMED - -------------------------------------------------------------------------------------- Class A (14,546) (119,011) (15,198) (127,781) - -------------------------------------------------------------------------------------- Class B (478) (3,932) (31) (261) - -------------------------------------------------------------------------------------- Class C (142) (1,182) (15) (125) - -------------------------------------------------------------------------------------- CONVERSION OF SHARES - -------------------------------------------------------------------------------------- Class A 31 262 -- -- - -------------------------------------------------------------------------------------- Class B (31) (262) -- -- - -------------------------------------------------------------------------------------- NET DECREASE FROM CAPITAL SHARE TRANSACTIONS $ (71,446) $ (535) ======================================================================================
6 FINANCIAL FUTURES CONTRACTS In order to take advantage of anticipated market conditions, the Fund has entered into exchange traded financial futures contracts as described below. The Fund bears the market risk that arises from changes in the value of these financial instruments. At the time the Fund enters into a futures contract, it is required to make a margin deposit with its custodian of a specified amount of cash or eligible securities. Subsequently, gain or loss is recognized and payments are made on a daily basis between the Fund and the broker as the market price of the futures contract fluctuates. At August 31, 1995, the market value of investments pledged by the Fund to cover margin requirements for open futures positions was $219,000. At August 31, 1995, the Fund had outstanding financial futures contracts as follows:
FACE EXPIRATION GAIN AT TYPE AMOUNT POSITION MONTH 8/31/95 - ------------------------------------------------------------------------------------- U.S. Treasury Securities $7,500,000 Long December $5,000
18 130 Financial Highlights
Class A ----------------------------------------------------------- JULY 1, 1991 TO YEAR ENDED YEAR ENDED AUGUST 31, AUGUST 31, JUNE 30, 1995 1994 1993 1992 1991 1991 - ------------------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $8.33 8.68 8.63 8.37 8.21 8.21 - ------------------------------------------------------------------------------------------------------------------ Income from investment operations: Net investment income .48 .34 .47 .63 .13 .79 - ------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) (.04) (.29) .02 .22 .17 .02 - ------------------------------------------------------------------------------------------------------------------ Total from investment operations .44 .05 .49 .85 .30 .81 - ------------------------------------------------------------------------------------------------------------------ Less distribution from net investment income .47 .40 .44 .59 .14 .81 - ------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $8.30 8.33 8.68 8.63 8.37 8.21 ================================================================================================================== TOTAL RETURN 5.52% .59 5.87 10.56 3.62 10.33 ================================================================================================================== RATIOS TO AVERAGE NET ASSETS Expenses 1.10% .93 .21 .28 1.09 1.07 - ------------------------------------------------------------------------------------------------------------------ Net investment income 5.76 3.96 5.44 7.02 9.45 9.62 - ------------------------------------------------------------------------------------------------------------------
Class B Class C --------------------------- --------------------------- Year May 31, Year May 31, ended 1994 to ended 1994 to August 31, August 31, August 31, August 31, 1995 1994 1995 1994 - --------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period $8.32 8.37 8.33 8.37 - ----------------------------------------------------------------------------------------------- Income from investment operations: Net investment income .43 .07 .43 .08 - ----------------------------------------------------------------------------------------------- Net realized and unrealized loss (.04) (.04) (.04) (.04) - ----------------------------------------------------------------------------------------------- Total from investment operations .39 .03 .39 .04 - ----------------------------------------------------------------------------------------------- Less distribution from net investment income .40 .08 .40 .08 - ----------------------------------------------------------------------------------------------- Net asset value, end of period $8.31 8.32 8.32 8.33 =============================================================================================== Total return 4.84% .34 4.89 .47 =============================================================================================== RATIOS TO AVERAGE NET ASSETS Expenses 1.85% 1.96 1.79 1.88 - ----------------------------------------------------------------------------------------------- Net investment income 5.01 3.36 5.07 3.52 - -----------------------------------------------------------------------------------------------
SUPPLEMENTAL FUND DATA July 1, 1991 to Year ended Year ended August 31, August 31, June 30, 1995 1994 1993 1992 1991 1991 - ------------------------------------------------------------------------------------------------------------ Net assets at end of period (in thousands) $129,757 202,815 212,694 174,967 76,749 75,012 - ------------------------------------------------------------------------------------------------------------ Portfolio turnover rate 308% 533 138 309 228 259 ============================================================================================================
NOTES: KFS agreed to waive its management fee and absorb certain operating expenses during a portion of the fiscal year ended August 31, 1992. Thereafter, these expenses were gradually reinstated from December 31, 1992 through January 31, 1994. Without this agreement, the ratios of expenses and net investment income to average net assets for Class A shares would have been .99% and 3.90% for the year ended August 31, 1994, .95% and 4.70% for the year ended August 31, 1993, and .90% and 6.40% for the year ended August 31, 1992. Ratios have been determined on an annualized basis. Total return is not annualized and does not reflect the effect of any sales charges. 19 131 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND PART C. OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements (i) Financial statements included in Part A of the Registration Statement: Financial Highlights. (ii) Financial Statements included in Part B of the Registration Statement: Statement of assets and liabilities--August 31, 1995. Statement of operations for the year ended August 31, 1995. Statement of changes in net assets for each of the two years in the period ended August 31, 1995. Portfolio of investments--August 31, 1995. Notes to financial statements. Schedules II, III, IV, V, VI and VII are omitted as the required information is not present. Schedule I has been omitted as the required information is presented in the portfolio of investments at August 31, 1995. (b) Exhibits 99.B1 Amended and Restated Agreement and Declaration of Trust 99.B2 By-Laws 99.B3 Inapplicable 99.B4(a) Text of Share Certificate 99.B4(b) Written Instrument Establishing and Designating Separate Classes of Shares 99.B5 Investment Management Agreement 99.B6(a) Underwriting and Distribution Services Agreement 99.B6(b) Assignment and Assumption 99.B6(c) Selling Group Agreement 99.B7 Inapplicable 99.B8 Custody Agreement 99.B9(a) Agency Agreement 99.B9(b) Supplement to Agency Agreement 99.B9(c) Administrative Services Agreement 99.B9(d) Amendment to Administrative Services Agreement 99.B9(e) Assignment and Assumption 99.B9(f) Amended Appendix I for Administrative Services Agreement 99.B10 Legal Opinion and Consent 99.B11 Report and Consent of Independent Auditors 99.B12 Inapplicable 99.B13 Inapplicable 99.B14(a) Kemper Retirement Plan Prototype 99.B14(b) Model Individual Retirement Account 99.B15 See 6(a) above (Class B and Class C Shares) 99.B16 Performance Calculations* 99.B18 Multi-Distribution System Plan 99.B24 Powers of Attorney 99.B485(b) Representation of Counsel (Rule 485(b)) 27All Financial Data Schedule 27A Financial Data Schedule 27B Financial Data Schedule 27C Financial Data Schedule
- --------------- * Incorporated herein by reference to the Post-Effective Amendment to Registrant's Registration Statement on Form N-1A identified below.
EXHIBIT NO. POST-EFFECTIVE AMENDMENT NO. FILING DATE - ----------- ---------------------------- ----------- 16 3 10/26/88
C-1 132 ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Inapplicable. ITEM 26. NUMBER OF HOLDERS OF SECURITIES As of October 31, 1995, there were holders of record of the sole series of shares of Registrant as follows: 9,220 Class A, 767 Class B and 156 Class C. ITEM 27. INDEMNIFICATION Article VIII of the Registrant's Agreement and Declaration of Trust (Exhibit 1 hereto, which is incorporated herein by reference) provides in effect that the Registrant will indemnify its officers and trustees under certain circumstances. However, in accordance with Section 17(h) and 17(i) of the Investment Company Act of 1940 and its own terms, said Article of the Agreement and Declaration of Trust does not protect any person against any liability to the Registrant or its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such trustee, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question as to whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. C-2 133 ITEM 28.(a) BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Information pertaining to business and other connections of the Registrant's investment adviser is hereby incorporated by reference to the section of the Prospectus captioned "Investment Manager and Underwriter," and to the section of the Statement of Additional Information captioned "Investment Manager and Underwriter." Kemper Financial Services, Inc., investment adviser of the Registrant, is investment adviser of: Kemper Mutual Funds: Kemper Technology Fund Kemper Total Return Fund Kemper Growth Fund Kemper Small Capitalization Equity Fund Kemper Income and Capital Preservation Fund Kemper Money Market Fund Kemper National Tax-Free Income Series Kemper Diversified Income Fund Kemper High Yield Fund Cash Equivalent Fund Kemper U.S. Government Securities Fund Kemper International Fund Kemper Portfolios Kemper State Tax-Free Income Series Tax-Exempt California Money Market Fund Kemper Adjustable Rate U.S. Government Fund Kemper Blue Chip Fund Kemper Global Income Fund Kemper Target Equity Fund Cash Account Trust Investors Cash Trust Tax-Exempt New York Money Market Fund Kemper Value Plus Growth Fund Kemper Quantitative Equity Fund Kemper Horizon Fund Kemper Closed-End Funds: Kemper High Income Trust Kemper Intermediate Government Trust Kemper Municipal Income Trust Kemper Multi-Market Income Trust Kemper Strategic Municipal Income Trust The Growth Fund of Spain, Inc. Kemper Strategic Income Fund Kemper Financial Services, Inc. also furnishes investment advice to and manages investment portfolios for other clients including Kemper Investors Fund and Kemper International Bond Fund. C-3 134 Item 28(b) Business and Other Connections of Officers and Directors of Kemper Financial Services Inc., the Investment Advisor MATHIS, DAVID B. Director, Kemper Financial Services, Inc. Director, Federal Kemper Life Assurance Company Director, Fidelity Life Association Director, Chairman and Chief Executive Officer, Kemper Corporation Director, Kemper Financial Companies, Inc. Director, Kemper Investors Life Insurance Company Director, IMC Global, Inc. Trustee, Kemper Funds Chairman of the Board, Lumbermen's Mutual Casualty Company TIMBERS, STEPHEN B. Director, Chairman, Chief Executive Officer and Chief Investment Officer, Kemper Financial Services, Inc. Director, Vice President, Kemper Asset Holdings, Inc. Director, Kemper Distributors, Inc. Director, Chairman, Kemper Asset Management Company Director, Chairman, Kemper Service Company Director, Federal Kemper Life Assurance Company Director, Dreman Value Advisors, Inc. Director, Vice President, FKLA Loire Court, Inc. Vice President, FKLA Realty Corporation Director, President, Galaxy Offshore, Inc. Director, Vice President, FLA First Nationwide, Inc. Director, Vice President, FLA Plate Building, Inc. Vice President, FLA Realty Corp. Director, President and Chief Operating Officer, Kemper Corporation Director, Chairman, President and Chief Executive Officer, Kemper Financial Companies, Inc. Director, President, Kemper International Management, Inc. Director, Kemper Investors Life Insurance Company Trustee and President, Kemper Funds Vice President, Kemper Portfolio Corp. Director, Vice President, Kemper Real Estate, Inc. C-4 135 Director, Vice President, Kemper/Cymrot Management, Inc. Director, Vice President, Kemper/Cymrot, Inc. Vice President, KFC Portfolio Corp. Director, Vice President, KI Arnold Industrial, Inc. Director, Vice President, KI Canyon Park, Inc. Director, Vice President, KI Centreville, Inc. Director, Vice President, KI Colorado Boulevard, Inc. Director, Vice President, KI Dublin Boulevard, Inc. Director, Vice President, KI LaFiesta Square, Inc. Director, Vice President, KI Lewinsville, Inc. Director, Vice President, KI Monterey Research, Inc. Director, Vice President, KI Olive Street, Inc. Director, Vice President, KI Sutter Street, Inc. Director, Vice President, KI Thornton Boulevard, Inc. Vice President, KILICO Realty Corporation Director, Vice President, KR 77 Fitness Center, Inc. Director, Vice President, KR Avondale Redmond, Inc. Director, Vice President, KR Black Mountain, Inc. Director, Vice President, KR Brannan Resources, Inc. Director, Vice President, KR Clay Capital, Inc. Director, Vice President, KR Cranbury, Inc. Director, Vice President, KR Delta Wetlands, Inc. Director, Vice President, KR Gainesville, Inc. Director, Vice President, KR Hotels, Inc. Director, Vice President, KR Lafayette Apartments, Inc. Director, Vice President, KR Lafayette BART, Inc. Director, Vice President, KR Palm Plaza, Inc. Director, Vice President, KR Red Hill Associates, Inc. Director, Vice President, KR Seagate/Gateway North, Inc. Director, Vice President, KR Venture Way, Inc. Director, Vice President, KR Walnut Creek, Inc. Director, The LTV Corporation Director, Investment Analysts Society of Chicago NEAL, JOHN E. Director, President and Chief Operating Officer, Kemper Financial Services, Inc., Senior Vice President, Kemper Corporation Director, President, Kemper Service Company Director, Kemper Distributors, Inc. Director, Kemper Asset Management Company Director, Dreman Value Advisors, Inc. Director, Ardenwood Financial Corporation Director, Avondale Redmond, Inc. Director, Black Mountain, Inc. Director, Brannan Resources, Inc. Director, Butterfield Financial Corporation Director, Camelot Financial Corporation Director, Clay Capital, Inc. Director, Coast Broadcasting Company C-5 136 Director, Crow Canyon, Inc. Director, Hawaii Kai Development Company Director, Kacor Gateway, Inc. Director, Kailua Associates, Inc. Director, Kacor Trust Deed Company Director, Community Investment Corporation Director, Continental Community Development Corporation Director, President, Kemper Real Estate, Inc. Director, President, Kemper Cymrot, Inc. Director, President, Cymrot Management, Inc. Director, President, FKLA Loire Court, Inc. Director, Vice President, FKLA Realty Corporation Director, President, FLA First Nationwide, Inc. Director, President, FLA Plate Building, Inc. Director, Vice President, FLA Realty Corporation Director, Kemper/Lumbermens Properties, Inc. Director, Senior Vice President, Kemper Real Estate Management Company Director, KRDC, Inc. Director, Lafayette Apartments, Inc. Director, Lafayette Hills, Inc. Director, Margarita Village Retirement Community, Inc. Director, Mesa Homes Director, Mesa Homes Brokerage Company Director, Mount Doloroes Corporation Director, Montgomery Gallery, Inc. Director, Monterey Research Park, Inc. Director, One Corporate Centre, Inc. Director, Pacific Homes, Inc. Director, Palomar Triad, Inc. Director, Pine/Battery Properties, Inc. Director, Rancho and Industrial Property Brokerage, Inc. Director, Rancho California, Inc. Director, Rancho Regional Shopping Center, Inc. Director, Red Hill Associates, Inc. Director, Seagate Associates, Inc. Director, Seattle Gateway, Inc. Director, Sutter Street, Inc. Director, Technology Way, Inc. Director, Time DC, Inc. Director, Tourelle Corporation Director, Two Corporate Centre, Inc. Director, Venture Way, Inc. Director, Vice President, Kemper Portfolio Corporation Director, Vice President, KFC Portfolio Corporation Director, Vice President, KILICO Realty Corporation Director, President, KI Arnold Industrial, Inc. Director, President, KI Canyon Park, Inc. Director, President, KI Centreville, Inc. Director, President, KI Colorado Boulevard, Inc. Director, President, KI Dublin Boulevard, Inc. Director, President, KI LaFiesta Square, Inc. C-6 137 Director, President, KI Lewinsville, Inc. Director, President, KI Monterey Research, Inc. Director, President, KI Olive Street, Inc. Director, President, KI Thornton Boulevard, Inc. Director, President, KI Sutter Street, Inc. Director, President, KR 77 Fitness Center, Inc. Director, President, KR Avondale Redmond, Inc. Director, President, KR Black Mountain, Inc. Director, President, KR Brannan Resources, Inc. Director, President, KR Clay Capital, Inc. Director, President, KR Cranbury, Inc. Director, President, KR Delta Wetlands, Inc. Director, President, KR Gainesville, Inc. Director, President, KR Hotels, Inc. Director, President, KR Lafayette Apartments, Inc. Director, President, KR Lafayette BART, Inc. Director, President, KR Palm Plaza, Inc. Director, President, KR Red Hill Associates, Inc. Director, President, KR Seagate/Gateway North, Inc. Director, President, KR Venture Way, Inc. Director, President, KR Walnut Creek, Inc. Director, K-P Greenway, Inc. Director, K-P Plaza Dallas, Inc. Director, Kemper/Prime Acquisition Fund, Inc. Director, KRDC, Inc. Director, RespiteCare Director, President, SMS Realty Corp. Director, Urban Shopping Centers, Inc. Vice President, Kemper-Dreman Fund, Inc. Vice President, Kemper Value Plus Growth Fund Vice President, Kemper Quantitative Equity Fund Vice President, Kemper Horizon Fund PETERS, JOHN E. Director, Senior Executive Vice President, Kemper Financial Services, Inc. Director, Dreman Value Advisors, Inc. Director, President, Kemper Distributors, Inc. Vice President, Kemper Asset Management Company Vice President, Kemper Funds Director, Kemper Service Company FITZPATRICK, JOHN H. Director, Chief Financial Officer, Kemper Financial Services, Inc. Director, Ardenwood Financial Corporation Director, Camelot Financial Corporation Director, Crow Canyon, Inc. Director, Hawaii Kai Development Company Director, Kacor Gateway, Inc. Director, Kacor Trust Deed Company Director, Senior Vice President and Chief Financial Officer, C-7 138 Federal Kemper Life Assurance Company Senior Vice President, Chief Financial Officer, Fidelity Life Association Director, Vice President, FKLA Loire Court, Inc. Director, Vice President, FLA First Nationwide, Inc. Director, Vice President, FLA Plate Building, Inc. Director, Executive Vice President and Chief Financial Officer, Kemper Corporation Director, Executive Vice President and Chief Financial Officer, Kemper Financial Companies, Inc. Senior Vice President, Kemper Investors Life Insurance Company Director, Vice President, Kemper/Cymrot Management, Inc. Director, Vice President, Kemper/Cymrot, Inc. Director, Vice President, Kemper/Lumbermens Properties, Inc. Director, Senior Vice President, Kemper Real Estate Management Company Director, KRDC, Inc. Director, Margarita Village Retirement Community, Inc. Director, Mesa Homes Director, Mesa Homes Brokerage Company Director, Montgomery Gallery, Inc. Director, One Corporate Centre, Inc. Director, Pacific Homes, Inc. Director, Palomar Triad, Inc. Director, Pine/Battery Properties, Inc. Director, Rancho and Industrial Property Brokerage, Inc. Director, Rancho California, Inc. Director, Rancho Regional Shopping Center, Inc. Director, Seattle Gateway, Inc. Director, SMS Realty Corporation Director, Sutter Street, Inc. Director, Time DC, Inc. Director, Two Corporate Centre, Inc. Director, Vice President, KFC Portfolio Corp. Director, Vice President, KI Arnold Industrial, Inc. Director, Vice President, KI Canyon Park, Inc. Director, Vice President, KI Centreville, Inc. Director, Vice President, KI Colorado Boulevard, Inc. Director, Vice President, KI Dublin Boulevard, Inc. Director, Vice President, KI LaFiesta Square, Inc. Director, Vice President, KI Lewinsville, Inc. Director, Vice President, KI Monterey Research, Inc. Director, Vice President, KI Olive Street, Inc. Director, Vice President, KI Sutter Street, Inc. Director, Vice President, KI Thornton Boulevard, Inc. Director, Vice President, KILICO Realty Corporation Director, Vice President, KR 77 Fitness Center, Inc. Director, Vice President, KR Avondale Redmond, Inc. Director, Vice President, KR Black Mountain, Inc. Director, Vice President, KR Brannan Resources, Inc. Director, Vice President, KR Clay Capital, Inc. Director, Vice President, KR Cranbury, Inc. Director, Vice President, KR Delta Wetlands, Inc. Director, Vice President, KR Gainesville, Inc. C-8 139 Director, Vice President, KR Hotels, Inc. Director, Vice President, KR Lafayette Apartments, Inc. Director, Vice President, KR Lafayette BART, Inc. Director, Vice President, KR Palm Plaza, Inc. Director, Vice President, KR Red Hill Associates, Inc. Director, Vice President, KR Seagate/Gateway North, Inc. Director, Vice President, KR Venture Way, Inc. Director, Vice President, KR Walnut Creek, Inc. BEIMFORD, JR., JOSEPH P. Executive Vice President, Kemper Financial Services, Inc. Vice President, Cash Account Trust Vice President, Cash Equivalent Fund Vice President, Galaxy Offshore, Inc. Vice President, Investors Cash Trust Vice President, Kemper Adjustable Rate U.S. Government Fund Vice President, Kemper Diversified Income Fund Vice President, Kemper Global Income Fund Vice President, Kemper High Income Trust Vice President, Kemper High Yield Fund Vice President, Kemper Income and Capital Preservation Fund Vice President, Kemper Intermediate Government Trust Vice President, Kemper International Bond Fund Vice President, Kemper Investors Fund Vice President, Kemper Money Market Fund Vice President, Kemper Multi-Market Income Trust Vice President, Kemper Municipal Income Trust Vice President, Kemper National Tax-Free Income Series Vice President, Kemper Portfolios Vice President, Kemper State Tax-Free Income Series Vice President, Kemper Strategic Income Fund Vice President, Kemper Strategic Municipal Income Trust Vice President, Kemper U.S. Government Securities Fund Vice President, Sterling Funds Vice President, Tax-Exempt California Money Market Fund Vice President, Tax-Exempt New York Money Market Fund CHAPMAN II, WILLIAM E. Executive Vice President, Kemper Financial Services, Inc. Director, Executive Vice President, Kemper Distributors, Inc. COXON, JAMES H. Executive Vice President, Kemper Financial Services, Inc. Director, Vice President, Galaxy Offshore, Inc. Executive Vice President, Kemper Asset Management Company FERRO, DENNIS H. Executive Vice President, Kemper Financial Services, Inc. Vice President, Kemper International Fund Director, Managing Director-Equities, Kemper Investment Management Company Limited Vice President, Kemper Investors Fund Vice President, Kemper Target Equity Fund C-9 140 Vice President, The Growth Fund of Spain, Inc. GREENAWALT, JAMES L. Executive Vice President, Kemper Financial Services, Inc. Director, Executive Vice President, Kemper Distributors, Inc. JOHNS, GORDON K. Executive Vice President, Kemper Financial Services, Inc. Vice President, Kemper Global Income Fund Vice President, Kemper Diversified Income Fund Vice President, Kemper International Bond Fund Vice President, Kemper International Management, Inc. Managing Director and Joint Secretary, Kemper Investment Management Company Limited Vice President, Kemper Multi-Market Income Trust Director, Thames Heritage Parade Limited LANGBAUM, GARY A. Executive Vice President, Kemper Financial Services, Inc. Vice President, Kemper Total Return Fund Vice President, Kemper Investors Fund REYNOLDS, STEVEN H. Executive Vice President, Kemper Financial Services, Inc. Vice President, Kemper Technology Fund Vice President, Kemper Total Return Fund Vice President, Kemper Growth Fund Vice President, Kemper Small Capitalization Equity Fund Vice President, Kemper International Fund Vice President, Kemper Blue Chip Fund Vice President, Kemper Value Plus Growth Fund Vice President, Kemper Quantitative Equity Fund Vice President, Kemper Target Equity Fund Vice President, Kemper Sterling Funds Vice President, Kemper Horizon Fund Vice President, Kemper Investors Fund Vice President, The Growth Fund of Spain, Inc. SILIGMUELLER, DALE S. Executive Vice President, Kemper Financial Services, Inc. Director, Executive Vice President, Kemper Service Company BUKOWSKI, DANIEL J. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Quantitative Equity Fund Vice President, Kemper Value Plus Growth Fund BUTLER, DAVID H. Senior Vice President, Kemper Financial Services, Inc. CERVONE, DAVID M. Senior Vice President, Kemper Financial Services, Inc. CESSINE, ROBERT S. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Income and Capital Preservation Fund Vice President, Kemper Diversified Income Fund Vice President, Kemper Multi-Market Income Trust CHESTER, TRACY McCORMICK Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Blue Chip Fund Vice President, Kemper Target Equity Fund Vice President, Kemper Value Plus Growth Fund CIARLELLI, ROBERT W. Senior Vice President, Kemper Financial Services, Inc. Executive Vice President, Kemper Service Company C-10 141 COLLECCHIA, FRANK E. Senior Vice President, Kemper Financial Services, Inc. Senior Investment Officer, Federal Kemper Life Assurance Company Senior Investment Officer, Fidelity Life Association Vice President, FKLA Loire Court, Inc. Vice President, FLA First Nationwide, Inc. Vice President, FLA Plate Building, Inc. Vice President, Galaxy Offshore, Inc. Senior Investment Officer, Kemper Investors Life Insurance Company Vice President, KI Arnold Industrial, Inc. Vice President, KI Canyon Park, Inc. Vice President, KI Centreville, Inc. Vice President, KI Colorado Boulevard, Inc. Vice President, KI Dublin Boulevard, Inc. Vice President, KI LaFiesta Square, Inc. Vice President, KI Lewinsville, Inc. Vice President, KI Monterey Research, Inc. Vice President, KI Olive Street, Inc. Vice President, KI Sutter Street, Inc. Vice President, KI Thornton Boulevard, Inc. Vice President, KR 77 Fitness Center, Inc. Vice President, KR Avondale Redmond, Inc. Vice President, KR Black Mountain, Inc. Vice President, KR Brannan Resources, Inc. Vice President, KR Clay Capital, Inc. Vice President, KR Cranbury, Inc. Vice President, KR Delta Wetlands, Inc. Vice President, KR Gainesville, Inc. Vice President, KR Halawa Associates, Inc. Vice President, KR Hotels, Inc. Vice President, KR Lafayette Apartments, Inc. Vice President, KR Lafayette BART, Inc. Vice President, KR Palm Plaza, Inc. Vice President, KR Red Hill Associates, Inc. Vice President, KR Seagate/Gateway North, Inc. Vice President, KR Venture Way, Inc. Vice President, KR Walnut Creek, Inc. COLLORA, PHILIP J. Senior Vice President and Assistant Secretary, Kemper Financial Services, Inc. Vice President and Secretary, Kemper Funds Assistant Secretary, Kemper International Management, Inc. DIERENFELDT, DAVID F. Senior Vice President, Associate General Counsel, Assistant Secretary, Kemper Financial Services, Inc. Vice President and Secretary, Kemper Distributors, Inc. Secretary, Dreman Value Advisors, Inc. Assistant Secretary, Galaxy Offshore, Inc. C-11 142 Director, Secretary, INVEST Financial Corporation Secretary, INVEST Financial Corporation Holding Company Assistant Secretary, Investors Brokerage Services Insurance Agency, Inc. Assistant Secretary, Investors Brokerage Services, Inc. Secretary, Kemper Asset Management Company Assistant Secretary, Kemper International Management, Inc. Assistant Secretary, Kemper Investment Management Company Limited Vice President and Assistant Secretary, Kemper Investors Fund Secretary, Kemper Service Company DUDASIK, PATRICK H. Senior Vice President, Kemper Financial Services, Inc. Executive Vice President, Chief Financial Officer and Treasurer, Dreman Value Advisors, Inc. Vice President and Treasurer, Kemper Asset Management Company Treasurer and Chief Financial Officer, Kemper Distributors, Inc. Treasurer and Chief Financial Officer, Kemper Service Company Director and Treasurer, Kemper Investment Management Company Limited DUFFY, JEROME L. Senior Vice President, Kemper Financial Services, Inc. Treasurer, Kemper Funds GALLAGHER, MICHAEL L. Senior Vice President, Kemper Financial Services, Inc. Senior Vice President, Kemper Service Company GLASSMAN, HARVEY Senior Vice President, Kemper Financial Services, Inc. GOERS, RICHARD A. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Technology Fund GUENTHER, HAROLD E. Senior Vice President, Kemper Financial Services, Inc. Vice President, Galaxy Offshore, Inc. HUSSEY, KAREN A. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Investors Fund Vice President, Kemper Small Capitalization Equity Fund INNES, BRUCE D. Senior Vice President, Kemper Financial Services, Inc. Co-President, International Association of Corporate and Professional Recruiters C-12 143 KLEIN, GEORGE Senior Vice President, Kemper Financial Services, Inc. Director, Executive Vice President, Kemper Asset Management Company KORTH, FRANK D. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Technology Fund McNAMARA, MICHAEL A. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Diversified Income Fund Vice President, Kemper High Income Trust Vice President, Kemper High Yield Fund Vice President, Kemper Investors Fund Vice President, Kemper Multi-Market Income Trust Vice President, Kemper Strategic Income Fund MIER, CHRISTOPHER J. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper National Tax-Free Income Series Vice President, Kemper Municipal Income Trust Vice President, Kemper State Tax-Free Income Series Vice President, Kemper Strategic Municipal Income Trust Vice President, Sterling Funds MURRIHY, MAURA J. Senior Vice President, Kemper Financial Services, Inc. NATHANSON, IRA Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Corporation RABIEGA, CRAIG F. Senior Vice President, Kemper Financial Services, Inc. First Vice President, Kemper Service Company RACHWALSKI, JR. FRANK J. Senior Vice President, Kemper Financial Services, Inc. Vice President, Cash Account Trust Vice President, Cash Equivalent Fund Vice President, Investors Cash Trust Vice President, Kemper Investors Fund Vice President, Kemper Money Market Fund Vice President, Kemper Portfolios C-13 144 Vice President, Sterling Funds Vice President, Tax-Exempt California Money Market Fund Vice President, Tax-Exempt New York Money Market Fund REGNER, THOMAS M. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Horizon Fund RESIS, JR., HARRY E. Senior Vice President, Kemper Financial Services, Inc. Vice President, Kemper Diversified Income Fund Vice President, Kemper High Income Trust Vice President, Kemper High Yield Fund Vice President, Kemper Investors Fund Vice President, Kemper Multi-Market Income Trust Vice President, Kemper Strategic Income Fund SCHUMACHER, ROBERT T. Senior Vice President, Kemper Financial Services, Inc. SMITH, JR., EDWARD BYRON Senior Vice President, Kemper Financial Services, Inc. VINCENT, CHRISTOPHER T. Senior Vice President, Kemper Financial Services, Inc. First Vice President, Kemper Asset Management Company BAZAN, KENNETH M. First Vice President, Kemper Financial Services, Inc. Director, K-P Greenway, Inc. Director, K-P Plaza Dallas, Inc. Director, Kemper/Prime Acquisition Fund, Inc. BOEHM, JONATHAN J. First Vice President, Kemper Financial Services, Inc. Senior Vice President, Kemper Service Company BURROW, DALE R. First Vice President, Kemper Financial Services, Inc. Vice President, Kemper Strategic Municipal Income Trust BYRNES, ELIZABETH A. First Vice President, Kemper Financial Services, Inc. Vice President, Kemper Adjustable Rate U.S. Government Fund Vice President, Kemper Intermediate Government Trust C-14 145 CHIEN, CHRISTINE First Vice President, Kemper Financial Services, Inc. DeMAIO, CHRIS C. First Vice President, Kemper Financial Services, Inc. Vice President and Chief Accounting Officer, Kemper Service Company DEXTER, STEPHEN P. First Vice President, Kemper Financial Services, Inc. DOYLE, DANIEL J. First Vice President, Kemper Financial Services, Inc. FENGER, JAMES E. First Vice President, Kemper Financial Services, Inc. HALE, DAVID D. First Vice President, Kemper Financial Services, Inc. HARRINGTON, MICHAEL E. First Vice President, Kemper Financial Services, Inc. HORTON, ROBERT J. First Vice President, Kemper Financial Services, Inc. JACOBS, PETER M. First Vice President, Kemper Financial Services, Inc. KEELEY, MICHELLE M. First Vice President, Kemper Financial Services, Inc. Vice President, Kemper Intermediate Government Trust Vice President, Kemper Portfolios KIEL, CAROL L. First Vice President, Kemper Financial Services, Inc. LAUGHLIN, ANN M. First Vice President, Kemper Financial Services, Inc. LENTZ, MAUREEN P. First Vice President, Kemper Financial Services, Inc. McCRINDLE-PETRARCA, SUSAN First Vice President, Kemper Financial Services, Inc. MINER, EDWARD First Vice President, Kemper Financial Services, Inc. MURRAY, SCOTT S. First Vice President, Kemper Financial Services, Inc. C-15 146 Vice President, Kemper Service Company PAYNE, III, ROBERT D. First Vice President, Kemper Financial Services, Inc. PANOZZO, ROBERTA L. First Vice President, Kemper Financial Services, Inc. RADIS, STEVE A. First Vice President, Kemper Financial Services, Inc. RATEKIN, DIANE E. First Vice President, Assistant General Counsel and Assistant Secretary, Kemper Financial Services, Inc. Assistant Secretary, Kemper Distributors, Inc. SILVIA, JOHN E. First Vice President, Kemper Financial Services, Inc. STUEBE, JOHN W. First Vice President, Kemper Financial Services, Inc. Vice President, Cash Account Trust Vice President, Cash Equivalent Fund THOUIN-LEERKAMP, EDITH A. First Vice President, Kemper Financial Services, Inc. Director-European Equities, Kemper Investment Management Company Limited TRUTTER, JONATHAN W. First Vice President, Kemper Financial Services, Inc. Vice President, Kemper Diversified Income Fund Vice President, Kemper Multi-Market Income Trust Vice President, Kemper Strategic Income Fund WETHERALD, ROBERT F. First Vice President, Kemper Financial Services, Inc. WILLSON, STEPHEN R. First Vice President, Kemper Financial Services, Inc. Vice President, Kemper Strategic Municipal Income Trust WITTNEBEL, MARK E. First Vice President, Kemper Financial Services, Inc. BARRY, JOANN M. Vice President, Kemper Financial Services, Inc. BODEM, RICHARD A. Vice President, Kemper Financial Services, Inc. Vice President, Kemper Service Company C-16 147 CARNEY, ANNE T. Vice President, Kemper Financial Services, Inc. CARTER, PAUL J. Vice President, Kemper Financial Services, Inc. CHRISTIANSEN, HERBERT A. Vice President, Kemper Financial Services, Inc. First Vice President, Kemper Service Company COHEN, JERRI I. Vice President, Kemper Financial Services, Inc. ESOLA, CHARLES J. Vice President, Kemper Financial Services, Inc. Vice President, Kemper Service Company FRIHART, THORA A. Vice President, Kemper Financial Services, Inc. GERACI, AUGUST L. Vice President, Kemper Financial Services, Inc. GERICKE, KATHLEEN E. Vice President, Kemper Financial Services, Inc. GOLAN, JAMES S. Vice President, Kemper Financial Services, Inc. HESS, THOMAS L. Vice President, Kemper Financial Services, Inc. HUOT, LISA L. Vice President, Kemper Financial Services, Inc. KARWOWSKI, KENNETH F. Vice President, Kemper Financial Services, Inc. KNAPP, WILLIAM M. Vice President, Kemper Financial Services, Inc. KOCH, DEBORAH L. Vice President, Kemper Financial Services, Inc. KOURY, KATHRYN E. Vice President, Kemper Financial Services, Inc. KRANZ, KATHY J. Vice President, Kemper Financial Services, Inc. KRUEGER, PAMELA D. Vice President, Kemper Financial Services, Inc. C-17 148 KYCE, JOYCE Vice President, Kemper Financial Services, Inc. Vice President, Kemper Service Company LeFEBVRE, THOMAS J. Vice President, Kemper Financial Services, Inc. MANGIPUDI, V. RAO Vice President, Kemper Financial Services, Inc. McGOVERN, KAREN B. Vice President, Kemper Financial Services, Inc. MILLER, MAUREEN A. Vice President, Kemper Financial Services, Inc. MITCHELL, KATHERINE H. Vice President, Kemper Financial Services, Inc. MURPHY, THOMAS M. Vice President, Kemper Financial Services, Inc. NEVILLE, BRIAN P. Vice President, Kemper Financial Services, Inc. PANOZZO, ALBERT R. Vice President, Kemper Financial Services, Inc. PONTECORE, SUSAN E. Vice President, Kemper Financial Services, Inc. QUADRINI, LISA L. Vice President, Kemper Financial Services, Inc. ROKOSZ, PAUL A. Vice President, Kemper Financial Services, Inc. ROSE, KATIE M. Vice President, Kemper Financial Services, Inc. SHULTZ, KAREN D. Vice President, Kemper Financial Services, Inc. Vice President, Kemper Service Company SMITH, ROBERT G. Vice President, Kemper Financial Services, Inc. SOPHER, EDWARD O. Vice President, Kemper Financial Services, Inc. STROMM, LAWRENCE D. Vice President, Kemper Financial Services, Inc. C-18 149 TEPPER, SHARYN A. Vice President, Kemper Financial Services, Inc. VANDEMERKT, RICHARD J. Vice President, Kemper Financial Services, Inc. Vice President, Kemper Service Company WATKINS, JAMES K. Vice President, Kemper Financial Services, Inc. Vice President, Kemper Service Company WERTH, ELIZABETH C. Vice President, Kemper Financial Services, Inc. Vice President, Kemper Distributors, Inc. Assistant Secretary, Kemper Mutual Funds Assistant Secretary, Kemper International Bond Fund Assistant Secretary, Kemper Target Equity Fund Assistant Secretary, Sterling Funds Assistant Secretary, Kemper-Dreman Fund, Inc. Assistant Secretary, Kemper Horizon Fund WIZER, BARBARA K. Vice President, Kemper Financial Services, Inc. ZURAWSKI, CATHERINE N. Vice President, Kemper Financial Services, Inc. C-19 150 ITEM 29. PRINCIPAL UNDERWRITER (a) Kemper Distributors, Inc. acts as principal underwriter of the Registrant's shares and acts as principal underwriter of the Kemper Mutual Funds, Kemper Investors Fund, Kemper International Bond Fund and Kemper-Dreman Fund, Inc. (b) Information on the officers and directors of Kemper Distributors, Inc., principal underwriter for the Registrant is set forth below. The principal business address is 120 South LaSalle Street, Chicago, Illinois 60603.
POSITIONS AND POSITIONS AND OFFICES OFFICES WITH NAME WITH UNDERWRITER REGISTRANT ---- --------------------- ------------- John E. Peters Principal Director, President Vice President William E. Chapman, II Director, Executive Vice President None James L. Greenawalt Director, Executive Vice President None John E. Neal Director None Stephen B. Timbers Director President, Trustee Patrick H. Dudasik Financial Principal, Treasurer and Chief Financial Officer None Linda A. Bercher Senior Vice President None Thomas V. Bruns Senior Vice President None Terry Cunningham Senior Vice President None Daniel T. O'Lear Senior Vice President None John H. Robison, Jr. Senior Vice President None Henry J. Schulthesz Senior Vice President None David F. Dierenfeldt Vice President, Secretary None Carlene D. Merold Vice President None Elizabeth C. Werth Vice President Assistant Secretary Kathleen A. Gallichio Assistant Secretary None Diane E. Ratekin Assistant Secretary None
(c) Not applicable. C-20 151 ITEM 30. LOCATION OF ACCOUNTS AND RECORDS All such accounts, books and other documents are maintained at the offices of the Registrant, the offices of Registrant's investment adviser, Kemper Financial Services, Inc. and Registrant's principal underwriter, Kemper Distributors, Inc., 120 South LaSalle Street, Chicago, Illinois 60603, at the offices of the custodian and transfer agent, Investors Fiduciary Trust Company, 21 West 10th Street, Kansas City, Missouri 64141 or at the offices of the Shareholder Service Agent, Kemper Service Company, 811 Main Street, Kansas City, Missouri 64105. ITEM 31. MANAGEMENT SERVICES Not applicable. ITEM 32. UNDERTAKINGS Not applicable. C-21 152 S I G N A T U R E S Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago and State of Illinois, on the 28th day of November, 1995. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By /s/ Stephen B. Timbers ------------------------------ Stephen B. Timbers, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on November 28, 1995 on behalf of the following persons in the capacities indicated. Signature Title --------- ----- /s/ Stephen B. Timbers President ---------------------------------- (Principal Stephen B. Timbers Executive Officer) and Trustee /s/David W. Belin* Trustee -------------------------------------- /s/Lewis A. Burnham* Trustee -------------------------------------- /s/Donald L. Dunaway* Trustee -------------------------------------- /s/Robert B. Hoffman* Trustee -------------------------------------- /s/Donald R. Jones* Trustee -------------------------------------- /s/David B. Mathis* Trustee -------------------------------------- /s/Shirley D. Peterson* Trustee -------------------------------------- /s/William P. Sommers* Trustee -------------------------------------- /s/ Jerome L. Duffy -------------------------------------- Treasurer Jerome L. Duffy (Principal Financial and Accounting Officer) *Philip J. Collora signs this document pursuant to powers of attorney filed herewith. /s/ Philip J. Collora -------------------------------- Philip J. Collora 153 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND INDEX TO EXHIBITS Exhibits 99.B1 Amended and Restated Agreement and Declaration of Trust 99.B2 By-Laws 99.B3 Inapplicable 99.B4(a) Text of Share Certificate 99.B4(b) Written Instrument Establishing and Designating Separate Classes of Shares 99.B5 Investment Management Agreement 99.B6(a) Underwriting and Distribution Services Agreement 99.B6(b) Assignment and Assumption 99.B6(c) Selling Group Agreement 99.B7 Inapplicable 99.B8 Custody Agreement 99.B9(a) Agency Agreement 99.B9(b) Supplement to Agency Agreement 99.B9(c) Administrative Services Agreement 99.B9(d) Amendment to Administrative Services Agreement 99.B9(e) Assignment and Assumption 99.B9(f) Amended Appendix I for Administrative Services Agreement 99.B10 Legal Opinion and Consent 99.B11 Report and Consent of Independent Auditors 99.B12 Inapplicable 99.B13 Inapplicable 99.B14(a) Kemper Retirement Plan Prototype 99.B14(b) Model Individual Retirement Account 99.B15 See 6(a) above (Class B and Class C Shares) 99.B16 Performance Calculations* 99.B18 Multi-Distribution System Plan 99.B24 Powers of Attorney 99.B485(b) Representation of Counsel (Rule 485(b)) 27All Financial Data Schedule 27A Financial Data Schedule 27B Financial Data Schedule 27C Financial Data Schedule
- --------------- * Incorporated herein by reference to the Post-Effective Amendment to Registrant's Registration Statement on Form N-1A identified below.
EXHIBIT NO. POST-EFFECTIVE AMENDMENT NO. FILING DATE - ----------- ---------------------------- ----------- 16 3 10/26/88
EX-99.B1 2 AMENDED RESTATED AGREEMENT AND DECLARATION 1 EXHIBIT 99.B1 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST WHEREAS, Article IX, Section 4 of the Agreement and Declaration of Trust of Kemper Adjustable Rate U.S. Government Fund dated May 28, 1987, as amended, provides that the Agreement and Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the then Trustees when authorized so to do by vote of Shareholders holding a majority of the Shares entitled to vote; and WHEREAS, the holders of a majority of the Shares entitled to vote have authorized this Amendment and Restatement of said Agreement and Declaration of Trust; NOW, THEREFORE, said Agreement and Declaration of Trust is amended and restated to read in its entirety as follows: WITNESSETH WHEREAS, this Trust has been formed for the purposes of carrying on the business of a management investment company; and WHEREAS, in furtherance of such purposes, the Trustees have acquired and may hereafter acquire assets and properties, to hold and manage as trustees of a Massachusetts voluntary association with transferable shares in accordance with the provisions hereinafter set forth; NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities and other assets and properties which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the pro rata benefit of the holders from time to time of shares in this Trust as hereinafter set forth. 2 ARTICLE I Name and Definitions Name and Registered Agent Section 1. This Trust shall be known as Kemper Adjustable Rate U.S. Government Fund and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine. The registered agent for the Trust in Massachusetts shall be CT Corporation System whose address is 2 Oliver Street, Boston, Massachusetts or such other person as the Trustees may from time to time designate. Definitions Section 2. Whenever used herein, unless otherwise required by the context or specifically provided: (a) The "Trust" refers to the Massachusetts voluntary association established by this Agreement and Declaration of Trust, as amended from time to time, pursuant to Massachusetts General Laws, Chapter 182; (b) "Trustees" refers to the Trustees of the Trust named herein or elected in accordance with Article IV and then in office; (c) "Shares" mean the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time or, if more than one series or class of shares is authorized under or pursuant to Article III, the equal proportionate transferable units of interest into which each such series or class shall be divided from time to time; (d) "Shareholder" means a record owner of Shares; (e) The "1940 Act" refers to the Investment Company Act of 1940 (and any successor statute) and the Rules and Regulations thereunder, all as amended from time to time; (f) The terms "Affiliated Person", "Assignment", "Commission", "Interested Person", "Principal Underwriter" and "vote of a majority of the outstanding voting securities" shall have the meanings given them in the 1940 Act; (g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust as amended or restated from time to time; (h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time; 2 3 (i) "Net asset value" shall have the meaning set forth in Section 6 of Article VI hereof; (j) The terms "series" or "series of Shares" refers to the one or more separate investment portfolios of the Trust authorized under or pursuant to Article III into which the assets and liabilities of the Trust may be divided and the Shares of the Trust representing the beneficial interest of Shareholders in such respective portfolios; and (k) The terms "class" or "class of Shares" refers to the division of Shares representing any series into two or more classes authorized under or pursuant to Article III. ARTICLE II Nature and Purpose The Trust is a voluntary association (commonly known as a business trust) of the type referred to in Chapter 182 of the General Laws of the Commonwealth of Massachusetts. The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general or a limited partnership, joint venture, corporation or joint stock company, nor shall the Trustees or Shareholders or any of them for any purpose be deemed to be, or be treated in any way whatsoever as though they were, liable or responsible hereunder as partners or joint venturers. The purpose of the Trust is to engage in, operate and carry on the business of an open-end management investment company and to do any and all acts or things as are necessary, convenient, appropriate, incidental or customary in connection therewith. ARTICLE III Shares Section 1. The Shares of the Trust shall be issued in one or more series as the Trustees may, without Shareholder approval, authorize from time to time. Each series shall be preferred over all other series in respect of the assets allocated to that series as hereinafter provided. The beneficial interest in each series shall at all times be divided into Shares (without par value) of such series, each of which shall, except as provided in the following sentence, represent an equal proportionate interest in such series with each other Share of the same series, none having priority or preference over another Share of the same series. The Trustees may, without Shareholder approval, divide the Shares of any series into two or more classes, Shares of each such class having such preferences and special or relative rights or privileges (including conversion rights, if any) as the 3 4 Trustees may determine. The number of Shares authorized shall be unlimited, and the Shares so authorized may be represented in part by fractional Shares. The Trustees may from time to time divide or combine the shares of any series or class into a greater or lesser number without thereby changing the proportionate beneficial interests in the series or class. Without limiting the authority of the Trustees set forth in this Section 1 to establish and designate any further series or class, the Trustees hereby establish and designate one series of Shares to be known as the "Initial Portfolio." The establishment and designation of any series or class of Shares in addition to the foregoing shall be effective upon the execution by a majority of the then Trustees of an instrument setting forth such establishment and designation and the relative rights and preferences of such series or class. As provided in Article IX, Section 1 hereof, any series or class of Shares (whether or not there shall then be Shares outstanding of said series or class) may be terminated by the Trustees by written notice to the Shareholders of such series or class or by the vote of the Shareholders of such series or class entitled to vote more than fifty percent (50%) of the votes entitled to be cast on the matter. In the event of any such termination, a majority of the then Trustees shall execute an instrument setting forth the termination of such series or class. Ownership of Shares Section 2. The ownership and transfer of Shares shall be recorded on the books of the Trust or its transfer or similar agent. No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the issuance of Share certificates, the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent of the Trust, as the case may be, shall be conclusive as to who are the Shareholders of each series or class and as to the number of Shares of each series or class held from time to time by each Shareholder. Investment in the Trust; Assets of a Series Section 3. The Trustees may issue Shares of the Trust to such persons and on such terms and, subject to any requirements of law, for such consideration, which may consist of cash or tangible or intangible property or a combination thereof, as they may from time to time authorize. All consideration received by the Trust for the issue or sale of Shares of a particular series, together with all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation thereof, and any 4 5 funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall, irrevocably belong to such series of Shares for all purposes, subject only to the rights of creditors, and shall be so handled upon the books of account of the Trust and are herein referred to as "assets of" such series. Any allocation of the assets of a series among any classes of Shares of such series shall be made in a manner consistent with the preferences and special or relative rights or privileges of such classes. Right to Refuse Orders Section 4. The Trust by action of its Trustees shall have the right to refuse to accept any subscription for its Shares at any time without any cause or reason therefore whatsoever. Without limiting the foregoing, the Trust shall have the right not to accept subscriptions under circumstances or in amounts as the Trustees in their sole discretion consider to be disadvantageous to existing Shareholders and the Trust may from time to time set minimum and/or maximum amounts which may be invested in Shares by a subscriber. Order in Proper Form Section 5. The criteria for determining what constitutes an order in proper form and the time of receipt of such an order by the Trust shall be prescribed by resolution of the Trustees. When Shares Become Outstanding Section 6. Shares subscribed for and for which an order in proper form has been received shall be deemed to be outstanding as of the time of acceptance of the order therefor and the determination of the net price thereof, which price shall be then deemed to be an asset of the Trust. Merger or Consolidation Section 7. In connection with the acquisition of all or substantially all the assets or stock of another investment company, investment trust, or of a company classified as a personal holding company under Federal Income Tax laws, the Trustees may issue or cause to be issued Shares of a series or class and accept in payment therefor, in lieu of cash, such assets at their market value, or such stock at the market value of the assets held by such investment company or investment trust, either with or without adjustment for contingent costs or liabilities. 5 6 No Preemptive Rights, Etc. Section 8. Shareholders shall have no preemptive or other right to receive, purchase or subscribe for any additional Shares or other securities issued by the Trust. The Shareholders shall have no appraisal rights with respect to their Shares and, except as otherwise determined by the Trustees in their sole discretion, shall have no exchange or conversion rights with respect to their Shares. Status of Shares and Limitation of Personal Liability Section 9. Shares shall be deemed to be personal property giving only the rights provided in this instrument. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms of the Declaration of Trust and to have become a party thereto. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the same nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but only to the rights of said decedent under this Trust. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders partners. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally any Shareholder, nor except as specifically provided herein to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay. Shareholder Inspection Rights Section 10. Any Shareholder or his agent may inspect and copy during normal business hours any of the following documents of the Trust: By-Laws, minutes of the proceedings of the Shareholders and annual financial statements of the Trust, including a balance sheet and financial statements of operations. The foregoing rights of inspection of Shareholders of the Trust are the exclusive and sole rights of the Shareholders with respect thereto and no Shareholder of the Trust shall have, as a Shareholder, the right to inspect or copy any of the books, records or other documents of the Trust except as specifically provided in this Section 10 of this Article III or except as otherwise determined by the Trustees. 6 7 ARTICLE IV The Trustees Number, Designation, Election, Term, Etc. Section 1. (a) Initial Trustee. Philip J. Collora, the initial Trustee, appointed other Trustees pursuant to subsection (c) of this Section 1 and then resigned. (b) Number. The Trustees serving as such, whether named above or hereafter becoming Trustees, may increase or decrease the number of Trustees to a number other than the number theretofore determined which number shall not be less than three nor more than fifteen except during the period that the initial Trustee named above is sole Trustee. No decrease in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term, but the number of Trustees may be decreased in conjunction with the removal of a Trustee pursuant to subsection (e) of this Section 1. (c) Term and Election. Each Trustee, whether named above or hereafter becoming a Trustee, shall serve as a Trustee until the next meeting of Shareholders, if any, called for the purpose of considering the election or re-election of such Trustee or of a successor to such Trustee, and until the election and qualification of his successor, if any, elected at such meeting, or until such Trustee sooner dies, resigns, retires or is removed. Upon the election and qualification of a new Trustee, the Trust estate shall vest in the new Trustee (together with the continuing or other new Trustees) without any further act or conveyance. Prior to any sale of Shares pursuant to any public offering, the initial Trustee named above shall have the right to appoint other persons as Trustees each to serve as Trustees as aforesaid until the first meeting of Shareholders called for the purpose of the election or re-election of such Trustee or of a successor to such Trustee. (d) Resignation and Retirement. Any Trustee may resign his trust or retire as a Trustee, by written instrument signed by him and delivered to the other Trustees or to the Chairman of the Board, if any, the President or the Secretary of the Trust, and such resignation or retirement shall take effect upon such delivery or upon such later date as is specified in such instrument. (e) Removal. Any Trustee may be removed for cause at any time by written instrument, signed by at least a majority of the number of Trustees prior to such removal, specifying the date 7 8 upon which such removal shall become effective. Any Trustee may be removed with or without cause (i) by the vote of the Shareholders entitled to vote more than fifty percent (50%) of the votes entitled to be cast on the matter voting together without regard to series or class at any meeting called for such purpose, or (ii) by a written consent filed with the custodian of the Trust's portfolio securities and executed by the Shareholders entitled to vote more than fifty percent (50%) of the votes entitled to be cast on the matter voting together without regard to series or class. Whenever ten or more Shareholders of record who have been such for at least six months preceding the date of application, and who hold in the aggregate Shares constituting at least one percent of the outstanding Shares of the Trust, shall apply to the Trustees in writing, stating that they wish to communicate with other Shareholders with a view to obtaining signatures to a request for a meeting to consider removal of a Trustee and accompanied by a form of communication and request that they wish to transmit, the Trustees shall within five business days after receipt of such application inform such applicants as to the approximate cost of mailing to the Shareholders of record the proposed communication and form of request. Upon the written request of such applicants, accompanied by a tender of the material to be mailed and of the reasonable expenses of mailing, the Trustees shall, within reasonable promptness, mail such material to all Shareholders of record at their addresses as recorded on the books of the Trust. Notwithstanding the foregoing, the Trustees may refuse to mail such material on the basis and in accordance with the procedures set forth in the last two paragraphs of Section 16(c) of the 1940 Act. (f) Vacancies. Any vacancy or anticipated vacancy resulting from any reason, including without limitation the death, resignation, retirement, removal or incapacity of any of the Trustees, or resulting from an increase in the number of Trustees by the other Trustees may (but so long as there are at least three remaining Trustees, need not unless required by the 1940 Act) be filled either by a majority of the remaining Trustees, even if less than a quorum, through the appointment in writing of such other person as such remaining Trustees in their discretion shall determine or, whenever deemed appropriate by the remaining Trustees, by the election by the Shareholders, at a meeting called for such purpose, of a person to fill such vacancy. Upon the appointment or election and qualification of a new Trustee as aforesaid, the Trust estate shall vest in the new Trustee, together with the continuing Trustees, without any further act or conveyance, except that any such appointment or election in anticipation of a vacancy to occur by reason of retirement, resignation, or increase in number of Trustees to be effective at a later date shall become effective only at or after 8 9 the effective date of said retirement, resignation, or increase in number of Trustees. (g) Mandatory Election by Shareholders. Notwithstanding the foregoing provisions of this Section 1, the Trustees shall call a meeting of the Shareholders for the election of one or more Trustees at such time or times as may be required in order that the provisions of the 1940 Act may be complied with, and the authority hereinabove provided for the Trustees to appoint any successor Trustee or Trustees shall be restricted if such appointment would result in failure of the Trust to comply with any provision of the 1940 Act. (h) Effect of Death, Resignation, Etc. The death, resignation, retirement, removal or incapacity of the Trustees, or any one of them, shall not operate to annul or terminate the Trust or to revoke or terminate any existing agency or contract created or entered into pursuant to the terms of this Declaration of Trust. (i) No Accounting. Except under circumstances which would justify his removal for cause, no person ceasing to be a Trustee as a result of his death, resignation, retirement, removal or incapacity (nor the estate of any such person) shall be required to make an accounting to the Shareholders or remaining Trustees upon such cessation. Powers Section 2. The Trustees, subject only to the specific limitations contained in this Declaration of Trust or otherwise imposed by the 1940 Act or other applicable law, shall have, without further or other authorization and free from any power or control of the Shareholders, full, absolute and exclusive power, control and authority over the Trust assets and the business and affairs of the Trust to the same extent as if the Trustees were the sole and absolute owners thereof in their own right and to do all such acts and things as in their sole judgment and discretion are necessary and incidental to, or desirable for the carrying out of any of the purposes of the Trust or conducting the business of the Trust. Any determination made in good faith by the Trustees of the purposes of the Trust or the existence of any power or authority hereunder shall be conclusive. In construing the provisions of this Declaration of Trust, there shall be a presumption in favor of the grant of power and authority to the Trustees. Without limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration of Trust containing provisions relating to the business of the Trust, the conduct of its affairs, its rights or powers and the rights or powers of its Shareholders, Trustees, officers, employees and other agents and may amend and repeal them to the extent that such By-Laws do not reserve that right to the Shareholders; fill 9 10 vacancies in their number, including vacancies resulting from increases in their number, unless a vote of the Trust's Shareholders is required to fill such vacancies pursuant to the 1940 Act; elect and remove such officers and appoint and terminate such agents as they consider appropriate; appoint from their own number, and terminate, any one or more committees consisting of two or more Trustees, including an executive committee which may, when the Trustees are not in session, exercise some or all of the powers and authority of the Trustees as the Trustees may determine; appoint an advisory board, the members of which shall not be Trustees and need not be Shareholders; employ one or more investment advisers or managers as provided in Section 6 of this Article IV; employ one or more custodians of the assets of the Trust and authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities; retain a transfer agent or a Shareholder services agent, or both; provide for the distribution of Shares by the Trust, through one or more principal underwriters or otherwise; set record dates for the determination of Shareholders with respect to various matters; and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian or underwriter. In furtherance of and not in limitation of the foregoing, the Trustees shall have power and authority: (a) To invest and reinvest in, to buy or otherwise acquire, to hold, for investment or otherwise, to sell or otherwise dispose of, to lend or to pledge, to trade in or deal in securities or interests of all kinds, however evidenced, or obligations of all kinds, however evidenced, or rights, warrants, or contracts to acquire such securities, interests, or obligations, of any private or public company, corporation, association, general or limited partnership, trust or other enterprise or organization, foreign or domestic, or issued or guaranteed by any national or state government, foreign or domestic, or their agencies, instrumentalities or subdivisions (including but not limited to, bonds, debentures, bills, time notes and all other evidences of indebtedness); negotiable or non-negotiable instruments; any and all futures contracts; government securities and money market instruments (including but not limited to, bank certificates of deposit, finance paper, commercial paper, bankers acceptances, and all kinds of repurchase agreements); (b) To invest and reinvest in, to buy or otherwise acquire, to hold, for investment or otherwise, to sell or otherwise dispose of foreign currencies, and funds and exchanges, and make deposits in banks, savings banks, trust companies, and savings and loan associations, foreign or domestic; 10 11 (c) To acquire (by purchase, lease or otherwise) and to hold, use, maintain, develop, and dispose of (by sale or otherwise) any property, real or personal, and any interest therein; (d) To sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all of the assets of the Trust; (e) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; (f) To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities; (g) To hold any security or property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in the name of the Trustees or of the Trust or in the name of a custodian, subcustodian or other depositary or a nominee or nominees or otherwise; (h) Subject to the provisions of Article III, to allocate assets, liabilities, income and expenses of the Trust to a particular series of Shares or to apportion the same among two or more series, provided that any liabilities or expenses incurred by a particular series shall be payable solely out of the assets of that series; and to the extent necessary or appropriate to give effect to the preferences and special or relative rights or privileges of any classes of Shares, to allocate assets, liabilities, income and expenses of a series to a particular class of Shares of that series or to apportion the same among two or more classes of Shares of that series; (i) To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer, any security or property of which is or was held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer, and to pay calls or subscriptions with respect to any security held in the Trust; (j) To join with other security holders in acting through a committee, depositary, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depositary or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion 11 12 of the expenses and compensation of such committee, depositary or trustee as the Trustees shall deem proper; (k) To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including but not limited to claims for taxes; (l) To enter into joint ventures, general or limited partnerships and any other combinations or associations; (m) To borrow funds; (n) To endorse or guarantee the payment of any notes or other obligations of any person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; and to mortgage and pledge the Trust property or any part thereof to secure any of or all such obligations; (o) To purchase and pay for entirely out of Trust property such insurance as they may deem necessary or appropriate for the conduct of the business, including, without limitation, insurance policies insuring the assets of the Trust and payment of distribution and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers or managers, principal underwriters, or independent contractors of the Trust individually against all claims and liabilities of every nature arising by reason of holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such person as Shareholder, Trustee, officer, employee, agent, investment adviser or manager, principal underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such person against such liability; and (p) To pay pensions for faithful service, as deemed appropriate by the Trustees, and to adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust. The Trustees shall not in any way be bound or limited by any present or future law or custom in regard to investments by trustees of common law trusts. Except as otherwise provided herein or from time to time in the By-Laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of Trustees (if a quorum by present), within or without Massachusetts, including any meeting held by means of 12 13 a conference telephone or other communications equipment by means of which all persons participating in the meeting can communicate with each other simultaneously and participation by such means shall constitute presence in person at a meeting, or by written consents of a majority of the Trustees then in office. Payment of Expenses, Allocation of Liabilities Section 3. The Trustees are authorized to pay or to cause to be paid out of the principal or income of the Trust, or partly out of principal and partly out of income, as they deem fair, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, investment adviser or manager, principal underwriter, auditor, counsel, custodian, transfer agent, shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur. The assets of a particular series of Shares shall be charged with the liabilities (including, in the discretion of the Trustees or their delegate, accrued expenses and reserves) incurred in respect of such series (but not with liabilities incurred in respect of any other series) and such series shall also be charged with its share of any other liabilities. Any allocation of the liabilities of a series among classes of Shares of that series shall be done in a manner consistent with the preferences and special or relative rights or privileges of such classes. The determination of the Trustees shall be final and conclusive as to the amount of liabilities to be charged to one or more particular series or class. The Trustees may delegate from time to time the power to make such allocation to one or more Trustees or to an agent of the Trust appointed for such purpose. The liabilities with which a series is so charged are herein referred to as the "liabilities of" such series. Section 4. The Trustees shall have the power, as frequently as they may determine, to cause each Shareholder to pay directly, in advance or arrears, for charges for the Trust's custodian or transfer or shareholder service or similar agent, an amount fixed from time to time by the Trustees, by setting off such charges due from such Shareholder from declared but unpaid dividends owed such Shareholder and/or by reducing the number of Shares in the account of such Shareholder by that number of full and/or fractional shares which represents the outstanding amount of such charges due from such Shareholder. 13 14 Ownership of Assets of the Trust Section 5. Title to all of the assets of each series of the Trust and of the Trust shall at all times be considered as vested in the Trustees. Advisory, Management and Distribution Section 6. Subject to a favorable vote of a majority of the outstanding voting securities of a series of the Trust, the Trustees may on behalf of such series, at any time and from time to time, contract for exclusive or nonexclusive advisory and/or management services for such series with a corporation, trust, association or other organization, every such contract to comply with such requirements and restrictions as may be set forth in the By-Laws; and any such contract may contain such other terms interpretive of or in addition to said requirements and restrictions as the Trustees may determine, including, without limitation, authority to determine from time to time what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of such series shall be held uninvested and to make changes in such series' investments. The Trustees may also, at any time and from time to time, contract with a corporation, trust, association or other organization, appointing it exclusive or nonexclusive distributor or principal underwriter for the Shares, every such contract to comply with such requirements and restrictions as may be set forth in the By-Laws; and any such contract may contain such other terms interpretive of or in addition to said requirements and restrictions as the Trustees may determine. The fact that: (a) any of the Shareholders, Trustees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, advisor, principal underwriter, or distributor or agent of or for any corporation, trust, association, or other organization, or of or for any parent or affiliate of any organization, with which an advisory or management or principal underwriter's or distributor's contract, or transfer, shareholder services or other agency contract may have been or may hereafter be made, or that any such organization, or any parent or affiliate thereof, is a Shareholder or has an interest in the Trust, or that (b) any corporation, trust, association or other organization with which an advisory or management or principal underwriter's or distributor's contract, or transfer, shareholder services or other agency contract may have been or may hereafter be made also has an advisory or management contract, or principal underwriter's or distributor's contract, or transfer, shareholder services or 14 15 other agency contract with one or more other corporations, trusts, associations, or other organizations, or has other businesses or interests shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same or create any liability or accountability to the Trust or its Shareholders. ARTICLE V Shareholders' Voting Powers and Meetings Voting Powers Section 1. Subject to the voting provisions of one or more classes of Shares, the Shareholders shall have power to vote only: (a) for the election or removal of Trustees as provided in Article IV, Section 1; (b) with respect to any investment advisor or manager as provided in Article IV, Section 6; (c) with respect to any termination or reorganization of the Trust or any series or class thereof to the extent and as provided in Article IX, Section 1; (d) with respect to any amendment of this Declaration of Trust to the extent and as provided in Article IX, Section 4; and (e) with respect to such additional matters relating to the Trust as may be required by law, the 1940 Act, this Declaration of Trust, the By-Laws or any registration of the Trust with the Securities and Exchange Commission (or any successor agency) or any state, or as the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote. Notwithstanding any other provision of the Declaration of Trust, on any matter submitted to a vote of Shareholders all Shares of the Trust then entitled to vote shall, except to the extent otherwise required or permitted by the preferences and special or relative rights or privileges of any class of Shares, be voted by individual series and not in the aggregate or by class, except (a) when required by the 1940 Act, Shares shall be voted in the aggregate and not by individual series; and (b) when the Trustees have determined that the matter affects only the interests of one or more series or classes, then only Shareholders of such series or class shall be entitled to vote thereon. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to the exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A 15 16 proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Until Shares of any series or class are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Declaration of Trust or the By-Laws to be taken by Shareholders of such series or class. Shareholder Meetings Section 2. Meetings of Shareholders (including meetings involving only one or more but less than all series or classes) may be called and held from time to time for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided or upon any other matter deemed by the Trustees to be necessary or desirable. Such meetings shall be held at the principal office of the Trust as set forth in the By-Laws of the Trust or at any such other place within the United States as may be designated in the call thereof, which call shall be made by the Trustees or the President of the Trust. Meetings of Shareholders may be called by the Trustees or such other person or persons as may be specified in the By-Laws upon written application by Shareholders holding at least twenty-five percent (25%) (or ten percent (10%)) if the purpose of the meeting is to determine if a Trustee is to be removed from office) of the Shares then outstanding of all series and classes entitled to vote at such meeting requesting a meeting be called for a purpose requiring action by the Shareholders as provided herein or in the By-Laws which purpose shall be specified in any such written application. Shareholders shall be entitled to at least seven days' written notice of any meeting of the Shareholders. Quorum and Required Vote Section 3. The presence at a meeting of Shareholders in person or by proxy of Shareholders entitled to vote at least thirty percent (30%) of all votes entitled to be cast at the meeting of each series or class entitled to vote as a series or class shall be a quorum for the transaction of business at a Shareholders' meeting, except that where any provision of law or of this Declaration of Trust permits or requires that the holders of Shares shall vote in the aggregate and not as a series or class, then the presence in person or by proxy of Shareholders entitled to vote at least thirty percent (30%) of all votes entitled to be cast at the meeting (without regard to series or class) shall constitute a quorum. Any lesser number, however, shall be sufficient for adjournments. Any adjourned session or 16 17 sessions may be held within a reasonable time after the date set for the original meeting without the necessity of further notice. Except when a larger vote is required by any provisions of the 1940 Act, this Declaration of Trust or the By-Laws, a majority of the Shares of each series or class voted on the matter shall decide that matter insofar as that series or class is concerned, provided that where any provision of law, this Declaration of Trust or the By-Laws permits or requires that the holders of Shares vote in the aggregate and not as a series or class, then a majority of the Shares voted on any matter (without regard to series or class) shall decide such matter and a plurality shall elect a Trustee. Action by Written Consent Section 4. Any action taken by Shareholders may be taken without a meeting if Shareholders entitled to vote more than fifty percent (50%) of the votes entitled to be cast on the matter of each series or class or, where any provision of law, this Declaration of Trust or the By-Laws permits or requires that the holders of Shares vote in the aggregate and not as a series or class, if Shareholders entitled to vote more than fifty percent (50%) of the votes entitled to be cast thereon (without regard to series or class) (or in either case such larger vote as shall be required by any provision of this Declaration of Trust or the By-Laws) consent to the action in writing and such written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. Additional Provisions Section 5. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters not inconsistent with the provisions hereof. ARTICLE VI Distributions, Redemptions and Repurchases, And Determination of Net Asset Value Distributions Section 1. The Trustees may in their sole discretion from time to time distribute to the Shareholders of any series such income and gains, accrued or realized, as the Trustees may determine, after providing for actual and accrued expenses and liabilities of such series (including such reserves as the Trustees may establish) determined in accordance with this 17 18 Declaration of Trust and good accounting practices. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital and their determination shall be binding upon the Shareholders. Distributions to any series, if any be made, shall be in Shares of such series, in cash or otherwise and on a date or dates determined by the Trustees. At any time and from time to time in their discretion, the Trustees may distribute to the Shareholders of any series as of a record date or dates determined by the Trustees, in Shares of such series, in cash or otherwise, all or part of any gains realized on the sale or disposition of property of the series or otherwise, or all or part of any other principal of the Trust attributable to the series. Except to the extent otherwise required or permitted by the preferences and special or relative rights or privileges of any classes of Shares of that series, each distribution pursuant to this Section 1 shall be made ratably according to the number of Shares of the series held by the several Shareholders on the applicable record date thereof, provided that distributions from assets of a series may only be made to the holders of the Shares of such series and provided that no distributions need be made on Shares purchased pursuant to orders received, or for which payment is made, after such time or times as the Trustees may determine. Any distribution to the Shareholders of a particular class of Shares shall be made to such Shareholders prorata in proportion to the number of Shares of such class held by each of them. Any distribution paid in Shares will be paid at the net asset value thereof as determined in accordance with this Declaration of Trust. The Trustees have the power, in their discretion, to distribute for any year amounts sufficient to enable the Trust to qualify as a "regulated investment company" under the Internal Revenue Code as amended (or any successor thereto) to avoid any liability for federal income tax in respect of that year. Redemptions and Repurchases Section 2. Any holder of Shares of the Trust may, by presentation of a request in proper form, together with his certificates, if any, for such Shares, in proper form for transfer to the Trust or duly authorized agent of the Trust, request redemption of his shares for the net asset value thereof determined and computed in accordance with the provisions of this Section 2 and the provisions of Section 6 of this Article VI. Upon receipt by the Trust or its duly authorized agent, as the case may be, of such a request for redemption of Shares in proper form, such Shares shall be redeemed at the net asset value per share of the particular series or class next determined after such request is received or determined as of such other time fixed by the Trustees as may be permitted or required by the 1940 Act. The criteria for determining what constitutes a request for 18 19 redemption in proper form and the time of receipt of such request shall be fixed by the Trustees. The obligation of the Trust to redeem its Shares as set forth above in this Section 2 shall be subject to the condition that such obligation may be suspended by the Trust by or under authority of the Trustees during any period or periods when and to the extent permissible under the 1940 Act. If there is such a suspension, any Shareholder may withdraw any request for redemption which has been received by the Trust during any such period and the applicable net asset value with respect to which would but for such suspension be calculated as of a time during such period. Upon such withdrawal, the Trust shall return to the Shareholder the certificates therefor, if any. The Trust may also purchase, repurchase or redeem Shares in accordance with such other methods, upon such other terms and subject to such other conditions as the Trustee may from time to time authorize at a price not exceeding the net asset value of such Shares in effect when the purchase or repurchase or any contract to purchase or repurchase is made. Shares redeemed or repurchased by the Trust hereunder shall be canceled upon such redemption or repurchase without further action by the Trust or the Trustees and the number of issued and outstanding Shares of the relevant series and class shall thereupon by reduced by such amount. Payment for Shares Redeemed Section 3. Payment of the redemption price for Shares redeemed pursuant to this Article VI shall be made by the Trust or its duly authorized agent after receipt by the Trust or its duly authorized agent of a request for redemption in proper form (together with any certificates for such Shares as provided in Section 2 above) in accordance with procedures and subject to conditions prescribed by the Trustees; provided, however, that payment may be postponed during the period in which the redemption of Shares is suspended under Section 2 above. Subject to any generally applicable limitation imposed by the Trustees, any payment on redemption, purchase or repurchase by the Trust of Shares may, if authorized by the Trustees, be made wholly or partly in kind, instead of in cash. Such payment in kind shall be made by distributing securities or other property, constituting, in the opinion of the Trustees, a fair representation of the various types of securities and other property then held by the series of Shares being redeemed, purchased or repurchased (but not necessarily involving a portion of each of the series' holdings) and taken at their value used in determining the net asset value of the Shares in respect of which payment is made. 19 20 Redemptions at the Option of the Trust Section 4. The Trust shall have the right at its option and at any time and from time to time to redeem Shares of any Shareholder at the net asset value thereof as determined in accordance with Section 6 of this Article VI, if at such time such Shareholder owns fewer shares of a series or class than, or Shares of a series or class having an aggregate net asset value of less than, an amount determined from time to time by the Trustees. Any such redemption at the option of the Trust shall be made in accordance with such other criteria and procedures for determining the Shares to be redeemed, the redemption date and the means of effecting such redemption as the Trustees may from time to time authorize. Additional Provisions Relating to Dividends, Redemptions and Repurchases Section 5. The completion of redemption, purchase or repurchase of Shares shall constitute a full discharge of the Trust and the Trustees with respect to such Shares. No dividend or distribution (including, without limitation, any distribution paid upon termination of the Trust or of any series or class) with respect to, nor any redemption or repurchase of, the Shares of any series or class shall be effected by the Trust other than from the assets of such series. Determination of Net Asset Value Section 6. The term "net asset value" of each Share of a series or class as of any particular time shall be the quotient obtained by dividing the value, as at such time, of the net assets of such series or class (i.e., the value of the assets of such series or class less the liabilities of such series or class, exclusive of liabilities represented by the Shares of such series or class) by the total number of Shares of such series or class outstanding at such time, all determined and computed in accordance with the Trust's current prospectus. The Trustees, or any officer, or officers or agent of the Trust designated for the purpose by the Trustees shall determine the net asset value of the Shares of each series or class, and the Trustees shall fix the time or times as of which the net asset value of the Shares of each series or class shall be determined and shall fix the periods during which any such net asset value shall be effective as to sales, redemptions and repurchases of, and other transactions in, the Shares of such series or class, except as such times and periods for any such transaction may be fixed by other provisions of this Declaration of Trust or by the By-Laws. 20 21 Determinations in accordance with this Section 6 made in good faith shall be binding on all parties concerned. How Long Shares are Outstanding Section 7. Shares of the Trust surrendered to the Trust for redemption by it pursuant to the provisions of Section 2 of this Article VI shall be deemed to be outstanding until the redemption price thereof is determined pursuant to this Article VI and, thereupon and until paid, the redemption price thereof shall be deemed to be a liability of the Trust. Shares of the Trust purchased by the Trust in the open market shall be deemed to be outstanding until confirmation of purchase thereof by the Trust and, thereupon and until paid, the purchase price thereof shall be deemed to be a liability of the Trust. Shares of the Trust redeemed by the Trust pursuant to Section 4 of this Article VI shall be deemed to be outstanding until said Shares are deemed to be redeemed in accordance with procedures adopted by the Trustees pursuant to said Section 4. ARTICLE VII Compensation and Limitation of Liability of Trustees and Shareholders Section 1. The Trustees as such shall be entitled to reasonable compensation from the Trust if the rate thereof is prescribed by such Trustees. Nothing herein shall in any way prevent the employment of any Trustee for advisory, management, legal, accounting, investment banking or other services and payment for the same by the Trust, it being recognized that such employment may result in such Trustee being considered an Affiliated Person or an Interested Person. Limitation of Liability Section 2. The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, investment advisor or manager, principal underwriter or custodian, nor shall any Trustee be responsible for the act or omission of any other Trustee. Nothing in this Declaration of Trust shall protect any Trustee against any liability to which such Trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee. Every note, bond, contract, instrument, certificate, Share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustee or any of them in connection with the Trust shall be conclusively deemed to 21 22 have been executed or done only in or with respect to their or his capacity as Trustees or Trustee and neither such Trustees or Trustee nor the Shareholders shall be personally liable thereon. Every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers or officer shall give notice that this Declaration of Trust is on file with the Secretary of State of The Commonwealth of Massachusetts and shall recite that the same was executed or made by or on behalf of the Trust by them as Trustees or Trustee or as officers or officer and not individually and that the obligations of such instrument are not binding upon any of them or the Shareholders individually but are binding only upon the assets and property of the Trust or a particular series of Shares, and may contain such further recital as he or they may deem appropriate, but the omission thereof shall not operate to bind any Trustees or Trustee or officers or officer or Shareholders or Shareholder individually. All persons extending credit to, contracting with or having any claim against the Trust or a particular series of Shares shall look only to the assets of the Trust or the assets of that particular series of Shares, as the case may be, for payment under such credit, contract or claim; and neither the Shareholders nor the Trustees, nor any of the Trust's officers, employees or agents, whether past, present or future, shall be personally liable therefor. Trustees' Good Faith Action, Expert Advice, No Bond or Surety Section 3. The exercise by the Trustees of their powers and discretions hereunder shall be binding upon everyone interested. A Trustee shall be liable only for his own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust and their duties as Trustees hereunder, and shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. In discharging their duties, the Trustees, when acting in good faith, shall be entitled to rely upon the books of account of the Trust and upon written reports made to the Trustees by any officer appointed by them, any independent public accountant and (with respect to the subject matter of the contract involved) any officer, partner or responsible employee of any other party to any contract entered into pursuant to Section 2 of Article IV. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required. 22 23 Liability of Third Persons Dealing With Trustees Section 4. No person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order. ARTICLE VIII Indemnification Subject to the exceptions and limitations contained in this Article, every person who is, or has been, a Trustee or officer of the Trust (including persons who serve at the request of the Trust as directors, officers or trustees of another organization in which the Trust has an interest as a shareholder, creditor or otherwise) hereinafter referred to as a "Covered Person", shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee, director or officer and against amounts paid or incurred by him in settlement thereof. No indemnification shall be provided hereunder to a Covered Person: (a) against any liability to the Trust or its Shareholders by reason of a final adjudication by the court or other body before which the proceeding was brought that he engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (b) with respect to any matter as to which he shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or (c) in the event of a settlement or other disposition not involving a final adjudication (as provided in paragraph (a) or (b)) and resulting in a payment by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by the court or other body approving the settlement or other disposition or a reasonable determination, based on a review of readily 23 24 available facts (as opposed to a full trial-type inquiry) that he did not engage in such conduct: (i) by a vote of a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter); or (ii) by written opinion of independent legal counsel. The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law. Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under this Article shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Article, provided that either: (a) such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or (b) a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or independent legal counsel in a written opinion shall determine, based upon a review of the readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. As used in this Article, a "Disinterested Trustee" is one (a) who is not an "interested person" of the Trust, as defined in the 1940 Act (including anyone who has been exempted from being an "interested person" by any rule, regulation or order of the Commission), and (b) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending. As used in this Article, the words "claim", "action", "suit" or "proceeding" shall apply to all claims, actions, suits or 24 25 proceedings (civil, criminal or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include without limitation, attorneys' fees, cost, judgments, amounts paid in settlement, fines, penalties and other liabilities. In case any Shareholder or former Shareholder shall be held to be personally liable solely by reason of his or her being or having been a Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled to be held harmless from and indemnified against all loss and expense arising from such liability but only out of the assets of the particular series of Shares of which he or she is or was a Shareholder; provided, however, there shall be no liability or obligation of the Trust arising hereunder to reimburse any Shareholder for taxes paid by reason of such Shareholder's ownership of Shares or for losses suffered by reason of any changes in value of any Trust assets. ARTICLE IX Miscellaneous Duration, Termination and Reorganization of Trust Section 1. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be terminated at any time by the Trustees by written notice to the Shareholders without a vote of the Shareholders of the Trust or by the vote of the Shareholders entitled to vote more than fifty percent (50%) of the votes of each series or class entitled to be cast on the matter. Any series or class of Shares may be terminated at any time by the Trustees by written notice to the Shareholders of such series or class without a vote of the Shareholders of such series or class or by the vote of the Shareholders of such series or class entitled to vote more than fifty percent (50%) of the votes entitled to be cast on the matter. Upon termination of the Trust or of any one or more series or classes of Shares, after paying or otherwise providing for all charges, taxes, expenses and liabilities, whether due or accrued or anticipated, of the particular series or class as may be determined by the Trustees, the Trust shall in accordance with such procedures as the Trustees consider appropriate reduce to the extent necessary the remaining assets of the particular series to distributable form in cash or other securities, or any combination thereof, and distribute the proceeds to the 25 26 Shareholders of the series or class involved, ratably according the number of Shares of such series or class held by the several Shareholders of such series or class on the date of termination. Any such distributions with respect to any series which has one or more classes of Shares outstanding shall be made ratably to such classes in the same proportion as the number of Shares of each class bears to the total number of Shares of the series, except to the extent otherwise required or permitted by the preferences and special or relative rights or privileges of any classes of Shares of any such series. At any time by the affirmative vote of the Shareholders of the affected series entitled to vote more than fifty percent (50%) of the votes entitled to be cast on the matter, the Trustees may sell, convey and transfer the assets of the Trust, or the assets belonging to any one or more series, to another trust, partnership, association or corporation organized under the laws of any state of the United States, or to the Trust to be held as assets belonging to another series of the Trust, in exchange for cash, shares or other securities (including, in the case of a transfer to another series of the Trust, Shares of such other series) with such transfer being made subject to or with the assumption by the transferee of, the liabilities belonging to each series the assets of which are so distributed. Following such transfer, the Trustees shall distribute such cash, shares or other securities (giving due effect to the assets and liabilities belonging to and any other differences among the various series the assets belonging to which have so been transferred) among the Shareholders of the series the assets belonging to which have been so transferred; and if all the assets of the Trust have been so distributed, the Trust shall be terminated. Filing of Copies, References, Headings Section 2. The original or a copy of this instrument and of each amendment hereto shall be kept at the office of the Trust where it may be inspected by any Shareholder. A copy of this instrument and of each amendment hereto shall be filed by the Trust with the Secretary of State of The Commonwealth of Massachusetts and with the Boston City Clerk, as well as any other governmental office where such filing may from time to time be required. Anyone dealing with the Trust may rely on a certificate by any officer of the Trust as to whether or not any such amendments have been made and as to any matters in connection with the Trust hereunder; and, with the same effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this instrument or of any such amendments. In this instrument and in any such amendment, references to this instrument, and all expressions like "herein", "hereof", and "hereunder", shall be deemed to refer to this instrument as amended from time to time. Headings are placed herein for convenience of reference only and shall not be taken 26 27 as a part hereof or control or affect the meaning, construction or effect of this instrument. This instrument may be executed in any number of counterparts each of which shall be deemed an original. Applicable Law Section 3. This Declaration of Trust is made in The Commonwealth of Massachusetts, and it is created under and is to be governed by and construed and administered according to the laws of said Commonwealth. The Trust shall be of the type commonly called a Massachusetts business trust, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a trust. Amendments Section 4. This Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the then Trustees when authorized so to do by vote of Shareholders holding more than fifty percent (50%) of the Shares of each series entitled to vote, except that an amendment which in the determination of the Trustees shall affect the holders of one or more series or classes of Shares but not the holders of all outstanding series and classes shall be authorized by vote of the Shareholders holding more than fifty percent (50%) of the Shares entitled to vote of each series or class affected and no vote of Shareholders of a series or class not affected shall be required. Amendments having the purpose of changing the name of the Trust or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any provision which is defective or inconsistent with the 1940 Act or with the requirements of the Internal Revenue Code and the regulations thereunder for the Trust's obtaining the most favorable treatment thereunder available to regulated investment companies shall not require authorization by Shareholder vote. 27 28 IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals for themselves and their assigns, as of this 27th day of May, 1994. (SEAL) /s/ Charles M. Kierscht ----------------------------------- Charles M. Kierscht, Trustee 321 Princeton Road Hinsdale, Illinois 60521 (signatures continue) 28 29 /s/ David W. Belin ----------------------------------- David W. Belin, Trustee 1705 Plaza Circle Des Moines, Iowa 50322 /s/ Lewis A. Burnham ----------------------------------- Lewis A. Burnham, Trustee 16410 Avila Boulevard Tampa, Florida 33613 /s/ Donald L. Dunaway ----------------------------------- Donald L. Dunaway, Trustee 235A North Elm Grove Road Brookfield, Wisconsin 53005 /s/ Robert B. Hoffman ----------------------------------- Robert B. Hoffman, Trustee 1448 North Lake Shore Drive, Apt. 7-8A Chicago, IL 60610 /s/ Donald R. Jones ----------------------------------- Donald R. Jones, Trustee 1776 Beaver Pond Road Inverness, Illinois 60067 ------------------------------------ Charles M. Kierscht, Trustee 321 Princeton Road Hinsdale, Illinois 60521 /s/ William P. Sommers ------------------------------------ William P. Sommers, Trustee 2181 Parkside Ave. Hillsborough, California 94010 /s/ Stephen B. Timbers ------------------------------------ Stephen B. Timbers, Trustee 1448 North Lake Shore Drive, Apt. 12 1/2 C Chicago, Illinois 60610 30 STATE OF ILLINOIS ) ) SS COUNTY OF COOK ) Then personally appeared the afore-named David W. Belin, Lewis A. Burnham, Donald L. Dunaway, Robert B. Hoffman, Donald R. Jones, Charles M. Kierscht, William P. Sommers and Stephen B. Timbers who acknowledged the foregoing instrument to be their free act and deed, before me this 27th day of May, 1994. /s/ Mary A. McCallister ------------------------------ NOTARY PUBLIC EX-99.B2 3 BY-LAWS 1 EXHIBIT 99.B2 AMENDED BY-LAWS OF KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND Section 1. Agreement and Declaration of Trust and Principal Office 1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to the Agreement and Declaration of Trust, as from time to time in effect (the "Declaration of Trust"), of Kemper Adjustable Rate U.S. Government Fund, the Massachusetts business trust established by the Declaration of Trust (the "Trust"). 1.2 Principal Office of the Trust; Resident Agent. The principal office of the Trust shall be located in Chicago, Illinois. Its resident agent in Massachusetts shall be CT Corporation System, 2 Oliver Street, Boston, Massachusetts or such other person as the Trustees may from time to time select. Section 2. Shareholders 2.1 Shareholder Meetings. Meetings of the shareholders may be called at any time by the Trustees, by the President or, if the Trustees and the President shall fail to call any meeting of shareholders for a period of 30 days after written application of one or more shareholders who hold at least 25% of all shares issued and outstanding and entitled to vote at the meeting (or 10% if the purpose of the meeting is to determine if a Trustee shall be removed from office), then such shareholders may call such meeting. Each call of a meeting shall state the place, date, hour and purposes of the meeting. 2.2 Place of Meetings. All meetings of the shareholders shall be held at the principal office of the Trust, or, to the extent permitted by the Declaration of Trust, at such other place within the United States as shall be designated by the Trustees or the President of the Trust. 2.3 Notice of Meetings. A written notice of each meeting of shareholders, stating the place, date and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each shareholder entitled to vote thereat by leaving such notice with him or at his residence or usual place of business or by mailing it, postage prepaid, and addressed to such shareholder at his address as it appears in the records of the 2 Trust. Such notice shall be given by the Secretary or an Assistant Secretary or by an officer designated by the Trustees. No notice of any meeting of shareholders need be given to a shareholder if a written waiver of notice, executed before or after the meeting by such shareholder or his attorney thereunto duly authorized, is filed with the records of the meeting. 2.4 Ballots. No ballot shall be required for any election unless requested by a shareholder present or represented at the meeting and entitled to vote in the election. 2.5 Proxies and Voting. Shareholders entitled to vote may vote either in person or by proxy in writing dated not more than six months before the meeting named therein, which proxies shall be filed with the Secretary or other person responsible to record the proceedings of the meeting before being voted. Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. At all meetings of shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided by the chairman of the meeting. Section 3. Trustees 3.1 Committees and Advisory Board. The Trustees may appoint from their number an executive committee and other committees. Any such committee may be abolished and reconstituted at any time and from time to time by the Trustees. Except as the Trustees may otherwise determine, any such committee may make rules for the conduct of its business. The Trustees may appoint an advisory board to consist of not less than two nor more than five members. The members of the advisory board shall be compensated in such manner as the Trustees may determine and shall confer with and advise the Trustees regarding the investments and other affairs of the Trust. Each member of the advisory board shall hold office until the first meeting of the Trustees following the meeting of the shareholders, if any, next following his appointment and until his successor is appointed and qualified, or until he sooner dies, resigns, is removed, or becomes disqualified, or until the advisory board is sooner abolished by the Trustees. 3.2 Regular Meetings. Regular meetings of the Trustees may be held without call or notice at such places and at such times as the Trustees may from time to time determine, provided that notice of the first regular meeting following any such 2 3 determination shall be given to absent Trustees. A regular meeting of the Trustees may be held without call or notice immediately after and at the same place as any meeting of the shareholders. 3.3 Special Meetings. Special meetings of the Trustees may be held at any time and at any place designated in the call of the meeting, when called by the Chairman of the Board or by two or more Trustees, sufficient notice thereof being given to each Trustee by the Secretary or an Assistant Secretary or by the officer or one of the Trustees calling the meeting. 3.4 Notice. It shall be sufficient notice to a Trustee to send notice by mail at least three days or by telegram at least twenty-four hours before the meeting addressed to the Trustee at his or her usual or last known business or residence address or to give notice to him or her in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him or her before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.5 Quorum. At any meeting of the Trustees, one-third of the Trustees then in office shall constitute a quorum; provided, however, a quorum (unless the Board of Trustees consists of two or fewer persons) shall not be less than two. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. Section 4. Officers and Agents 4.1 Enumeration; Qualification. The officers of the Trust shall be a President, a Treasurer, a Secretary and such other officers, if any, as the Trustees from time to time may in their discretion elect or appoint. The Trust may also have such agents, if any, as the Trustees from time to time may in their discretion appoint. Any officer may be but none need be a Trustee or shareholder. Any two or more offices may be held by the same person. 4.2 Powers. Subject to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers herein and in the Declaration of Trust set forth, such duties and powers as are commonly incident to his or her office as if the 3 4 Trust were organized as a Massachusetts business corporation and such other duties and powers as the Trustees may from time to time designate. 4.3 Election. The President, the Treasurer and the Secretary shall be elected annually by the Trustees at their first meeting in each calendar year or at such later meeting in such year as the Trustees shall determine. Other officers or agents, if any, may be elected or appointed by the Trustees at said meeting or at any other time. 4.4 Tenure. The President, Treasurer and Secretary shall hold office until the first meeting of Trustees in each calendar year and until their respective successors are chosen and qualified, or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer shall hold office and each agent shall retain his or her authority at the pleasure of the Trustees. 4.5 Chairman of the Board. The Chairman of the Board of Trustees, if one is so appointed, shall be chosen from among the Trustees and may hold office only so long as he continues to be a Trustee. The Chairman of the Board, if any is so appointed, shall preside at all meetings of the shareholders and of the Trustees at which he is present; and shall have such other duties and powers as specified herein and as may be assigned to him by the Trustee. 4.6 President and Vice Presidents. The President shall be the chief executive officer of the Trust. The President shall, subject to the control of the Trustees, have general charge and supervision of the Trust and shall perform such other duties and have such other powers as the Trustees shall prescribe from time to time. Any Vice President shall at the request or in the absence or disability of the President exercise the powers of the President and perform such other duties and have such other powers as shall be designated from time to time by the Trustees. 4.7 Treasurer and Controller. The Treasurer shall be the chief financial officer of the Trust and, subject to any arrangement made by the Trustees with a bank or trust company or other organization as custodian or transfer or shareholder services agent, shall be in charge of its valuable papers and shall have such other duties and powers as may be designated from time to time by the Trustees or by the President. If at any time there shall be no Controller, the Treasurer shall also be the chief accounting officer of the Trust and shall have the duties and power prescribed herein for the Controller. Any Assistant Treasurer shall have such duties and powers as shall be designated from time to time by the Trustees. 4 5 The Controller, if any be elected, shall be the chief accounting officer of the Trust and shall be in charge of its books of account and accounting records. The Controller shall be responsible for preparation of financial statements of the Trust and shall have such other duties and powers as may be designated from time to time by the Trustees or the President. 4.8 Secretary and Assistant Secretaries. The Secretary shall record all proceedings of the shareholders and the Trustees in books to be kept therefor, which books shall be kept at the principal office of the Trust. In the absence of the Secretary from any meeting of shareholders or Trustees, an Assistant Secretary, or if there be none or if he or she is absent, a temporary clerk chosen at the meeting shall record the proceedings thereof in the aforesaid books. Section 5. Resignations and Removals Any Trustee may resign his trust or retire as a Trustee in accordance with procedures set forth in the Declaration of Trust. Any officer or advisory board member may resign at any time by delivering his or her resignation in writing to the Chairman of the Board, the President or the Secretary or to a meeting of the Trustees. The Trustees may remove any officer or advisory board member elected or appointed by them with or without cause by the vote of a majority of the Trustees then in office. Except to the extent expressly provided in a written agreement with the Trust, no Trustee, officer, or advisory board member resigning, and no officer or advisory board member removed, shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages on account of such removal. Section 6. Vacancies A vacancy in the office of Trustee shall be filed in accordance with the Declaration of Trust. Vacancies resulting from the death, resignation, incapacity or removal of any officer may be filled by the Trustees. Each successor of any such officer shall hold office for the unexpired term, and in the case of the President, the Treasurer and the Secretary, until his or her successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Section 7. Shares of Beneficial Interest 7.1 Share Certificates. No certificates certifying the ownership of shares shall be issued except as the Trustees may otherwise authorize. In the event that the Trustees authorize 5 6 the issuance of share certificates, subject to the provisions of Section 7.3, each shareholder shall be entitled to a certificate stating the number of shares owned by him or her, in such form as shall be prescribed from time to time by the Trustees. Such certificate shall be signed by the President or a Vice President and by the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary. Such signatures may be facsimiles if the certificate is signed by a transfer or shareholder services agent or by a registrar, other than a Trustee, officer or employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Trust with the same effect as if he or she were such officer at the time of its issue. In lieu of issuing certificates for shares, the Trustees or the transfer or shareholder services agent may either issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such shares, who shall in either case be deemed, for all purposes hereunder, to be the holders of certificates for such shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. 7.2 Loss of Certificates. In the case of the alleged loss or destruction or the mutilation of a share certificate, a duplicate certificate may be issued in place thereof, upon such terms as the Trustees may prescribe. 7.3 Discontinuance of Issuance of Certificates. The Trustees may at any time discontinue the issuance of share certificates and may, by written notice to each shareholder, require the surrender of share certificates to the Trust for cancellation. Such surrender and cancellation shall not affect the ownership of shares in the Trust. Section 8. Record Date The Trustees may fix in advance a time, which shall not be more than 90 days before the date of any meeting of shareholders or the date for the payment of any dividend or making of any other distribution to shareholders, as the record date for determining the shareholders having the right to notice and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution, and in such case only shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Trust after the record date. 6 7 Section 9. Seal The seal of the Trust shall, subject to alteration by the Trustees, consist of a flat-faced circular die with the word "Massachusetts" together with the name of the Trust, cut or engraved thereon; but, unless otherwise required by the Trustees, the seal shall not be necessary to be placed on, and its absence shall not impair the validity of, any document, instrument, or other paper executed and delivered by or on behalf of the Trust. Section 10. Execution of Papers Except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the Trust shall be signed, and any transfers of securities standing in the name of the Trust shall be executed, by the President or by one of the Vice Presidents or by the Treasurer or by whomsoever else shall be designated for that purpose by the vote of the Trustees and need not bear the seal of the Trust. Section 11. Fiscal Year The fiscal year of the Trust shall end on such date in each year as the Trustees shall from time to time determine. Section 12. Amendments These By-Laws may be amended or repealed, in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such majority. 7 EX-99.B4(A) 4 TEXT OF SHARE CERTIFICATE 1 EXHIBIT 99.B4(a) [Name] is the owner of [number] shares of beneficial interest in the above noted Fund (the "FUND"), of the series and class, if any, specified, fully paid and nonassessable, the said shares being issued and held subject to the provisions of the Agreement and Declaration of Trust of the Fund, and all amendments thereto, copies of which are on file with the Secretary of The Commonwealth of Massachusetts. The said owner by accepting this certificate agrees to and is bound by all of the said provisions. The shares represented hereby are transferable in writing by the owner thereof in person or by attorney upon surrender of this certificate to the Fund properly endorsed for transfer. This certificate is executed on behalf of the Trustees of the Fund as Trustees and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders individually but are binding only upon the assets and property of the Fund or, if applicable, the specified series of the Fund. The shares may be subject to a contingent deferred sales charge. This certificate is not valid unless countersigned by the Transfer Agent. EX-99.B4(B) 5 WRIT. INST. ESTAB. & DESIGN. SEP. CLASSES OF SHARE 1 EXHIBIT 99.B4(b) KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND WRITTEN INSTRUMENT ESTABLISHING AND DESIGNATING SEPARATE CLASSES OF SHARES The undersigned constitute all the Trustees of Kemper Adjustable Rate U.S. Government Fund (the "Fund"), a Massachusetts business trust governed by an Amended and Restated Agreement and Declaration of Trust dated May 27, 1994 (the "Amended Declaration of Trust"). This instrument is executed pursuant to Section 1 of Article III of the Amended Declaration of Trust in order to establish and designate separate classes of shares of any series of the Fund, and it is based in part upon resolutions of the Board of Trustees of the Fund adopted at a meeting on January 14, 1994. WHEREAS, Under the Amended Declaration of Trust the Board of Trustees has the authority, in its discretion and without shareholder approval, to divide the shares of any series of the Fund into separate classes of shares; WHEREAS, This Board of Trustees has previously approved, subject to various conditions, the division of the shares of each series of the Fund into four classes of shares, to be named "Class A Shares," "Class B Shares," "Class C Shares" and "Class I Shares;" WHEREAS, This Board of Trustees deems it desirable and in the best interests of the Fund to divide the shares of each series of the Fund, whether now existing or hereafter created (the "series"), into four separate classes of shares to be named, as previously indicated, "Class A Shares," "Class B Shares," "Class C Shares" and "Class I Shares" and to provide investors with a conversion feature from Class B Shares to the Class A Shares, which conversion feature would thereby eliminate any distribution services fee then in effect under any plan adopted pursuant to Rule 12b-1 of the Investment Company Act of 1940 ("1940 Act") for such Class B Shares; and WHEREAS, This Board of Trustees believes that the creation of four separate classes of shares as provided herein will be in the best interests of and will have no negative effects upon the current shareholders of the Fund; NOW, THEREFORE, the establishment and designation of separate classes of shares of any series of the Fund is approved in accordance with the following provisions: 2 1. Subject to the conditions hereinafter set forth, the shares of any series shall be divided into four classes to be known respectively as the "Class A Shares," the "Class B Shares," the "Class C Shares" and the "Class I Shares," which classes shall have such preferences and special or relative rights and privileges as may be determined from time to time by this Board of Trustees subject always to the Amended Declaration of Trust and the 1940 Act and the rules and regulations thereunder. 2. Subject to the terms of the Amended Declaration of Trust, the Class A Shares, Class B Shares, Class C Shares and Class I Shares will have the same rights and privileges except that: (A) the Class A Shares (1) shall be sold subject to an initial sales charge as described in the prospectus for the Fund as from time to time in effect or shall be issued to shareholders in connection with the conversion feature as hereinafter described; (2) shall have an administrative service fee; (3) shall not have a plan of distribution adopted under Rule 12b-1 of the 1940 Act ("Rule 12b-1 plan") and no fees payable under the Rule 12b-1 plans for the Class B Shares or Class C Shares shall be allocated or charged to the Class A Shares; and (4) shall have such dividend reinvestment, exchange and redemption rights and privileges as may be described in the prospectus for the Fund as from time to time in effect; and (B) the Class B Shares (1) shall be sold without an initial sales charge but subject to a contingent deferred sales charge imposed upon the redemption of the Class B shares as described in the prospectus of the Fund as from time to time in effect; (2) shall have an administrative service fee; (3) shall have a Rule 12b-1 plan and any fees payable from time to time under such plan shall be allocated and charged to, and any voting rights with respect to such plan shall be exercisable by, the Class B Shares only; (4) shall convert to Class A Shares within a specified number of years as hereinafter described; and 2 3 (5) shall have such purchase, dividend reinvestment, exchange and redemption rights and privileges associated therewith as may be described in the prospectus for the Fund as from time to time in effect; and (C) the Class C Shares (1) shall be sold without any initial sales charge or any contingent deferred sales charge; (2) shall have an administrative service fee; (3) shall have a Rule 12b-1 plan and any fees payable from time to time under such plan shall be allocated and charged to, and any voting rights with respect to such plan shall be exercisable by, the Class C Shares only; and (4) shall have such purchase, dividend reinvestment, exchange and redemption rights and privileges associated therewith as may be described in the prospectus for the Fund as from time to time in effect; and (D) the Class I Shares (1) shall be sold without any initial sales charge or any contingent deferred sales charge; (2) shall not have an administrative service fee; (3) shall not have a Rule 12b-1 plan and no fees payable under the plans for the Class B Shares or Class C Shares shall be allocated or charged to the Class I Shares; and (4) shall have such dividend reinvestment, exchange and redemption rights and privileges as may be described in the prospectus for the Fund as from time to time in effect. 3. Any shares of the Fund that are issued and outstanding at the time when shares of the Fund are effectively divided into separate classes of shares as set forth above shall be classified as Class A Shares. 4. Class A Shares of a series shall be issued to holders of Class B Shares of the same series pursuant to the following described conversion feature: (A) Class B Shares will convert to Class A Shares six years after issuance of such Class B Shares; provided, however, that any Class B Shares issued in exchange for shares originally classified as Initial Shares of Kemper Portfolios, formerly known as Kemper Investment Portfolios 3 4 (KP), whether in connection with a reorganization with a series of KP or otherwise, shall convert to Class A Shares seven years after issuance of such Initial Shares if such Initial Shares were issued prior to February 1, 1991; (B) Class B Shares issued upon reinvestment of income and capital gain dividends and other distributions will convert to Class A Shares on a pro rata basis with other Class B Shares; and (C) Conversion to Class A Shares shall be based upon the relative net asset values of the Class A Shares and the Class B Shares at the time of conversion. IN WITNESS WHEREOF, the undersigned have this 27th day of May, 1994 signed these presents. /s/ Charles M. Kierscht ----------------------------------- Charles M. Kierscht 321 Princeton Road Hinsdale, Illinois 60521 (signatures continue) 4 5 /s/ David W. Belin ----------------------------------- David W. Belin, Trustee 1705 Plaza Circle Des Moines, Iowa 50322 /s/ Lewis A. Burnham ----------------------------------- Lewis A. Burnham, Trustee 16410 Avila Boulevard Tampa, Florida 33613 /s/ Donald L. Dunaway ----------------------------------- Donald L. Dunaway, Trustee 235A North Elm Grove Road Brookfield, Wisconsin 53005 /s/ Robert B. Hoffman ----------------------------------- Robert B. Hoffman, Trustee 1448 North Lake Shore Drive, Apt. 7-8A Chicago, IL 60610 /s/ Donald R. Jones ----------------------------------- Donald R. Jones, Trustee 1776 Beaver Pond Road Inverness, Illinois 60067 /s/ William P. Sommers ----------------------------------- William P. Sommers, Trustee 2181 Parkside Ave. Hillsborough, California 94010 /s/ Stephen B. Timbers ----------------------------------- Stephen B. Timbers, Trustee 1448 North Lake Shore Drive, Apt. 12 1/2 C Chicago, Illinois 60610 EX-99.B5 6 INVESTMENT MANAGEMENT AGREEMENT 1 EXHIBIT 99.B5 INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made this 28th day of May, 1994, by and between KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND, a Massachusetts business trust (the "Fund"), and KEMPER FINANCIAL SERVICES, INC., a Delaware corporation (the "Adviser"). WHEREAS, the Fund is an open-end management investment company registered under the Investment Company Act of 1940, the shares of beneficial interest ("Shares") of which are registered under the Securities Act of 1933; WHEREAS, the Fund is authorized to issue Shares in separate series or portfolios with each representing the interests in a separate portfolio of securities and other assets; WHEREAS, the Fund currently offers or intends to offer Shares in one portfolio, the Initial Portfolio, together with any other Fund portfolios which may be established later and served by the Adviser hereunder, being herein referred to collectively as the "Portfolios" and individually referred to as a "Portfolio"; and WHEREAS, the Fund desires at this time to retain the Adviser to render investment advisory and management services to the Initial Portfolio, and the Adviser is willing to render such services; NOW THEREFORE, in consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Fund hereby employs the Adviser to act as the investment adviser for the Initial Portfolio and other Portfolios hereunder and to manage the investment and reinvestment of the assets of each such Portfolio in accordance with the applicable investment objectives and policies and limitations, and to administer the affairs of each such Portfolio to the extent requested by and subject to the supervision of the Board of Trustees of the Fund for the period and upon the terms herein set forth, and to place orders for the purchase or sale of portfolio securities for the Fund's account with brokers or dealers selected by it; and, in connection therewith, the Adviser is authorized as the agent of the Fund to give instructions to the Custodian of the Fund as to the deliveries of securities and payments of cash for the account of the Fund. In connection with the 2 selection of such brokers or dealers and the placing of such orders, the Adviser is directed to seek for the Fund best execution of orders. Subject to such policies as the Board of Trustees of the Fund determines, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty, created by this Agreement or otherwise, solely by reason of its having caused the Fund to pay a broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determined in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the clients of the Adviser as to which the Adviser exercises investment discretion. The Fund recognizes that all research services and research that the Adviser receives or generates are available for all clients, and that the Fund and other clients may benefit thereby. The investment of funds shall be subject to all applicable restrictions of the Agreement and Declaration of Trust and By-Laws of the Fund as may from time to time be in force. The Adviser accepts such employment and agrees during such period to render such services, to furnish office facilities and equipment and clerical, bookkeeping and administrative services for the Fund, to permit any of its officers or employees to serve without compensation as trustees or officers of the Fund if elected to such positions and to assume the obligations herein set forth for the compensation herein provided. The Adviser shall for all purposes herein provided be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. It is understood and agreed that the Adviser, by separate agreements with the Fund, may also serve the Fund in other capacities. 2. In the event that the Fund establishes one or more portfolios other than the Initial Portfolio with respect to which it desires to retain the Adviser to render investment advisory and management services hereunder, it shall notify the Adviser in writing. If the Adviser is willing to render such services, it shall notify the Fund in writing whereupon such portfolio or portfolios shall become a Portfolio or Portfolios hereunder. 2 3 3. For the services and facilities described in Section 1, the Fund will pay to the Adviser at the end of each calendar month, an investment management fee for each Portfolio computed by applying the following annual rates to the applicable average daily net assets of the Portfolio: Applicable Average Daily Net Assets
(Thousands) Annual Rate ----------------- ----------- $0 - $ 250,000 .55 of 1% $ 250,000 - $ 1,000,000 .52 of 1% $ 1,000,000 - $ 2,500,000 .50 of 1% $ 2,500,000 - $ 5,000,000 .48 of 1% $ 5,000,000 - $ 7,500,000 .45 of 1% $ 7,500,000 - $10,000,000 .43 of 1% $10,000,000 - $12,500,000 .41 of 1% Over $12,500,000 .40 of 1%
The fee as computed above shall be computed separately for, and charged as an expense of, each Portfolio based upon the average daily net assets of such Portfolio. For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement is in effect during the month and year, respectively. 4. The services of the Adviser to the Fund under this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby. 5. In addition to the fee of the Adviser, the Fund shall assume and pay any expenses for services rendered by a custodian for the safekeeping of the Fund's securities or other property, for keeping its books of account, for any other charges of the custodian, and for calculating the net asset value of the Fund as provided in the prospectus of the Fund. The Adviser shall not be required to pay and the Fund shall assume and pay the charges and expenses of its operations, including compensation of the trustees (other than those affiliated with the Adviser), charges and expenses of independent auditors, of legal counsel, of any transfer or dividend disbursing agent, and of any registrar of the Fund, costs of acquiring and disposing of portfolio securities, 3 4 interest, if any, on obligations incurred by the Fund, costs of share certificates and of reports, membership dues in the Investment Company Institute or any similar organization, costs of reports and notices to shareholders, other like miscellaneous expenses and all taxes and fees payable to federal, state or other governmental agencies on account of the registration of securities issued by the Fund, filing of trust documents or otherwise. The Fund shall not pay or incur any obligation for any expenses for which the Fund intends to seek reimbursement from the Adviser as herein provided without first obtaining the written approval of the Adviser. The Adviser shall arrange, if desired by the Fund, for officers or employees of the Adviser to serve, without compensation from the Fund, as trustees, officers or agents of the Fund if duly elected or appointed to such positions and subject to their individual consent and to any limitations imposed by law. If expenses borne by the Fund for those Portfolios which the Adviser manages in any fiscal year (including the Adviser's fee, but excluding interest, taxes, fees incurred in acquiring and disposing of portfolio securities, distribution services fees, extraordinary expenses and any other expenses excludable under state securities law limitations) exceed any applicable limitation arising under state securities laws, the Adviser will reduce its fee or reimburse the Fund for any excess to the extent required by such state securities laws. If for any month the expenses of the Fund properly chargeable to the income account shall exceed 1/12 of the percentage of average net assets allowable as expenses, the payment to the Adviser for that month shall be reduced and if necessary the Adviser shall make a refund payment to the Fund so that the total net expense will not exceed such percentage. As of the end of the Fund's fiscal year, however, the foregoing computations and payments shall be readjusted so that the aggregate compensation payable to the Adviser for the year is equal to the percentage calculated in accordance with Section 3 hereof of the average net asset value as determined as described herein throughout the fiscal year, diminished to the extent necessary so that the total of the aforementioned expense items of the Fund shall not exceed the expense limitation. The aggregate of repayments, if any, by the Adviser to the Fund for the year shall be the amount necessary to limit the said net expense to said percentage in accordance with the foregoing. The net asset value for each Portfolio shall be calculated in accordance with the provisions of the Fund's prospectus or as the trustees may determine in accordance with the provisions of the Investment Company Act of 1940. On each day when net asset value is not calculated, the net asset value of a Portfolio shall be deemed to be the net 4 5 asset value of such Portfolio as of the close of business on the last day on which such calculation was made for the purpose of the foregoing computations. 6. Subject to applicable statutes and regulations, it is understood that trustees, officers or agents of the Fund are or may be interested in the Adviser as officers, directors, agents, shareholders or otherwise, and that the officers, directors, shareholders and agents of the Adviser may be interested in the Fund otherwise than as a trustee, officer or agent. 7. The Adviser shall not be liable for any error of judgment or of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its obligations and duties or by reason of its reckless disregard of its obligations and duties under this Agreement. 8. This Agreement shall become effective with respect to the Initial Portfolio on the date hereof and shall remain in full force until March 1, 1995, unless sooner terminated as hereinafter provided. This Agreement shall continue in force from year to year thereafter with respect to each Portfolio, but only as long as such continuance is specifically approved for each Portfolio at least annually in the manner required by the Investment Company Act of 1940 and the rules and regulations thereunder; provided, however, that if the continuation of this Agreement is not approved for a Portfolio, the Adviser may continue to serve in such capacity for such Portfolio in the manner and to the extent permitted by the Investment Company Act of 1940 and the rules and regulations thereunder. This Agreement shall automatically terminate in the event of its assignment and may be terminated at any time without the payment of any penalty by the Fund or by the Adviser on sixty (60) days written notice to the other party. The Fund may effect termination with respect to any Portfolio by action of the Board of Trustees or by vote of a majority of the outstanding voting securities of such Portfolio. This Agreement may be terminated with respect to any Portfolio at any time without the payment of any penalty by the Board of Trustees or by vote of a majority of the outstanding voting securities of such Portfolio in the event that it shall have been established by a court of competent jurisdiction that the Adviser or any officer or director of the Adviser has taken any action which results in a breach of the covenants of the Adviser set forth herein. 5 6 The terms "assignment" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth in the Investment Company Act of 1940 and the rules and regulations thereunder. Termination of this Agreement shall not affect the right of the Adviser to receive payments on any unpaid balance of the compensation described in Section 3 earned prior to such termination. 9. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected. 10. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice. 11. All parties hereto are expressly put on notice of the Fund's Agreement and Declaration of Trust and all amendments thereto, all of which are on file with the Secretary of The Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein. This Agreement has been executed by and on behalf of the Fund by its representatives as such representatives and not individually, and the obligations of the Fund hereunder are not binding upon any of the trustees, officers, or shareholders of the Fund individually but are binding upon only the assets and property of the Fund. With respect to any claim by the Adviser for recovery of that portion of the investment management fee (or any other liability of the Fund arising hereunder) allocated to a particular Portfolio, whether in accordance with the express terms hereof or otherwise, the Adviser shall have recourse solely against the assets of that Portfolio to satisfy such claim and shall have no recourse against the assets of any other Portfolio for such purpose. 12. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 11 hereof which shall be construed in accordance with the laws of The Commonwealth of Massachusetts) the laws of the State of Illinois. 6 7 13. This Agreement is the entire contract between the parties relating to the subject matter hereof and supersedes all prior agreements between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to be executed as of the day and year first above written. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters ---------------------------------------- Title: Vice President ATTEST: /s/ Philip Collora ---------------------------- Title: Asst. Secretary KEMPER FINANCIAL SERVICES, INC. By: /s/ Patrick H. Dudasik ---------------------------------------- Title: Sr. Vice President ATTEST: /s/ David F. Dierenfeldt --------------------------- Title: Asst. Secretary 7 EX-99.B6(A) 7 UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT 1 EXHIBIT 99.B6(a) UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT AGREEMENT made this 28th day of May, 1994, between KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND, a Massachusetts business trust (the "Fund"), and KEMPER FINANCIAL SERVICES, INC., a Delaware corporation ("KFS"). In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Fund hereby appoints KFS to act as agent for the distribution of shares of beneficial interest (hereinafter called "shares") of the Fund in jurisdictions wherein shares of the Fund may legally be offered for sale; provided, however, that the Fund in its absolute discretion may (a) issue or sell shares directly to holders of shares of the Fund upon such terms and conditions and for such consideration, if any, as it may determine, whether in connection with the distribution of subscription or purchase rights, the payment or reinvestment of dividends or distributions, or otherwise; or (b) issue or sell shares at net asset value to the shareholders of any other investment company, for which KFS shall act as exclusive distributor, who wish to exchange all or a portion of their investment in shares of such other investment company for shares of the Fund. KFS shall appoint various financial service firms ("Firms") to provide distribution services to investors. The Firms shall provide such office space and equipment, telephone facilities, personnel, literature distribution, advertising and promotion as is necessary or beneficial for providing information and distribution services to existing and potential clients of the Firms. KFS may also provide some of the above services for the Fund. KFS accepts such appointment as distributor and principal underwriter and agrees to render such services and to assume the obligations herein set forth for the compensation herein provided. KFS shall for all purposes herein provided be deemed to be an independent contractor and, unless expressly provided herein or otherwise authorized, shall have no authority to act for or represent the Fund in any way. KFS, by separate agreement with the Fund, may also serve the Fund in other capacities. The services of KFS to the Fund under this Agreement are not to be deemed exclusive, and KFS shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby. 2 In carrying out its duties and responsibilities hereunder, KFS will, pursuant to separate written contracts, appoint various Firms to provide advertising, promotion and other distribution services contemplated hereunder directly to or for the benefit of existing and potential shareholders who may be clients of such Firms. Such Firms shall at all times be deemed to be independent contractors retained by KFS and not the Fund. KFS shall use its best efforts with reasonable promptness to sell such part of the authorized shares of the Fund remaining unissued as from time to time shall be effectively registered under the Securities Act of 1933 ("Securities Act"), at prices determined as hereinafter provided and on terms hereinafter set forth, all subject to applicable federal and state laws and regulations and to the Agreement and Declaration of Trust of the Fund. 2. KFS shall sell shares of the Fund to or through qualified Firms in such manner, not inconsistent with the provisions hereof and the then effective registration statement (and related prospectus) of the Fund under the Securities Act, as KFS may determine from time to time, provided that no Firm or other person shall be appointed or authorized to act as agent of the Fund without the prior consent of the Fund. In addition to sales made by it as agent of the Fund, KFS may, in its discretion, also sell shares of the Fund as principal to persons with whom it does not have selling group agreements. Shares of any class of any series of the Fund offered for sale or sold by KFS shall be so offered or sold at a price per share determined in accordance with the then current prospectus. The price the Fund shall receive for all shares purchased from it shall be the net asset value used in determining the public offering price applicable to the sale of such shares. Any excess of the sales price over the net asset value of the shares of the Fund sold by KFS as agent shall be retained by KFS as a commission for its services hereunder. KFS may compensate Firms for sales of shares at the commission levels provided in the Fund's prospectus from time to time. KFS may pay other commissions, fees or concessions to Firms, and may pay them to others in its discretion, in such amounts as KFS shall determine from time to time. KFS shall be entitled to receive and retain any applicable contingent deferred sales charge as described in the Fund's prospectus. KFS shall also receive any distribution services fee payable by the Fund as provided in Section 8 hereof. KFS will require each Firm to conform to the provisions hereof and the Registration Statement (and related prospectus) at the time in effect under the Securities Act with respect to the public offering price or net asset value, as applicable, of the Fund's shares, and neither KFS nor any such Firms shall withhold the placing of purchase orders so as to make a profit thereby. 2 3 3. The Fund will use its best efforts to keep effectively registered under the Securities Act for sale as herein contemplated such shares as KFS shall reasonably request and as the Securities and Exchange Commission shall permit to be so registered. Notwithstanding any other provision hereof, the Fund may terminate, suspend or withdraw the offering of shares whenever, in its sole discretion, it deems such action to be desirable. 4. The Fund will execute any and all documents and furnish any and all information that may be reasonably necessary in connection with the qualification of its shares for sale (including the qualification of the Fund as a dealer where necessary or advisable) in such states as KFS may reasonably request (it being understood that the Fund shall not be required without its consent to comply with any requirement which in its opinion is unduly burdensome). The Fund will furnish to KFS from time to time such information with respect to the Fund and its shares as KFS may reasonably request for use in connection with the sale of shares of the Fund. 5. KFS shall issue and deliver or shall arrange for various Firms to issue and deliver on behalf of the Fund such confirmations of sales made by it pursuant to this agreement as may be required. At or prior to the time of issuance of shares, KFS will pay or cause to be paid to the Fund the amount due the Fund for the sale of such shares. Certificates shall be issued or shares registered on the transfer books of the Fund in such names and denominations as KFS may specify. 6. KFS shall order shares of the Fund from the Fund only to the extent that it shall have received purchase orders therefor. KFS will not make, or authorize Firms or others to make (a) any short sales of shares of the Fund; or (b) any sales of such shares to any trustee or officer of the Fund or to any officer or director of KFS or of any corporation or association furnishing investment advisory, managerial or supervisory services to the Fund, or to any corporation or association, unless such sales are made in accordance with the then current prospectus relating to the sale of such shares. KFS, as agent of and for the account of the Fund, may repurchase the shares of the Fund at such prices and upon such terms and conditions as shall be specified in the current prospectus of the Fund. In selling or reacquiring shares of the Fund for the account of the Fund, KFS will in all respects conform to the requirements of all state and federal laws and the Rules of Fair Practice of the National Association of Securities Dealers, Inc., relating to such sale or reacquisition, as the case may be, and will indemnify and save harmless the Fund from any damage or expense on account of any wrongful act by KFS or any employee, representative or agent of KFS. KFS will observe and be bound by all the provisions of the Agreement and Declaration of Trust of the Fund (and of any fundamental policies 3 4 adopted by the Fund pursuant to the Investment Company Act of 1940, notice of which shall have been given to KFS) which at the time in any way require, limit, restrict, prohibit or otherwise regulate any action of the part of KFS hereunder. 7. The Fund shall assume and pay all charges and expenses of its operations not specifically assumed or otherwise to be provided by KFS under this Agreement. The Fund will pay or cause to be paid expenses (including the fees and disbursements of its own counsel) of any registration of the Fund and its shares under the United States securities laws and expenses incident to the issuance of shares of beneficial interest, such as the cost of share certificates, issue taxes, and fees of the transfer agent. KFS will pay all expenses (other than expenses which one or more Firms may bear pursuant to any agreement with KFS) incident to the sale and distribution of the shares issued or sold hereunder, including, without limiting the generality of the foregoing, all (a) expenses of printing and distributing any prospectus and of preparing, printing and distributing or disseminating any other literature, advertising and selling aids in connection with the offering of the shares for sale (except that such expenses need not include expenses incurred by the Fund in connection with the preparation, typesetting, printing and distribution of any registration statement or prospectus, report or other communication to shareholders in their capacity as such), (b) expenses of advertising in connection with such offering and (c) expenses (other than the Fund's auditing expenses) of qualifying or continuing the qualification of the shares for sale and, in connection therewith, of qualifying or continuing the qualification of the Fund as a dealer or broker under the laws of such states as may be designated by KFS under the conditions herein specified. No transfer taxes, if any, which may be payable in connection with the issue or delivery of shares sold as herein contemplated or of the certificates for such shares shall be borne by the Fund, and KFS will indemnify and hold harmless the Fund against liability for all such transfer taxes. 8. For the services and facilities described herein in connection with Class B shares and Class C shares of each series of the Fund, the Fund will pay to KFS at the end of each calendar month a distribution services fee computed at the annual rate of .75% of average daily net assets attributable to the Class B shares and Class C shares of each such series. For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement is in effect during the month and year, respectively. The foregoing fee shall be in addition to and shall not be reduced or offset by the amount of any contingent deferred sales charge received by KFS under Section 2 hereof. 4 5 The net asset value shall be calculated in accordance with the provisions of the Fund's current prospectus. On each day when net asset value is not calculated, the net asset value of a share of any class of any series of the Fund shall be deemed to be the net asset value of such a share as of the close of business on the last previous day on which such calculation was made. The distribution services fee for any class of a series of the Fund shall be based upon average daily net assets of the series attributable to the class and such fee shall be charged only to such class. 9. KFS shall prepare reports for the Board of Trustees of the Fund on a quarterly basis in connection with the Fund's distribution plan for Class B shares and Class C shares showing amounts paid to the various Firms and such other information as from time to time shall be reasonably requested by the Board of Trustees. 10. To the extent applicable, this Agreement constitutes the plan for the Class B shares and Class C shares of each series of the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940; and this Agreement and plan shall be approved and renewed in accordance with Rule 12b-1 for such Class B shares and Class C shares separately. This Agreement shall become effective on the date hereof and shall continue until March 1, 1995; and shall continue from year to year thereafter only so long as such continuance is approved in the manner required by the Investment Company Act of 1940. This Agreement shall automatically terminate in the event of its assignment and may be terminated at any time without the payment of any penalty by the Fund or by KFS on sixty (60) days written notice to the other party. The Fund may effect termination with respect to any class of any series of the Fund by a vote of (i) a majority of the Board of Trustees, (ii) a majority of the trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in this Agreement or in any agreement related to this Agreement, or (iii) a majority of the outstanding voting securities of the class. Without prejudice to any other remedies of the Fund, the Fund may terminate this Agreement at any time immediately upon KFS' failure to fulfill any of its obligations hereunder. This Agreement may not be amended to increase the amount to be paid to KFS by the Fund for services hereunder with respect to a class of any series of the Fund without the vote of a majority of the outstanding voting securities of such class. All material amendments to this Agreement must in any event be approved by a vote of the Board of Trustees of the Fund including the trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in this Agreement or in any 5 6 agreement related to this Agreement, cast in person at a meeting called for such purpose. The terms "assignment", "interested" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth in the Investment Company Act of 1940 and the rules and regulations thereunder. Termination of this Agreement shall not affect the right of KFS to receive payments on any unpaid balance of the compensation described in Section 8 earned prior to such termination. 11. KFS will not use or distribute, or authorize the use, distribution or dissemination by Firms or others in connection with the sale of Fund shares any statements other than those contained in the Fund's current prospectus, except such supplemental literature or advertising as shall be lawful under federal and state securities laws and regulations. KFS will furnish the Fund with copies of all such material. 12. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected. 13. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice. 14. All parties hereto are expressly put on notice of the Fund's Agreement and Declaration of Trust, and all amendments thereto, all of which are on file with the Secretary of The Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein. This Agreement has been executed by and on behalf of the Fund by its representatives as such representatives and not individually, and the obligations of the Fund hereunder are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding upon only the assets and property of the Fund. With respect to any claim by KFS for recovery of any liability of the Fund arising hereunder allocated to a particular series or class, whether in accordance with the express terms hereof or otherwise, KFS shall have recourse solely against the assets of that series or class to satisfy such claim and shall have no recourse against the assets of any other series or class for such purpose. 15. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 14 hereof which shall be construed in accordance with the laws of The Commonwealth of Massachusetts) the laws of the State of Illinois. 6 7 16. This Agreement is the entire contract between the parties relating to the subject matter hereof and supersedes all prior agreements between the parties relating to the subject matter hereof. IN WITNESS WHEREOF, the Fund and KFS have caused this Agreement to be executed as of the day and year first above written. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters --------------------------- Title: Vice President ATTEST: /s/ Philip J. Collora -------------------------- Title: Asst. Secretary KEMPER FINANCIAL SERVICES, INC. By: /s/ Patrick H. Dudasik ---------------------------- Title: Sr. Vice President ATTEST: /s/ David F. Dierenfeldt ---------------------------- Title: Asst. Secretary 7 EX-99.B6(B) 8 ASSIGNMENT AND ASSUMPTION 1 EXHIBIT 99.B6(b) ASSIGNMENT AND ASSUMPTION ASSIGNMENT AND ASSUMPTION ("Assignment and Assumption") made and entered into as of February 1, 1995 by and between Kemper Financial Services, Inc., a Delaware corporation ("Assignor"), and Kemper Distributors, Inc., a Delaware corporation ("Assignee"). WHEREAS, Assignor serves as principal underwriter for Kemper Adjustable Rate U.S. Government Fund, a Massachusetts business trust (the "Fund"), pursuant to that certain Underwriting and Distribution Services Agreement dated May 28, 1994 by and between Assignor and the Fund (the "Agreement"); WHEREAS, Assignee is a wholly-owned subsidiary of Assignor; WHEREAS, It has been proposed that the rights, duties and responsibilities of Assignor under the Agreement be transferred to and assumed by Assignee; WHEREAS, The Fund has determined that such transfer of rights, duties and responsibilities is reasonable and in the best interests of the Fund and the Fund's shareholders; and NOW, THEREFORE, in consideration of the covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. Assignment and Assumption. Assignor assigns and transfers to Assignee all of Assignor's rights, interests, liabilities, duties and obligations under the Agreement ("Assigned Rights and Obligations"). Assignee accepts the foregoing assignment and transfer of the Assigned Rights and Obligations and agrees to assume, pay, perform and otherwise be fully responsible for the same. 2. Further Assurances. From time to time, at the request of either party, the other party will execute and deliver such further instruments of assignment, transfer and assumption and take such further action as may be required to assign, transfer and assume the Assigned Rights and Obligations. 3. Applicable Law. This Assignment and Assumption shall be governed by the laws of the State of Illinois. 4. Amendments. This Assignment and Assumption may only be amended by the written agreement of the parties. 2 IN WITNESS WHEREOF, the parties have each caused this Assignment and Assumption to be executed on its behalf by a duly authorized officer as of the date first written above. KEMPER FINANCIAL SERVICES, INC. By: /s/ Patrick H. Dudasik --------------------------- Its: Senior Vice President KEMPER DISTRIBUTORS, INC. By: /s/ James L. Greenawalt --------------------------- Its: Executive Vice President The undersigned hereby acknowledges and consents to the foregoing Assignment and Assumption as of February 1, 1995. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters ------------------------------ Its: Vice President 2 EX-99.B6(C) 9 SELLING GROUP AGREEMENT 1 EXHIBIT 99.B6(c) SELLING GROUP AGREEMENT KEMPER DISTRIBUTORS, INC. 120 South LaSalle Street, Chicago, Illinois 60603 Dear Financial Services Firm: As principal underwriter and distributor, we invite you to join a Selling Group for the distribution of shares of the Kemper Mutual Funds (herein called "Funds"), but only in those states in which the shares of the respective Funds may legally be offered for sale. As exclusive agent of each of the Funds, we offer to sell to you shares of the Funds on the following terms: 1. In all sales of these shares to the public you shall act as dealer for your own account, and in no transaction shall you have any authority to act as agent for the issuer, for us, or for any other member of the Selling Group. 2. Orders received from you will be accepted by us only at the public offering price applicable to each order, as established by the Prospectus of each Fund, subject to the discount, commission or other concession, if any, as provided in such Prospectus. Upon receipt from you of any order to purchase shares of a Fund, we shall confirm to you in writing or by wire to be followed by a confirmation in writing. Additional instructions may be forwarded to you from time to time. All orders are subject to acceptance or rejection by us in our sole discretion. 3. You may offer and sell shares to your customers only at the public offering price determined in the manner described in the applicable Prospectus. The public offering price is the net asset value per share as provided in the applicable Prospectus plus, with respect to certain Funds, a sales charge from which you shall receive a discount equal to a percentage of the applicable offering price as provided in the applicable Prospectus. You shall receive a sales commission, with respect to certain Funds, equal to a percentage of the amount invested as provided in the applicable Prospectus. You shall receive a distribution service fee, for certain Funds for which such fees are available, as provided in the applicable Prospectus which fee shall be payable with respect to such assets, for such periods and at such intervals as are from time to tome specified by us. The discounts or other concessions to which you may be entitled in connection with sales to your customers pursuant to any special features of a Fund (such as cumulative discounts, letters of intent, etc., the terms of which shall be as described in the applicable Prospectus and related forms) shall be in accordance with the terms of such features. You may receive an administrative service fee, with respect to certain Funds for which such fees are available, as provided in the applicable Prospectus, which fee shall be payable with respect to such 2 assets, for such periods and at such intervals as are from time to time specified by us. 4. By accepting this agreement, you agree: (a) To purchase shares only from us or from your customers. (b) That you will purchase shares from us only to cover purchase orders already received from your customers, or for your own bona fide investments. (c) That you will not purchase shares from your customers at a price lower than the bid price then quoted by or for the Fund involved. You may, however, sell shares for the account of your customer to the Fund, or to us as agent for the Fund, at the bid price currently quoted by or for the Fund and charge your customer a fair commission for handling the transaction. (d) That you will not withhold placing with us orders received from your customers so as to profit yourself as a result of such withholding. 5. We will not accept from you any conditional orders for shares. 6. If any shares confirmed to you under the terms of this agreement are repurchased by the issuing Fund or by us as agent for the Fund, or are tendered for repurchase, within seven business days after the date of our confirmation of the original purchase order, you shall forthwith refund to us the full discount, commission, finder's fee or other concession, if any, allowed or paid to you on such shares. 7. Payment for shares ordered from us shall be in New York clearing house funds and must be received by the appropriate Fund's shareholder service agent within seven days after our acceptance of your order (or such shorter time period as may be required by applicable regulations). If such payment is not received, we reserve the right, without notice, forthwith to cancel the sale or, at our option, to sell the shares ordered back to the Fund, in which case we may hold you responsible for any loss, including loss of profit suffered by us as a result of your failure to make such payment. 8. Shares sold to you hereunder shall be available in negotiable form for delivery at the appropriate Fund's shareholder services agent, against payment, unless other instructions have been given. 9. All sales will be made subject to our receipt of shares from the Fund. We reserve the right, in our discretion, without notice, to suspend sales or withdraw the offering of shares entirely. We reserve the right to modify, cancel or change the terms of this agreement, upon 15 days prior written notice to you. Also, the sales charges, discounts, commissions or other concessions, service fees of any kind provided for hereunder are subject to change at any time by the Funds and us. 10. All communications to us should be sent to the address in the heading above. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. 3 11. This agreement shall be construed in accordance with the laws of Illinois. This agreement is subject to the Prospectuses of the Funds from time to time in effect, and, in the event of a conflict, the terms of the Prospectuses shall control. References herein to the "Prospectus" of a Fund shall mean the prospectus and statement of additional information of such Fund as from time to time in effect. Any changes, modifications or additions reflected in any such Prospectus shall be effective on the date of such Prospectus (or supplement thereto) unless specified otherwise. 12. This agreement is subject to the Additional Stipulations and Conditions on the reverse side hereof, all of which are a part of this agreement. Kemper Distributors, Inc. By ---------------------------- Authorized Signature Title ------------------------- We have read the foregoing agreement and accept and agree to the terms and conditions thereof. Firm ------------------------- Witness ------------------------ By ---------------------------- Authorized Representative Dated Title ------------------------- ------------------------- 4 ADDITIONAL STIPULATIONS AND CONDITIONS 13. No person is authorized to make any representations concerning shares of any Fund except those contained in the Prospectus of such Fund and in printed information subsequently issued by the Fund or by us as information supplemental to such Prospectus. If you wish to use your own advertising with respect to a Fund, all such advertising must be approved by us or by the Fund prior to use. You shall be responsible for any required filing of such advertising. 14. Your acceptance of this agreement constitutes a representation (i) that you are a registered security dealer and a member in good standing of the National Association of Securities Dealers, Inc. and that you agree to comply with all state and federal laws, rules and regulations applicable to transactions hereunder and to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., including specifically Section 26, Article III thereof, or (ii) if you are offering and selling shares of the Funds only in jurisdictions outside of the several states, territories and possessions of the United States and are not otherwise required to be a member of the National Association of Securities Dealers, Inc., that you nevertheless agree to conduct your business in accordance with the spirit of the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and to observe the laws and regulations of the applicable jurisdiction. You likewise agree that you will not offer to sell shares of any Fund in any state or other jurisdiction in which they may not lawfully be offered for sale. 15. You shall make available an investment management account for your customers through the Funds and shall provide such office space and equipment, telephone facilities, personnel and literature distribution as is necessary or appropriate for providing information and services to your customer. Such services and assistance may include, but not be limited to, establishment and maintenance of shareholder accounts and records, processing purchase and redemption transactions, answering routine inquiries regarding the Funds, and such other services as may be agreed upon from time to time and as may be permitted by applicable statute, rule, or regulation. You agree to release, indemnify and hold harmless the Funds, us and our respective representatives and agents from any and all direct or indirect liabilities or losses resulting from requests, directions, actions or inactions of or by you, your officers, employees or agents regarding the purchase, redemption or transfer of registration of shares of the Funds for accounts of you, your customers and other shareholders or from any unauthorized or improper use of any on-line computer facilities. You shall prepare such periodic reports for us as shall reasonably be requested by us. You shall immediately inform the Funds or us of all written complaints received by you from Fund shareholders relating to the maintenance of their accounts and shall promptly answer all such complaints and other similar correspondence. You shall provide the Funds and us on a timely 5 basis with such information as may be required to complete various regulatory forms. 16. As a result of the necessity to compute the amount of any contingent deferred sales charge due with respect to the redemption of shares, you may not hold shares of a Fund imposing such a charge in an account registered in your name or in the name of your nominee for the benefit of certain of your customers except with our prior written consent. Except as otherwise permitted by us, shares of such a Fund owned by a shareholder must be in a separate identifiable account for such shareholder. 17. Shares of certain Funds have been divided into separate classes: Class A Shares, Class B Shares and Class C Shares. Class A shares are offered at net asset value plus an initial sales charge. Class B Shares are offered at net asset value without an initial sales charge but are subject to a contingent deferred sales charge and a Rule 12b-1 fee and have a conversion feature. Class C Shares are offered at net asset value without an initial sales charge or contingent deferred sales charge but are subject to a Rule 12b-1 fee and have no conversion feature. Please see the appropriate Prospectuses for a more complete description of the distinctions between the classes of shares. It is important to investors not only to choose Funds appropriate for their investment objectives, but also to choose the appropriate distribution arrangement, based on the amount invested and the expected duration of the investment. To assist investors in these decisions, we have instituted the following policies with respect to orders for shares of the Funds. The following policies and procedures with respect to sales of classes of shares of the Funds apply to each broker/dealer that distributes shares of the Funds. 1. All purchase orders for $500,000 or more (not including street name or omnibus accounts) should be for class A Shares. 2. Any purchase order of less than $500,000 may be for either Class A, Class B or Class C Shares in light of the relevant facts and circumstances, including: a. the specific purchase order dollar amount; b. the length of time the investor expects to hold the shares; and c. any other relevant circumstances such as the availability of purchases under a Letter of Intent, Combined Purchases or Cumulative Discount Privilege. There are instances when one pricing structure may be more appropriate than another. For example, investors who would qualify for a reduced sales charge on Class A Shares may determine that payment of a reduced front-end sales charge is preferable to payment of an ongoing Rule 12b-1 fee. On the other hand, investors whose orders would not qualify for such a discount and who plan to hold their investment for more than six years may wish to defer the sales charge and would consider Class B Shares. Investors who prefer not to pay an initial sales charge and who plan to redeem their shares within six years might consider Class C Shares. Appropriate supervisory personnel within your organization must ensure that all employees receiving investor inquiries about 6 the purchase of shares of the Funds advise the investor of the available pricing structures offered by the Funds and the impact of choosing one method over another, including breakpoints and the availability of Letters of Intent, Combined Purchases and Cumulative Discounts. In some instances it may be appropriate for a supervisory person to discuss a purchase with the investor. 18. This agreement shall be in substitution of any prior selling group agreement between you and us regarding these shares. This agreement shall not be applicable to the provision of services for Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Tax Exempt New York Money Market Fund, Investors Cash Trust and similar wholesale money market funds. The payment of related distribution and services fees, shall be subject to separate services agreements. EX-99.B8 10 CUSTODY AGREEMENT 1 EXHIBIT 99.B8 CUSTODY AGREEMENT AGREEMENT, made the 1st day of March, 1995 by and between Kemper Adjustable Rate U.S. Government Fund, a Massachusetts business trust having its principal place of business at 120 South LaSalle Street, Chicago, Illinois 60603 ("Fund") and Investors Fiduciary Trust Company, a trust company organized and existing under the laws of Missouri, having its principal place of business at Kansas City, Missouri ("Custodian"). WHEREAS, Fund wants to appoint Investors Fiduciary Trust Company as Custodian to have custody of the Fund's portfolio securities and monies pursuant to this Agreement; and WHEREAS, Investors Fiduciary Trust Company wants to accept such appointment; NOW, THEREFORE, for and in consideration of the mutual promises contained herein, the parties hereto, intending to be legally bound, mutually covenant and agree as follows: 1. APPOINTMENT OF CUSTODIAN. Fund hereby constitutes and appoints Investors Fiduciary Trust Company as Custodian of Fund which is to include: A. Custody of the securities and monies at any time owned by Fund; and B. Performing certain accounting and record keeping functions relating to its function as Custodian for Fund and each of its Portfolios. 2. DELIVERY OF CORPORATE DOCUMENTS. Fund has delivered or will deliver to Custodian prior to the effective date of this Agreement, copies of the following documents and all amendments or supplements thereto, properly certified or authenticated: A. Resolutions of the Board of Trustees of Fund appointing Investors Fiduciary Trust Company as Custodian hereunder and approving the form of this Agreement; and B. Resolutions of the Board of Trustees of Fund authorizing certain persons to give instructions on behalf of Fund to Custodian and authorizing Custodian to rely upon written instructions over their signatures. 2 3. DUTIES AND RESPONSIBILITIES OF CUSTODIAN. A. Delivery of Assets Fund will deliver or cause to be delivered to Custodian on the effective date of this Agreement, or as soon thereafter as practicable, and from time to time thereafter, all portfolio securities acquired by it and monies then owned by it except as permitted by the Investment Company Act of 1940 ("1940 Act") or from time to time coming into its possession during the time this Agreement shall continue in effect. Custodian shall have no responsibility or liability whatsoever for or on account of securities or monies not so delivered. All securities so delivered to Custodian (other than bearer securities) shall be registered in the name of Fund or its nominee, or of a nominee of Custodian, or shall be properly endorsed and in form for transfer satisfactory to Custodian. B. Safekeeping Custodian will receive delivery of and keep safely the assets of Fund delivered to it from time to time. Custodian will not deliver any such assets to any person except as permitted by the provisions of this Agreement or any agreement executed by it according to the terms of this Agreement. Custodian shall be responsible only for the monies and securities of Fund held directly by it or its nominees or sub-custodian under this Agreement; provided that Custodian's responsibility for any sub-custodian appointed at the Fund's direction for purposes of (i) effecting third-party repurchase transactions with banks, brokers, dealers, or other entities through the use of a common custodian or sub-custodian; or (ii) providing depository and clearing agency services with respect to certain variable rate demand note securities ("special sub- custodian") shall be further limited as set forth in this Agreement. Custodian may participate directly or indirectly through a sub-custodian in the Depository Trust Company, the Treasury/Federal Reserve Book Entry System, the Participants Trust Company and any other securities depository approved by the Board of Trustees of the Fund, subject to compliance with the provisions of Rule 17f-4 under the 1940 Act including, without limitation, the specific provisions of subsections (a) (1) through (d) (4) thereof. C. Registration of Securities Custodian will hold stocks and other registerable portfolio securities of Fund registered in the name of Fund or in the name of any nominee of Custodian for whose fidelity and liabilities Custodian shall be fully 2 3 responsible, or in street certificate form, so-called, with or without any indication of fiduciary capacity. Unless otherwise instructed, Custodian will register all such portfolio securities in the name of its authorized nominee. D. Exchange of Securities Upon receipt of instructions, Custodian will exchange, or cause to be exchanged, portfolio securities held by it for the account of Fund for other securities or cash issued or paid in connection with any reorganization, recapitalization, merger, consolidation, split-up of shares, change of par value, conversion or otherwise, and will deposit any such securities in accordance with the terms of any reorganization or protective plan. Without instructions, Custodian is authorized to exchange securities held by it in temporary form for securities in definitive form, to effect an exchange of shares when the par value of the stock is changed, and, upon receiving payment therefore, to surrender bonds or other securities held by it at maturity or when advised of earlier call for redemption, except that Custodian shall receive instructions prior to surrendering any convertible security. E. Purchases or Sales of Investments of Fund Fund shall, on each business day on which a purchase or sale of a portfolio security shall be made by it, deliver to Custodian instructions which shall specify with respect to each such transaction: (1) The name of the issuer and description of the security; (2) The number of shares or the principal amount purchased or sold, and accrued interest, if any; (3) The trade date; (4) The settlement date; (5) The date when the securities sold were purchased by Fund or other information identifying the securities sold and to be delivered; (6) The price per unit and the brokerage commission, taxes and other expenses in connection with the transaction; (7) The total amount payable or receivable upon such transaction; and (8) The name of the person from whom or the broker or dealer through whom the transaction was made. 3 4 In accordance with such purchase instructions, Custodian shall pay for out of monies held for the account of Fund, but only insofar as monies are available therein for such purpose, and receive the portfolio securities so purchased by or for the account of Fund. Such payment shall be made only upon receipt by Custodian of the securities so purchased in form for transfer satisfactory to Custodian. In accordance with such sales instructions, Custodian will deliver or cause to be delivered the securities thus designated as sold for the account of Fund to the broker or other person specified in the instructions relating to such sale, such delivery to be made only upon receipt of payment therefor in such form as shall be satisfactory to Custodian, with the understanding that Custodian may deliver or cause to be delivered securities for payment in accordance with the customs prevailing among dealers in securities. F. Purchases or Sales of Options and Futures Transactions Fund will, on each business day on which a purchase or sale of the following options and/or futures shall be made by it, deliver to Custodian instructions which shall specify with respect to each such purchase or sale: (1) Securities Options (a) The underlying security; (b) The price at which purchased or sold; (c) The expiration date; (d) The number of contracts; (e) The exercise price; (f) Whether opening, exercising, expiring or closing the transaction; (g) Whether the transaction involves a put or call; (h) Whether the option is written or purchased; (i) Market on which option traded; and (j) Name and address of the broker or dealer through whom the sale or purchase was made. (2) Options on Indices (a) The index; (b) The price at which purchased or sold; (c) The exercise price; (d) The premium; (e) The multiple; (f) The expiration date; (g) Whether the transaction is an opening, exercising, expiring or closing transaction; (h) Whether the transaction involves a put or call; 4 5 (i) Whether the option is written or purchased; and (j) Name and address of the broker or dealer through whom the sale or purchase was made. (3) Securities Index Futures Transactions (a) The last trading date specified in the contract and, when available, the closing level, thereof; (b) The index level on the date the contract is entered into; (c) The multiple; (d) Any margin requirements; (e) The need for a segregated margin account (in addition to instructions; and, if not already in the possession of Custodian, Fund shall deliver a substantially complete and executed custodial safekeeping account and procedural agreement which shall be incorporated into this Custody Agreement); and (f) The name and address of the futures commission merchant through whom the sale or purchase was made. (4) Options on Index Futures Contracts (a) The underlying index futures contract; (b) The premium; (c) The expiration date; (d) The number of options; (e) The exercise price; (f) Whether the transaction involves an opening, exercising, expiring or closing transaction; (g) Whether the transaction involves a put or call; (h) Whether the option is written or purchased; and (i) The market on which the option is traded. G. Securities Pledged to Secure Loans (1) Upon receipt of instructions, Custodian will release or cause to be released securities held in custody to the pledgee designated in such instructions by way of pledge or hypothecation to secure any loan incurred by Fund; provided, however, that the securities shall be released only upon payment to Custodian of the monies borrowed, except that in cases where additional collateral is required to secure a borrowing already made, further securities may be released or caused to be released for that purpose upon receipt of instructions. Upon receipt of instructions, Custodian will pay, but only from funds available for such purpose, any such loan upon redelivery to it of the securities pledged or hypothecated therefor and upon surrender of the note or notes evidencing such loan. 5 6 (2) Upon receipt of instructions, Custodian will release securities held in custody to the borrower designated in such instructions; provided, however, that the securities shall be released only upon deposit with Custodian of full cash collateral as specified in such instructions, and that Fund will retain the right to any dividends, interest or distribution on such loaned securities. Upon receipt of instructions and the loaned securities, Custodian will release the cash collateral to the borrower. H. Routine Matters Custodian will, in general, attend to all routine and mechanical matters in connection with the sale, exchange, substitution, purchase, transfer, or other dealings with securities or other property of Fund except as may be otherwise provided in this Agreement or directed from time to time by the Board of Trustees of Fund. I. Demand Deposit Account Custodian will open and maintain a demand deposit account or accounts in the name of Custodian, subject only to draft or order by Custodian upon receipt of instructions. All monies received by Custodian from or for the account of Fund shall be deposited in said account or accounts. When properly authorized by a resolution of the Board of Trustees of Fund, Custodian may open and maintain an additional demand deposit account or accounts in such other banks or trust companies as may be designated in such resolution, such accounts, however, to be in the name of Custodian and subject only to its draft or order. J. Income and Other Payments to Fund Custodian will: (1) collect, claim and receive and deposit for the account of Fund all income and other payments which become due and payable on or after the effective date of this Agreement with respect to the securities deposited under this Agreement, and credit the account of Fund with such income on the payable date; (2) execute ownership and other certificates and affidavits for all federal, state and local tax purposes in connection with the collection of bond and note coupons; and 6 7 (3) take such other action as may be necessary or proper in connection with: (a) the collection, receipt and deposit of such income and other payments, including but not limited to the presentation for payment of: (1) all coupons and other income items requiring presentation; (2) all other securities which may mature or be called, redeemed, retired or otherwise become payable and regarding which the Custodian has actual knowledge, or notice of which is contained in publications of the type to which it normally subscribes for such purpose; and (b) the endorsement for collection, in the name of Fund, of all checks, drafts or other negotiable instruments. Custodian, however, shall not be required to institute suit or take other extraordinary action to enforce collection except upon receipt of instructions and upon being indemnified to its satisfaction against the costs and expenses of such suit or other actions. Custodian will receive, claim and collect all stock dividends, rights and other similar items and deal with the same pursuant to instructions. Unless prior instructions have been received to the contrary, Custodian will, without further instructions, sell any rights held for the account of Fund on the last trade date prior to the date of expiration of such rights. K. Payment of Dividends and Other Distributions On the declaration of any dividend or other distribution on the shares of beneficial interest of any Portfolio ("Portfolio Shares") by the Board of Trustees of Fund, Fund shall deliver to Custodian instructions with respect thereto, including a copy of the Resolution of said Board of Trustees certified by the Secretary or an Assistant Secretary of Fund wherein there shall be set forth the record date as of which shareholders are entitled to receive such dividend or distribution, and the amount payable per share on such dividend or distribution. On the date specified in such Resolution for the payment of such dividend or other distribution, Custodian shall pay out of the monies held for the account of Fund, insofar as the same shall be available for such purposes, and credit to the account of the Dividend Disbursing Agent 7 8 for Fund, such amount as may be necessary to pay the amount per share payable in cash on Portfolio Shares issued and outstanding on the record date established by such Resolution. L. Portfolio Shares Purchased by Fund Whenever any Portfolio Shares are purchased by Fund, Fund or its agent shall advise Custodian of the aggregate dollar amount to be paid for such shares and shall confirm such advice in writing. Upon receipt of such advice, Custodian shall charge such aggregate dollar amount to the custody account of Fund and either deposit the same in the account maintained for the purpose of paying for the purchase of Portfolio Shares or deliver the same in accordance with such advice. M. Portfolio Shares Purchased from Fund Whenever Portfolio Shares are purchased from Fund, Fund will deposit or cause to be deposited with Custodian the amount received for such shares. Custodian shall not have any duty or responsibility to determine that Fund Shares purchased from Fund have been added to the proper shareholder account or accounts or that the proper number of such shares have been added to the shareholder records. N. Proxies and Notices Custodian will promptly deliver or mail to Fund all proxies properly signed, all notices of meetings, all proxy statements and other notices, requests or announcements affecting or relating to securities held by Custodian for Fund and will, upon receipt of instructions, execute and deliver or cause its nominee to execute and deliver such proxies or other authorizations as may be required. Except as provided by this Agreement or pursuant to instructions hereafter received by Custodian, neither it nor its nominee shall exercise any power inherent in any such securities, including any power to vote the same, or execute any proxy, power of attorney, or other similar instrument voting any of such securities, or give any consent, approval or waiver with respect thereto, or take any other similar action. O. Disbursements Custodian will pay or cause to be paid insofar as funds are available for the purpose, bills, statements and other obligations of Fund (including but not limited to obligations in connection with the conversion, exchange or surrender of securities owned by Fund, interest charges, variation margin, dividend disbursements, taxes, management 8 9 fees, administration-distribution fees, custodian fees, legal fees, auditors' fees, transfer agents' fees, brokerage commissions, compensation to personnel, and other operating expenses of Fund) pursuant to instructions of Fund setting forth the name of the person to whom payment is to be made, the amount of the payment, and the purpose of the payment. P. Books, Records and Accounts Custodian acknowledges that all the records it shall prepare and maintain pursuant to this Agreement shall be the property of Fund and that upon request of Fund it shall make Fund's records available to it, along with such other information and data as are reasonably requested by Fund, for inspection, audit or copying, or turn said records over to Fund. Custodian shall, within a reasonable time, render to Fund as of the close of business on each day, a detailed statement of the amounts received or paid and of securities received or delivered for the account of Fund during said day. Custodian shall, from time to time, upon request by Fund, render a detailed statement of the securities and monies held for Fund under this Agreement, and Custodian shall maintain such books and records as are necessary to enable it do so and shall permit such persons as are authorized by Fund, including Fund's independent public accountants, to examine such records or to confirm the contents of such records; and, if demanded, shall permit federal and state regulatory agencies to examine said securities, books and records. Upon the written instructions of Fund or as demanded by federal or state regulatory agencies, Custodian shall instruct any sub- custodian to permit such persons as are authorized by Fund to examine the books, records and securities held by such sub-custodian which relate to Fund. Q. Appointment of Sub-Custodian Notwithstanding any other provisions of this Agreement, all or any of the monies or securities of Fund may be held in Custodian's own custody or in the custody of one or more other banks or trust companies acting as sub-custodians as may be approved by resolutions of Fund's Board of Trustees, evidenced by a copy thereof certified by the Secretary or Assistant Secretary of Fund. Any sub-custodian must have the qualifications required for custodians under the 1940 Act unless exempted therefrom. Any sub-custodian may participate directly or indirectly in the Depository Trust Company, the Treasury/Reserve Book Entry System, the Participants Trust Company and any other securities depository approved by the Board of Trustees of the Fund to 9 10 the same extent and subject to the same conditions as provided hereunder. Neither Custodian nor sub-custodian shall be entitled to reimbursement by Fund for any fees or expenses of any sub-custodian; provided that Custodian shall not be liable for, and Fund shall hold Custodian harmless from, the expenses of any special sub-custodian. The appointment of a sub-custodian shall not relieve Custodian of any of its obligations hereunder; provided that Custodian shall be responsible to Fund for any loss, damage, or expense suffered or incurred by Fund resulting from the actions or omissions of a special sub-custodian only to the extent the special sub-custodian is liable to Custodian. R. Multiple Portfolios If Fund shall issue shares of more than one Portfolio during the term hereof, Custodian agrees that all securities and other assets of Fund shall be segregated by Portfolio and all books and records, account values or actions shall be maintained, held, made or taken, as the case may be, separately for each Portfolio. 4. INSTRUCTIONS. A. The term "instructions", as used herein, means written or oral instructions to Custodian from an authorized person of Fund. Certified copies of resolutions of the Board of Trustees of Fund naming one or more persons authorized to give instructions in the name and on behalf of Fund may be received and accepted by Custodian as conclusive evidence of the authority of any person so to act and may be considered to be in full force and effect (and Custodian shall be fully protected in acting in reliance thereon) until receipt by Custodian of notice to the contrary. Unless the resolution authorizing any person to give instructions specifically requires that the approval of anyone else shall first have been obtained, Custodian shall be under no obligation to inquire into the right of the person giving such instructions to do so. Notwithstanding any of the foregoing provisions of this Section 4, no authorizations or instructions received by Custodian from Fund shall be deemed to authorize or permit any trustee, officer, employee, or agent of Fund to withdraw any of the securities or monies of Fund upon the mere receipt of instructions from such trustee, officer, employee or agent. B. No later than the next business day immediately following each oral instruction referred to herein, Fund shall give Custodian written confirmation of each such oral instruction. Either party may electronically record any oral instruction whether given in person or via telephone. 10 11 5. LIMITATION OF LIABILITY OF CUSTODIAN A. Custodian shall hold harmless and indemnify Fund from and against any loss or liability arising out of Custodian's failure to comply with the terms of this Agreement or arising out of Custodian's negligence, willful misconduct, or bad faith. Custodian may request and obtain the advice and opinion of counsel for Fund or of its own counsel with respect to questions or matters of law, and it shall be without liability to Fund for any action taken or omitted by it in good faith, in conformity with such advice or opinion. B. If Fund requires Custodian in any capacity to take, with respect to any securities, any action which involves the payment of money by it, or which in Custodian's opinion might make it or its nominee liable for payment of monies or in any other way, Custodian shall be and be kept indemnified by Fund in an amount and form satisfactory to Custodian against any liability on account of such action. C. Custodian shall be entitled to receive, and Fund agrees to pay to Custodian, on demand, reimbursement for such cash disbursements, costs and expenses as may be agreed upon from time to time by Custodian and Fund. D. Custodian shall be protected in acting as custodian hereunder upon any instructions, advice, notice, request, consent, certificate or other instrument or paper reasonably appearing to it to be genuine and to have been properly executed and shall, unless otherwise specifically provided herein, be entitled to receive as conclusive proof of any fact or matter required to be ascertained from Fund hereunder, a certificate signed by Fund's President, or other officer specifically authorized for such purpose. E. Without limiting the generality of the foregoing, Custodian shall be under no duty or obligation to inquire into, and shall not be liable for: (1) The validity of the issue of any securities purchased by or for Fund, the legality of the purchase thereof or evidence of ownership required by Fund to be received by Custodian, or the propriety of the decision to purchase or amount paid therefor; (2) The legality of the sales of any securities by or for Fund, or the propriety of the amount paid therefor; 11 12 (3) The legality of the issue or sale of any shares of Fund, or the sufficiency of the amount to be received therefor; (4) The legality of the purchase of any shares of Fund, or the propriety of the amount to be paid therefor; or (5) The legality of the declaration of any dividend by Fund, or the legality of the issue of any shares of Fund in payment of any share dividend. F. Custodian shall not be liable for, or considered to be the custodian of, any money represented by any check, draft, wire transfer, clearing house funds, uncollected funds, or instrument for the payment of money received by it on behalf of Fund, until Custodian actually receives such money, provided only that it shall advise Fund promptly if it fails to receive any such money in the ordinary course of business, and use its best efforts and cooperate with Fund toward the end that such money shall be received. G. Subject to the obligations of Custodian under Section 3.B. hereof, Custodian shall not be responsible for loss occasioned by the acts, neglects, defaults or insolvency of any broker, bank, trust company, or any other person with whom Custodian may deal in the absence of negli- gence, misconduct or bad faith on the part of Custodian. H. Custodian or any sub-custodian shall provide Fund for its approval by its Board of Trustees agreements with banks or trust companies which will act as sub-custodian for Fund pursuant to this Agreement; and, as set forth in Section 3.B hereof, Custodian shall be responsible for the monies and securities of the Fund held by it or its nominees or sub-custodians under this Agreement, but not for monies and securities of the Fund held by any special sub-custodian except to the extent the special sub-custodian is liable to Custodian. 6. COMPENSATION. Fund shall pay to Custodian such compensation at such times as may from time to time be agreed upon in writing by Custodian and Fund. Custodian may charge such compensation against monies held by it for the account of Fund. Custodian shall also be entitled, notwithstanding the provisions of Sections 5B or 5C hereof, to charge against any monies held by it for the account of Fund the amount of any loss, damage, liability or expense for which it shall be entitled to reimbursement under the provisions of this Agreement. Custodian shall not be entitled to reimbursement by Fund for any loss or expenses of any sub- 12 13 custodian; provided that Custodian shall not be liable for, and Fund shall hold Custodian harmless from, the expenses of any special sub-custodian. 7. TERMINATION. Either party to this Agreement may terminate the same by notice in writing, delivered or mailed, postage prepaid, to the other party hereto and received not less than sixty (60) days prior to the date upon which such termination shall take effect. Upon termination of this Agreement, Fund shall pay to Custodian such compensation for its reimbursable disbursements, costs and expenses paid or incurred to such date and Fund shall use its best efforts to obtain a successor custodian. Unless the holders of a majority of the outstanding shares of Fund vote to have the securities, funds and other properties held under this Agreement delivered and paid over to some other person, firm or corporation specified in the vote, having not less than Two Million Dollars ($2,000,000) aggregate capital, surplus and undivided profits, as shown by its last published report, and meeting such other qualifications for custodian as set forth in the Bylaws of Fund, the Board of Trustees of Fund shall, forthwith upon giving or receiving notice of termination of this Agreement, appoint as successor custodian a bank or trust company having such qualifications. Custodian shall, upon termination of this Agreement, deliver to the successor custodian so specified or appointed, at custodian's office, all securities then held by Custodian hereunder, duly endorsed and in form for transfer, and all funds and other properties of Fund deposited with or held by Custodian hereunder, and shall cooperate in effecting changes in book-entries at the Depository Trust Company, the Treasury/Federal Reserve Book-Entry System, the Participants Trust Company and any other securities depository holding assets of the Fund. In the event no such vote has been adopted by the shareholders of Fund and no written order designating a successor custodian shall have been delivered to Custodian on or before the date when such termination shall become effective, then Custodian shall deliver the securities, funds and properties of Fund to a bank or trust company at the selection of Custodian and meeting the qualifications for custodian, if any, set forth in the Bylaws of Fund and having not less than Two Million Dollars ($2,000,000) aggregate capital, surplus and undivided profits, as shown by its last published report. Upon either such delivery to a successor custodian, Custodian shall have no further obligations or liabilities under this Agreement. Thereafter such bank or trust company shall be the successor custodian under this Agreement and shall be entitled to reasonable compensation for its services. In the event that no such successor custodian can be found, Fund will submit to its shareholders, before permitting delivery of the cash and securities owned by Fund to anyone other than a successor custodian, the question of whether Fund shall be liquidated or shall function without a custodian. Not- 13 14 withstanding the foregoing requirement as to delivery upon termination of this Agreement, Custodian may make any other delivery of the securities, funds and property of Fund which shall be permitted by the 1940 Act and Fund's Agreement and Declaration of Trust and Bylaws then in effect. Except as otherwise provided herein, neither this Agreement nor any portion thereof may be assigned by Custodian without the consent of Fund, authorized or approved by a resolution of its Board of Trustees. 8. NOTICES. Notices, requests, instructions and other writings received by Fund at 120 South LaSalle Street, Chicago, Illinois 60603 or at such other address as Fund may have designated by certified resolution of the Board of Trustees to Custodian and notices, requests, instructions and other writings received by Custodian at its offices at 21 West 10th Street, Kansas City, Missouri 64105, or to such other address as it may have designated to Fund in writing, shall be deemed to have been properly given hereunder. 9. MISCELLANEOUS. A. This Agreement is executed and delivered in the State of Missouri and shall be governed by the laws of the State of Missouri (except as to Section 9.H. hereof which shall be governed in accordance with the laws of The Commonwealth of Massachusetts). B. All the terms and provisions of this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and assigns of the parties hereto. C. No provisions of the Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties hereto. D. The captions in this Agreement are included for convenience of reference only, and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. E. This Agreement shall become effective at the close of business on the date hereof. F. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 14 15 G. If any part, term or provision of this Agreement is by the courts held to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid. H. All parties hereto are expressly put on notice of Fund's Agreement and Declaration of Trust, which is on file with the Secretary of The Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein. This Agreement has been executed by and on behalf of Fund by its representatives as such representatives and not individually, and the obligations of Fund hereunder are not binding upon any of the Trustees, officers or shareholders of Fund individually but are binding upon only the assets and property of Fund. With respect to any claim by Custodian for recovery of that portion of the compensation (or any other liability of Fund arising hereunder) allocated to a particular Portfolio, whether in accordance with the express terms hereof or otherwise, Custodian shall have recourse solely against the assets of that Portfolio to satisfy such claim and shall have no recourse against the assets of any other Portfolio for such purpose. I. This Agreement, together with the Fee Schedule, is the entire contract between the parties relating to the subject matter hereof and supersedes all prior agreements. 15 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective authorized officers. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters ------------------------------ Title: Vice President --------------------------- Attest: /s/ Philip J. Collora ----------------------- Title: Secretary ------------------------ INVESTORS FIDUCIARY TRUST COMPANY By: /s/ Joseph F. Smith ------------------------------ Title: E. V. P. --------------------------- Attest: /s/ Marvin Rau ----------------------- Title: Secretary ----------------------- 16 EX-99.B9(A) 11 AGENCY AGREEMENT 1 EXHIBIT 99.B9(a) AGENCY AGREEMENT AGREEMENT dated the 1st day of January, 1989, by and between KEMPER ENHANCED GOVERNMENT INCOME FUND, a Massachusetts business trust having its principal place of business at 120 South LaSalle Street, Chicago, IL 60603 ("Fund"), and INVESTORS FIDUCIARY TRUST COMPANY, a state chartered trust company organized and existing under the laws of the State of Missouri having its principal place of business at 127 West 10th Street, Kansas City, Missouri 64105 ("IFTC"). WHEREAS, Fund wants to appoint IFTC as Transfer Agent and Dividend Disbursing Agent, and IFTC wants to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Documents to be Filed with Appointment. In connection with the appointment of IFTC as Transfer Agent and Dividend Disbursing Agent for Fund, there will be filed with IFTC the following documents: A. A certified copy of the resolutions of the Board of Trustees of Fund appointing IFTC as Transfer Agent and Dividend Disbursing Agent, approving the form of this Agreement, and designating certain persons to give written instructions and requests on behalf of Fund. B. A certified copy of the Agreement and Declaration of Trust of Fund and any amendments thereto. C. A certified copy of the Bylaws of Fund. D. Copies of Registration Statements filed with the Securities and Exchange Commission. E. Specimens of all forms of outstanding share certificates as approved by the Board of Trustees of Fund, with a certificate of the Secretary of Fund as to such approval. 2 F. Specimens of the signatures of the officers of the Fund authorized to sign share certificates and individuals authorized to sign written instructions and requests on behalf of the Fund. G. An opinion of counsel for Fund: (1) With respect to Fund's organization and existence under the laws of The Commonwealth of Massachusetts. (2) With respect to the status of all shares of Fund covered by this appointment under the Securities Act of 1933, and any other applicable federal or state statute. (3) To the effect that all issued shares are, and all unissued shares will be when issued, validly issued, fully paid and non-assessable. 2. Certain Representations and Warranties of IFTC. IFTC represents and warrants to Fund that: A. It is a trust company duly organized and existing and in good standing under the laws of the State of Missouri. B. It is duly qualified to carry on its business in the State of Missouri. C. It is empowered under applicable laws and by its Articles of Incorporation and Bylaws to enter into and perform the services contemplated in this Agreement. D. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. E. It has and will continue to have and maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. F. It is, and will continue to be, registered as a transfer agent under the Securities Exchange Act of 1934. 3. Certain Representations and Warranties of Fund. Fund represents and warrants to IFTC that: 2 3 A. It is a business trust duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. B. It is an investment company registered under the Investment Company Act of 1940. C. A registration statement under the Securities Act of 1933 has been filed and will be effective with respect to all shares of Fund being offered for sale at any time and from time to time. D. All requisite steps have been or will be taken to register Fund's shares for sale in all applicable states, including the District of Columbia. E. Fund and its Trustees are empowered under applicable laws and by the Fund's Agreement and Declaration of Trust and Bylaws to enter into and perform this Agreement. 4. Scope of Appointment. A. Subject to the conditions set forth in this Agreement, Fund hereby employs and appoints IFTC as Transfer Agent and Dividend Disbursing Agent effective the date hereof. B. IFTC hereby accepts such employment and appointment and agrees that it will act as Fund's Transfer Agent and Dividend Disbursing Agent. IFTC agrees that it will also act as agent in connection with Fund's periodic withdrawal payment accounts and other open-account or similar plans for shareholders, if any. C. IFTC agrees to provide the necessary facilities, equipment and personnel to perform its duties and obligations hereunder in accordance with industry practice. D. Fund agrees to use all reasonable efforts to deliver to IFTC in Kansas City, Missouri, as soon as they are available, all its shareholder account records. E. Subject to the provisions of Sections 20 and 21 hereof, IFTC agrees that it will perform all the usual and ordinary services of Transfer Agent and Dividend Disbursing Agent and as agent for the various shareholder accounts, including, without limitation, the following: issuing, transferring and cancelling share certificates, maintaining all 3 4 shareholder accounts, preparing shareholder meeting lists, mailing proxies, receiving and tabulating proxies, mailing shareholder reports and prospectuses, withholding federal income taxes, preparing and mailing checks for disbursement of income and capital gains dividends, preparing and filing all required U.S. Treasury Department information returns for all shareholders, preparing and mailing confirmation forms to shareholders and dealers with respect to all purchases and liquidations of Fund shares and other transactions in shareholder accounts for which confirmations are required, recording reinvestments of dividends and distributions in Fund shares, recording redemptions of Fund shares and preparing and mailing checks for payments upon redemption and for disbursements to systematic withdrawal plan shareholders. 5. Compensation and Expenses. A. In consideration for the services provided hereunder by IFTC as Transfer Agent and Dividend Disbursing Agent, Fund will pay to IFTC from time to time compensation as agreed upon for all services rendered as Agent, and also, all its reasonable out-of-pocket expenses and other disbursements incurred in connection with the agency. Such compensation will be set forth in a separate schedule to be agreed to by Fund and IFTC. The initial agreement regarding compensation is attached as Exhibit A. B. Fund agrees to promptly reimburse IFTC for all reasonable out-of-pocket expenses or advances incurred by IFTC in connection with the performance of services under this Agreement including, but not limited to, postage (and first class mail insurance in connection with mailing share certificates), envelopes, check forms, continuous forms, forms for reports and statements, stationery, and other similar items, telephone and telegraph charges incurred in answering inquiries from dealers or shareholders, microfilm used each year to record the previous year's transactions in shareholder accounts and computer tapes used for permanent storage of records and cost of insertion of materials in mailing envelopes by outside firms. IFTC may, at its option, arrange to have various service providers submit invoices directly to the Fund for payment of out-of-pocket expenses reimbursable hereunder. 4 5 6. Efficient Operation of IFTC System. A. In connection with the performance of its services under this Agreement, IFTC is responsible for the accurate and efficient functioning of its system at all times, including: (1) The accuracy of the entries in IFTC's records reflecting purchase and redemption orders and other instructions received by IFTC from dealers, shareholders, Fund or its principal underwriter. (2) The timely availability and the accuracy of shareholder lists, shareholder account verifications, confirmations and other shareholder account information to be produced from IFTC's records or data. (3) The accurate and timely issuance of dividend and distribution checks in accordance with instructions received from Fund. (4) The accuracy of redemption transactions and payments in accordance with redemption instructions received from dealers, shareholders or Fund or other authorized persons. (5) The deposit daily in Fund's appropriate special bank account of all checks and payments received from dealers or shareholders for investment in shares. (6) The requiring of proper forms of instructions, signatures and signature guarantees and any necessary documents supporting the rightfulness of transfers, redemptions and other shareholder account transactions, all in conformance with IFTC's present procedures with such changes as may be deemed reasonably appropriate by IFTC or as may be reasonably approved by or on behalf of Fund. (7) The maintenance of a current duplicate set of Fund's essential or required records, as agreed upon from time to time by Fund and IFTC, at a secure distant location, in form available and usable forthwith in the event of any breakdown or disaster disrupting its main operation. 5 6 7. Indemnification. A. Fund shall indemnify and hold IFTC harmless from and against any and all claims, actions, suits, losses, damages, costs, charges, counsel fees, payments, expenses and liabilities arising out of or attributable to any action or omission by IFTC pursuant to this Agreement or in connection with the agency relationship created by this Agreement, provided that IFTC has acted in good faith, without negligence and without willful misconduct. B. IFTC shall indemnify and hold Fund harmless from and against any and all claims, actions, suits, losses, damages, costs, charges, counsel fees, payments, expenses and liabilities arising out of or attributable to any action or omission by IFTC pursuant to this Agreement or in connection with the agency relationship created by this Agreement, provided that IFTC has not acted in good faith, without negligence and without willful misconduct. C. In order that the indemnification provisions contained in this Section 7 shall apply, upon the assertion of a claim for which either party (the "Indemnifying Party") may be required to provide indemnification hereunder, the party seeking indemnification (the "Indemnitee") shall promptly notify the Indemnifying Party of such assertion, and shall keep such party advised with respect to all developments concerning such claim. The Indemnifying Party shall be entitled to assume control of the defense and the negotiations, if any, regarding settlement of the claim. If the Indemnifying Party assumes control, the Indemnitee shall have the option to participate in the defense and negotiations of such claim at its own expense. The Indemnitee shall in no event confess, admit to, compromise, or settle any claim for which the Indemnifying Party may be required to indemnify it except with the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld. 8. Certain Covenants of IFTC and Fund. A. All requisite steps will be taken by Fund from time to time when and as necessary to register the Fund's shares for sale in all states in which Fund's shares shall at the time be offered for sale and require registration. If at any time Fund receives notice of any stop order or other proceeding in any such 6 7 state affecting such registration or the sale of Fund's shares, or of any stop order or other proceeding under the Federal securities laws affecting the sale of Fund's shares, Fund will give prompt notice thereof to IFTC. B. IFTC hereby agrees to establish and maintain facilities and procedures reasonably acceptable to Fund for safekeeping of share certificates, check forms, and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. Further, IFTC agrees to carry insurance, as specified in Exhibit B hereto, with insurers reasonably acceptable to Fund and in minimum amounts that are reasonably acceptable to Fund, which will not be changed without the consent of Fund, which consent shall not be unreasonably withheld, and which will be expanded in coverage or increased in amounts from time to time if and when reasonably requested by Fund. If IFTC determines that it is unable to obtain any such insurance upon commercially reasonable terms, it shall promptly so advise Fund in writing. In such event, Fund shall have the right to terminate this Agreement upon 30 days notice. C. To the extent required by Section 31 of the Investment Company Act of 1940 and Rules thereunder, IFTC agrees that all records maintained by IFTC relating to the services to be performed by IFTC under this Agreement are the property of Fund and will be preserved and will be surrendered promptly to Fund on request. D. IFTC agrees to furnish Fund semi-annual reports of its financial condition, consisting of a balance sheet, earnings statement and any other reasonably available financial information reasonably requested by Fund. The annual financial statements will be certified by IFTC's certified public accountants. E. IFTC represents and agrees that it will use all reasonable efforts to keep current on the trends of the investment company industry relating to shareholder services and will use all reasonable efforts to continue to modernize and improve its system without additional cost to Fund. 7 8 F. IFTC will permit Fund and its authorized representatives to make periodic inspections of its operations at reasonable times during business hours. G. If IFTC is prevented from complying, either totally or in part, with any of the terms or provisions of this Agreement, by reason of fire, flood, storm, strike, lockout or other labor trouble, riot, war, rebellion, accidents, acts of God, equipment, utility or transmission failure or damage, and/or any other cause or casualty beyond the reasonable control of IFTC, whether similar to the foregoing matters or not, then upon written notice to Fund, the requirements of this Agreement that are affected by such disability, to the extent so affected, shall be suspended during the period of such disability; provided, however, that IFTC shall make reasonable effort to remove such disability as soon as possible. During such period, Fund may seek alternate sources of service without liability hereunder; and IFTC will use all reasonable efforts to assist Fund to obtain alternate sources of service. IFTC shall have no liability to Fund for nonperformance because of the reasons set forth in this Section 8.G; but if a disability that, in Fund's reasonable belief, materially affects IFTC's ability to perform its obligations under this Agreement continues for a period of 30 days, then Fund shall have the right to terminate this Agreement upon 10 days written notice to IFTC. 9. Adjustment. In case of any recapitalization, readjustment or other change in the structure of Fund requiring a change in the form of share certificates, IFTC will issue or register certificates in the new form in exchange for, or in transfer of, the outstanding certificates in the old form, upon receiving the following: A. Written instructions from an officer of Fund. B. Certified copy of any amendment to the Agreement and Declaration of Trust or other document effecting the change. 8 9 C. Certified copy of any order or consent of each governmental or regulatory authority required by law for the issuance of the shares in the new form, and an opinion of counsel that no order or consent of any other government or regulatory authority is required. D. Specimens of the new certificates in the form approved by the Board of Trustees of Fund, with a certificate of the Secretary of Fund as to such approval. E. Opinion of counsel for Fund: (1) With respect to the status of the shares of Fund in the new form under the Securities Act of 1933, and any other applicable federal or state laws. (2) To the effect that the issued shares in the new form are, and all unissued shares will be when issued, validly issued, fully paid and non-assessable. 10. Share Certificates. Fund will furnish IFTC with a sufficient supply of blank share certificates and from time to time will renew such supply upon the request of IFTC. Such certificates will be signed manually or by facsimile signatures of the officers of Fund authorized by law and Fund's Bylaws to sign share certificates and, if required, will bear the trust seal or facsimile thereof. 11. Death, Resignation or Removal of Signing Officer. Fund will file promptly with IFTC written notice of any change in the officers authorized to sign share certificates, written instructions or requests, together with two signature cards bearing the specimen signature of each newly authorized officer, all as certified by an appropriate officer of the Fund. In case any officer of Fund who will have signed manually or whose facsimile signature will have been affixed to blank share certificates will die, resign, or be removed prior to the issuance of such certificates, IFTC may issue or register such share certificates as the share certificates of Fund notwithstanding such death, resignation, or removal, until specifically directed to 9 10 the contrary by Fund in writing. In the absence of such direction, Fund will file promptly with IFTC such approval, adoption, or ratification as may be required by law. 12. Future Amendments of Agreement and Declaration of Trust and Bylaws. Fund will promptly file with IFTC copies of all material amendments to its Agreement and Declaration of Trust and Bylaws and Registration Statement made after the date of this Agreement. 13. Instructions, Opinion of Counsel and Signatures. At any time IFTC may apply to any officer of Fund for instructions, and may consult with legal counsel for Fund at the expense of Fund, or with its own legal counsel at its own expense, with respect to any matter arising in connection with the agency; and it will not be liable for any action taken or omitted by it in good faith in reliance upon such instructions or upon the opinion of such counsel. IFTC is authorized to act on the orders, directions or instructions of such persons as the Board of Trustees of Fund shall from time to time designate by resolution. IFTC will be protected in acting upon any paper or document, including any orders, directions or instructions, reasonably believed by it to be genuine and to have been signed by the proper person or persons; and IFTC will not be held to have notice of any change of authority of any person so authorized by Fund until receipt of written notice thereof from Fund. IFTC will also be protected in recognizing share certificates that it reasonably believes to bear the proper manual or facsimile signatures of the officers of Fund, and the proper countersignature of any former Transfer Agent or Registrar, or of a Co-Transfer Agent or Co-Registrar. 14. Papers Subject to Approval of Counsel. The acceptance by IFTC of its appointment as Transfer Agent and Dividend Disbursing Agent, and all documents filed in connection with such appointment and thereafter in connection with the agencies, will be subject to the approval of legal counsel for IFTC, which approval will not be unreasonably withheld. 10 11 15. Certification of Documents. The required copy of the Agreement and Declaration of Trust of Fund and copies of all amendments thereto will be certified by the appropriate official of The Commonwealth of Massachusetts; and if such Agreement and Declaration of Trust and amendments are required by law to be also filed with a county, city or other officer or official body, a certificate of such filing will appear on the certified copy submitted to IFTC. A copy of the order or consent of each governmental or regulatory authority required by law for the issuance of Fund shares will be certified by the Secretary or Clerk of such governmental or regulatory authority, under proper seal of such authority. The copy of the Bylaws and copies of all amendments thereto and copies of resolutions of the Board of Trustees of Fund will be certified by the Secretary or an Assistant Secretary of Fund. 16. Records. IFTC will maintain customary records in connection with its agency, and particularly will maintain those records required to be maintained pursuant to sub-paragraph (2)(iv) of paragraph (b) of Rule 31a-1 under the Investment Company Act of 1940, if any. 17. Disposition of Books, Records and Cancelled Certificates. IFTC will send periodically to Fund, or to where designated by the Secretary or an Assistant Secretary of Fund, all books, documents, and all records no longer deemed needed for current purposes and share certificates which have been cancelled in transfer or in exchange, upon the understanding that such books, documents, records, and share certificates will not be destroyed by Fund without the consent of IFTC (which consent will not be unreasonably withheld), but will be safely stored for possible future reference. 18. Provisions Relating to IFTC as Transfer Agent. A. IFTC will make original issues of share certificates upon written request of an officer of Fund and upon being furnished with a certified copy of a resolution of the Board of Trustees authorizing such original issue, an opinion of counsel as outlined in Section 1.G or 9.E of this Agreement, the certificates required by Section 10 of this 11 12 Agreement and any other documents required by Section 1 or 9 of this Agreement. B. Before making any original issue of certificates, Fund will furnish IFTC with sufficient funds to pay any taxes required on the original issue of the shares. Fund will furnish IFTC such evidence as may be required by IFTC to show the actual value of the shares. If no taxes are payable, IFTC will upon request be furnished with an opinion of outside counsel to that effect. C. Shares will be transferred and new certificates issued in transfer, or shares accepted for redemption and funds remitted therefor, upon surrender of the old certificates in form deemed by IFTC properly endorsed for transfer or redemption accompanied by such documents as IFTC may deem necessary to evidence the authority of the person making the transfer or redemption, and bearing satisfactory evidence of the payment of any applicable share transfer taxes. IFTC reserves the right to refuse to transfer or redeem shares until it is satisfied that the endorsement or signature on the certificate or any other document is valid and genuine, and for that purpose it may require a guarantee of signature by such persons as may from time to time be specified in the prospectus related to such shares or otherwise authorized by Fund. IFTC also reserves the right to refuse to transfer or redeem shares until it is satisfied that the requested transfer or redemption is legally authorized, and it will incur no liability for the refusal in good faith to make transfers or redemptions which, in its judgment, are improper, unauthorized, or otherwise not rightful. IFTC may, in effecting transfers or redemptions, rely upon Simplification Acts or other statutes which protect it and Fund in not requiring complete fiduciary documentation. D. When mail is used for delivery of share certificates, IFTC will forward share certificates in "nonnegotiable" form as provided by Fund by first class mail, all such mail deliveries to be covered while in transit to the addressee by insurance arranged for by IFTC. E. IFTC will issue and mail subscription warrants and certificates provided by Fund and representing share dividends, exchanges or split-ups, or act as Conversion Agent upon receiving written instructions 12 13 from any officer of Fund and such other documents as IFTC deems necessary. F. IFTC will issue, transfer, and split-up certificates upon receiving written instructions from an officer of Fund and such other documents as IFTC may deem necessary. G. IFTC may issue new certificates in place of certificates represented to have been lost, destroyed, stolen or otherwise wrongfully taken, upon receiving indemnity satisfactory to IFTC, and may issue new certificates in exchange for, and upon surrender of, mutilated certificates. Any such issuance shall be in accordance with the provisions of law governing such matter and any procedures adopted by the Board of Trustees of the Fund of which IFTC has notice. H. IFTC will supply a shareholder's list to Fund properly certified by an officer of IFTC for any shareholder meeting upon receiving a request from an officer of Fund. It will also supply lists at such other times as may be reasonably requested by an officer of Fund. I. Upon receipt of written instructions of an officer of Fund, IFTC will address and mail notices to shareholders. J. In case of any request or demand for the inspection of the share books of Fund or any other books of Fund in the possession of IFTC, IFTC will endeavor to notify Fund and to secure instructions as to permitting or refusing such inspection. IFTC reserves the right, however, to exhibit the share books or other books to any person in case it is advised by its counsel that it may be held responsible for the failure to exhibit the share books or other books to such person. 19. Provisions Relating to Dividend Disbursing Agency. A. IFTC will, at the expense of Fund, provide a special form of check containing the imprint of any device or other matter desired by Fund. Said checks must, however, be of a form and size convenient for use by IFTC. B. If Fund wants to include additional printed matter, financial statements, etc., with the dividend checks, the same will be furnished to IFTC within a 13 14 reasonable time prior to the date of mailing of the dividend checks, at the expense of Fund. C. If Fund wants its distributions mailed in any special form of envelopes, sufficient supply of the same will be furnished to IFTC but the size and form of said envelopes will be subject to the approval of IFTC. If stamped envelopes are used, they must be furnished by Fund; or, if postage stamps are to be affixed to the envelopes, the stamps or the cash necessary for such stamps must be furnished by Fund. D. IFTC will maintain one or more deposit accounts as Agent for Fund, into which the funds for payment of dividends, distributions, distributions, redemptions or other disbursements provided for hereunder will be deposited, and against which checks will be drawn. 20. Termination of Agreement. A. This Agreement may be terminated by either party upon sixty (60) days prior written notice to the other party. B. Fund, in addition to any other rights and remedies, shall have the right to terminate this Agreement forthwith upon the occurrence at any time of any of the following events: (1) Any interruption or cessation of operations by IFTC or its assigns which materially interferes with the business operation of Fund. (2) The bankruptcy of IFTC or its assigns or the appointment of a receiver for IFTC or its assigns. (3) Any merger, consolidation or sale of substantially all the assets of IFTC or its assigns. (4) The acquisition of a controlling interest in IFTC or its assigns, by any broker, dealer, investment adviser or investment company except as may presently exist. (5) Failure by IFTC or its assigns to perform its duties in accordance with this Agreement, which failure materially adversely affects the business operations of Fund and which failure 14 15 continues for thirty (30) days after written notice from Fund. (6) The registration of IFTC or its assigns as a transfer agent under the Securities Exchange Act of 1934 is revoked, terminated or suspended for any reason. C. In the event of termination, Fund will promptly pay IFTC all amounts due to IFTC hereunder. Upon termination of this Agreement, IFTC shall deliver all shareholder and account records pertaining to Fund either to Fund or as directed in writing by Fund. 21. Assignment. A. Except for the assignment of responsibilities pursuant to the Services Agreement ("Services Agreement") between IFTC and Kemper Service Company ("KSVC"), which Fund has approved, neither this Agreement nor any rights or obligations hereunder may be assigned by IFTC without the written consent of Fund; provided, however, no assignment will relieve IFTC of any of its obligations hereunder. B. This Agreement including, without limitation, the provisions of Section 7 will inure to the benefit of and be binding upon the parties and their respective successors and assigns including KSVC pursuant to the aforesaid Services Agreement. C. KSVC is authorized by Fund to use the system services of DST Systems, Inc. 22. Confidentiality. A. Except as provided in the last sentence of Section 18.J hereof, or as otherwise required by law, IFTC will keep confidential all records of and information in its possession relating to Fund or its shareholders or shareholder accounts and will not disclose the same to any person except at the request or with the consent of Fund. B. Except as otherwise required by law, Fund will keep confidential all financial statements and other financial records (other than statements and records relating solely to Fund's business dealings with IFTC) and all manuals, systems and other technical information and data, not publicly disclosed, relating to IFTC's operations and programs furnished 15 16 to it by IFTC pursuant to this Agreement and will not disclose the same to any person except at the request or with the consent of IFTC. Notwithstanding anything to the contrary in this Section 22.B, if an attempt is made pursuant to subpoena or other legal process to require Fund to disclose or produce any of the aforementioned manuals, systems or other technical information and data, Fund shall give IFTC prompt notice thereof prior to disclosure or production so that IFTC may, at its expense, resist such attempt. 23. Survival of Representations and Warranties. All representations and warranties by either party herein contained will survive the execution and delivery of this Agreement. 24. Miscellaneous. A. This Agreement is executed and delivered in the State of Illinois and shall be governed by the laws of said state (except as to Section 24.G hereof which shall be governed by the laws of The Commonwealth of Massachusetts). B. No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties hereto. C. The captions in this Agreement are included for convenience of reference only, and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. D. This Agreement shall become effective as of the date hereof. E. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. F. In any part, term or provision of this Agreement is held by the courts to be illegal, in conflict with any law or otherwise invalid, the remaining portion or portions shall be considered severable and not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular part, term or provision held to be illegal or invalid. 16 17 G. All parties hereto are expressly put on notice of Fund's Agreement and Declaration of Trust which is on file with the Secretary of The Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein. This Agreement has been executed by and on behalf of Fund by its representatives as such representatives and not individually, and the obligations of Fund hereunder are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding upon only the assets and property of Fund. With respect to any claim by IFTC for recovery of that portion of the compensation and expenses (or any other liability of Fund arising hereunder) allocated to a particular Portfolio, whether in accordance with the express terms hereof or otherwise, IFTC shall have recourse solely against the assets of that Portfolio to satisfy such claim and shall have no recourse against the assets of any other Portfolio for such purpose. H. This Agreement, together with the Fee Schedule, is the entire contract between the parties relating to the subject matter hereof and supersedes all prior agreements between the parties. 17 18 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized officer as of the day and year first set forth above. KEMPER ENHANCED GOVERNMENT INCOME FUND By /s/ Charles M. Kierscht ----------------------------------- Title: President ATTEST: /s/ Robert J. Engling ------------------------------- Title: Secretary INVESTORS FIDUCIARY TRUST COMPANY By /s/ Larry W. Rinne ----------------------------------- Title: President ATTEST: /s/ Cheryl J. Naegler ------------------------------- Title: Assistant Secretary 18 19 EXHIBIT A FEE SCHEDULE
Transfer Agency Function Fee Payable by Fund ------------------------ ------------------- 1. Maintenance of open shareholder $6.00 per year per account account. 2. Maintenance of closed shareholder $6.00 per year per account account. 3. Establishment of new shareholder $4.00 per new account account. 4. Payment of dividend. $.25 per dividend payment per account 5. Dividend reinvestment from Kemper $.50 per transaction Unit Investment Trusts. 6. Process purchase or redemption of $1.00 per transaction shares transaction. 7. All other shareholder account $1.00 per transaction transactions.
The out-of-pocket expenses of IFTC will be reimbursed by Fund in accordance with the provisions of paragraph 5 of the Agency Agreement. All fees will be subject to offset by earnings allowances under the Custody Agreement between Fund and IFTC. 20 EXHIBIT B IFTC INSURANCE COVERAGE DESCRIPTION OF POLICY: Brokers Blanket Bond, Standard Form 14 Covering losses caused by dishonesty of employees, physical loss of securities on or outside of premises while in possession of authorized person, loss caused by forgery or alteration of checks or similar instruments. Errors and Omissions Insurance Covering replacement of destroyed records and computer errors and omissions. Special Forgery Bond Covering losses through forgery or alteration of checks or drafts of customers processed by insured but drawn on or against them. Mail Insurance (applies to all full service operations) Provides indemnity for the following types of securities lost in the mails: Non-negotiable securities mailed to domestic locations via registered mail. Non-negotiable securities mailed to domestic locations via first-class or certified mail. Non-negotiable securities mailed to foreign locations via registered mail. Negotiable securities mailed to all locations via registered mail. EX-99.B9(B) 12 SUPPLEMENT TO AGENCY AGREEMENT 1 EXHIBIT 99.B9(b) Supplement to Agency Agreement Supplement to Agency Agreement ("Supplement") made as of May 31, 1994 by and between the registered investment company executing this document (the "Fund") and Investors Fiduciary Trust Company ("Agent"). WHEREAS, the Fund and Agent are parties to an Agency Agreement ("Agency Agreement") dated January 1, 1989, as supplemented from time to time; WHEREAS, Section 5.A. of the Agency Agreement provides that the fees payable by the Fund to Agent thereunder shall be as set forth in a separate schedule to be agreed to by the Fund and Agent; and WHEREAS, the parties desire to reflect in this Supplement the revised fee schedule for the Agency Agreement as in effect as of the date hereof; NOW THEREFORE, in consideration of the premises and the mutual covenants herein provided, the parties agree as follows: 1. The revised fee schedule for services provided by Agent to the Fund under the Agency Agreement as in effect as of the date hereof is set forth in Exhibit A attached hereto. 2. This Supplement shall become a part of the Agency Agreement and subject to its terms and shall supersede all previous fee schedules under such agreement as of the date hereof. IN WITNESS WHEREOF, the Fund and Agent have duly executed this Supplement as of the day and year first set forth above. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters ---------------------------------------- Title: Vice President INVESTORS FIDUCIARY TRUST COMPANY By: /s/ Joseph F. Smith ---------------------------------------- Title: EVP 2 EXHIBIT A FEE SCHEDULE (Multiple Classes of Shares)
Service Agent Function Fee Payable by IFTC ----------------------- ------------------- Class A, C and I Class B ---------------- ------- 1. Annual open shareholder account fee (per year per account). a. Non-daily dividend series. $6.00 $6.00 b. Daily dividend series. $8.00 $8.00 2. Annual closed shareholder account fee (per year per account). $6.00 $6.00 3. Contingent deferred sales charge account fee (per year per open Not account). Applicable $2.25 4. Establishment of new shareholder account (per new account). $4.00 $4.00 5. Payment of dividend (per dividend per account). $.40 $.40 6. Automated transaction (per transaction).** $.50 $.50 7. Non-monetary transactions fee (per year per open account). $2.00 $2.00 8. All other shareholder inquiry, correspondence and research transactions (per transaction). $1.25 $1.25 9. Disaster recovery fee (per year per open and closed account). $.40 $.40
The out-of-pocket expenses of KSvC will be reimbursed by IFTC in accordance with the provisions of Section 7 of the Services Agreement. 3 ------------------ * The new shareholder account fee is not applicable to Class A Share accounts established in connection with a conversion from Class B Shares. ** Automated transaction includes, without limitation, money market series purchases and redemptions, ACH purchases, systematic exchanges and conversions from Class B Shares to Class A Shares. EX-99.B9(C) 13 ADMINISTRATIVE SERVICES AGREEMENT 1 EXHIBIT 99.B9(c) ADMINISTRATIVE SERVICES AGREEMENT AGREEMENT dated this 1st day of August, 1990, by and between KEMPER ENHANCED GOVERNMENT INCOME FUND, a Massachusetts business trust (the "Fund"), and KEMPER FINANCIAL SERVICES, INC., a Delaware corporation ("KFS"). In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Fund hereby appoints KFS to provide information and administrative services for the benefit of the Fund and its shareholders. In this regard, KFS shall appoint various broker-dealer firms and other financial services firms ("Firms") to provide related services and facilities for their clients who are shareholders of the Fund ("clients"). The Firms shall provide such office space and equipment, telephone facilities and personnel as is necessary or beneficial for providing information and services to shareholders of the Fund. Such services and assistance may include, but are not limited to, establishing and maintaining shareholder accounts and records, processing purchase and redemption transactions, answering routine client inquiries regarding the Fund and its special features, assistance to clients in changing dividend and investment options, account designations and addresses, and such other services as the Fund or KFS may reasonably request. KFS may also provide some of the above services for the Fund directly. KFS accepts such appointment and agrees during such period to render such services and to assume the obligations herein set forth for the compensation herein provided. KFS shall for all purposes herein provided be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. KFS, by separate agreement with the Fund, may also serve the Fund in other capacities. In carrying out its duties and responsibilities hereunder, KFS will appoint various Firms to provide administrative and other services described herein directly to or for the benefit of shareholders of the Fund who may be clients of such Firms. Such Firms shall at all times be deemed to be independent contractors retained by KFS and not the Fund. KFS and not the Fund will be responsible for the payment of compensation to such Firms for such services. 2. For the services and facilities described in Section 1, the Fund will pay to KFS at the end of each calendar month an administrative service fee computed at an annual rate of up to 0.25 of 1% of the average daily net assets of the Fund. The 2 current fee schedule is set forth as Appendix I hereto. For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement is in effect during such month and year, respectively. The services of KFS to the Fund under this Agreement are not to be deemed exclusive, and KFS shall be free to render similar services or other services to others. The net asset value for each share of the Fund shall be calculated in accordance with the provisions of the Fund's current prospectus. On each day when net asset value is not calculated, the net asset value of a share of the Fund shall be deemed to be the net asset value of such a share as of the close of business on the last day on which such calculation was made for the purpose of the foregoing computations. 3. The Fund shall assume and pay all charges and expenses of its operations not specifically assumed or otherwise to be provided by KFS under this Agreement. 4. This Agreement may be terminated at any time without the payment of any penalty by the Fund or by KFS on sixty (60) days written notice to the other party. Termination of this Agreement shall not affect the right of KFS to receive payments on any unpaid balance of the compensation described in Section 2 hereof earned prior to such termination. This Agreement may not be amended to increase the amount to be paid to KFS for services hereunder above .25 of 1% of the average daily net assets of the Fund without the vote of a majority of the outstanding voting securities of the Fund. All material amendments to this Agreement must in any event be approved by vote of the Board of Trustees of the Fund. 5. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected. 6. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice. 7. All parties hereto are expressly put on notice of the Fund's Agreement and Declaration of Trust and all amendments thereto, all of which are on file with the Secretary of The Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein. This Agreement has been executed by and on behalf of the Fund by its representatives as such representatives and not individually, and the obligations of the Fund hereunder are not binding upon any of the trustees, officers 2 3 or shareholders of the Fund individually but are binding upon only the assets and property of the Fund. 8. This Agreement shall be construed in accordance with applicable federal law and (except as to Section 7 hereof which shall be construed in accordance with the laws of The Commonwealth of Massachusetts) the laws of the State of Illinois. IN WITNESS WHEREOF, the Fund and KFS have caused this Agreement to be executed as of the day and year first above written. KEMPER ENHANCED GOVERNMENT KEMPER FINANCIAL SERVICES, INC. INCOME FUND By: /s/ Charles M. Kierscht By: /s/ John E. Peters ------------------------ --------------------------- Title: President Title: Executive Vice President 3 4 APPENDIX I KEMPER ENHANCED GOVERNMENT INCOME FUND FEE SCHEDULE FOR ADMINISTRATIVE SERVICES AGREEMENT Pursuant to Section 2 of the Administrative Services Agreement to which this Appendix is attached, the Fund and KFS agree that the initial administrative service fee will be computed at an annual rate of .15 of 1% (the "Fee Rate"). For purposes of computing the fee due KFS, the Fee Rate shall be applied against the amount of assets of the Fund for which a broker-dealer or other financial services firm is listed on the records of the Fund as "dealer of record," which shall not include KFS. Dated: August 1, 1990 KEMPER ENHANCED GOVERNMENT KEMPER FINANCIAL SERVICES, INC. INCOME FUND By: /s/ Charles M. Kierscht By: /s/ John E. Peters ------------------------ --------------------------- Title: President Title: Executive Vice President EX-99.B9(D) 14 ADMENDMENT TO ADMINISTRATIVE SERVICE, AGREEMENT 1 EXHIBIT 99.B9(d) AMENDMENT TO ADMINISTRATIVE SERVICES AGREEMENT (Class A, B, C and I Shares) Amendment to Administrative Services Agreement ("Amendment") made as of May 31, 1994 by and between the registered investment company executing this document (the "Fund") and Kemper Financial Services, Inc. ("KFS"). WHEREAS, The Fund and KFS are parties to an Administrative Services Agreement ("ASF Agreement") dated August 1, 1990 as supplemented and amended from time to time; WHEREAS, The Fund currently issues shares in four separate classes for each series of the Fund, if there is more than one, being designated as Class A Shares, Class B Shares, Class C Shares and Class I Shares; and WHEREAS, The parties want to reflect in this Amendment the effect upon the fee schedule under the ASF Agreement of the division of the shares of the Fund into separate classes; NOW THEREFORE, in consideration of the premises and the mutual covenants herein provided, the parties agree as follows: 1. The administrative services fee under the ASF Agreement will be calculated separately for each class of each series of the Fund as an expense of such class at the annual rates and in accordance with the procedures specified in the ASF Agreement; provided, however, that no administrative services fee shall be payable with respect to the Class I Shares. 2. This Amendment shall become a part of the ASF Agreement. IN WITNESS WHEREOF, the Fund and KFS have duly executed this Amendment as of the day and year first set forth above. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters ---------------------------------------- Title: Vice President KEMPER FINANCIAL SERVICES, INC. By: /s/ Patrick H. Dudasik ---------------------------------------- Title: Senior Vice President EX-99.B9(E) 15 ASSIGNMENT AND ASSUMPTION 1 EXHIBIT 99.B9(e) ASSIGNMENT AND ASSUMPTION ASSIGNMENT AND ASSUMPTION ("Assignment and Assumption") made and entered into as of February 1, 1995 by and between Kemper Financial Services, Inc., a Delaware corporation ("Assignor"), and Kemper Distributors, Inc., a Delaware corporation ("Assignee"). WHEREAS, Assignor serves as administrator for Kemper Adjustable Rate U.S. Government Fund, a Massachusetts business trust (the "Fund"), pursuant to that certain Administrative Services Agreement dated August 1, 1990 by and between Assignor and the Fund, as may have been amended, (the "Agreement"); WHEREAS, Assignee is a wholly-owned subsidiary of Assignor; WHEREAS, It has been proposed that the rights, duties and responsibilities of Assignor under the Agreement be transferred to and assumed by Assignee; WHEREAS, The Fund has determined that such transfer of rights, duties and responsibilities is reasonable and in the best interests of the Fund and the Fund's shareholders; and NOW, THEREFORE, in consideration of the covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. Assignment and Assumption. Assignor assigns and transfers to Assignee all of Assignor's rights, interests, liabilities, duties and obligations under the Agreement ("Assigned Rights and Obligations"). Assignee accepts the foregoing assignment and transfer of the Assigned Rights and Obligations and agrees to assume, pay, perform and otherwise be fully responsible for the same. 2. Further Assurances. From time to time, at the request of either party, the other party will execute and deliver such further instruments of assignment, transfer and assumption and take such further action as may be required to assign, transfer and assume the Assigned Rights and Obligations. 3. Applicable Law. This Assignment and Assumption shall be governed by the laws of the State of Illinois. 4. Amendments. This Assignment and Assumption may only be amended by the written agreement of the parties. 2 IN WITNESS WHEREOF, the parties have each caused this Assignment and Assumption to be executed on its behalf by a duly authorized officer as of the date first written above. KEMPER FINANCIAL SERVICES, INC. By: /s/ Patrick H. Dudasik --------------------------- Its: Senior Vice President KEMPER DISTRIBUTORS, INC. By: /s/ James L. Greenawalt --------------------------- Its: Executive Vice President The undersigned hereby acknowledges and consents to the foregoing Assignment and Assumption as of February 1, 1995. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters ------------------------------ Its: Vice President 2 EX-99.B9(F) 16 AMENDED APPENDIX I FOR ADMIN. SERVICES AGREEMENT 1 EXHIBIT 99.B9(f) AMENDED APPENDIX I FOR ADMINISTRATIVE SERVICES AGREEMENT Amended Appendix I for Administrative Services Agreement ("Amended Appendix I") made as of October 1, 1993 by and between the registered investment company executing this document (the "Fund") and Kemper Financial Services, Inc. ("KFS"). WHEREAS, the Fund and KFS are parties to an Administrative Services Agreement ("ASF Agreement") dated August 1, 1990, as supplemented from time to time; WHEREAS, Section 2 of the ASF Agreement provides that the administrative service fees currently payable by the Fund to KFS thereunder shall be as set forth in Appendix I thereto subject to the requirement set forth in said Section 2 that said fees not exceed an annual rate of .25% of average daily net assets of the Fund; and WHEREAS, the parties desire to reflect in this Amended Appendix I the revised fee schedule for the ASF Agreement as in effect as of the date hereof; NOW THEREFORE, in consideration of the premises and the mutual covenants herein provided, the parties agree as follows: 1. The revised fee schedule for services provided by KFS to the Fund under the ASF Agreement is as described hereinafter. The Fund will pay KFS an administrative service fee at a rate sufficient to reimburse KFS for service fee payments made by KFS to broker-dealer firms and other financial services firms ("Firms") that are retained by KFS to provide information and administrative services for their clients as contemplated by Section 1 of the ASF Agreement. KFS will pay Firms a service fee at an annual rate of (a) up to .15 of 1% of net assets of those accounts in the Fund that they maintain and service attributable to shares acquired prior to October 1, 1993, and (b) up to .25 of 1% of net assets of those accounts in the Fund that they maintain and service attributable to shares acquired on or after October 1, 1993. For this purpose, Firms shall only include broker-dealers and other financial services firms listed on the records of the Fund as "dealer of record," and shall not include KFS. In no event shall the fee paid to KFS exceed the limitations set forth in Section 2 of the ASF Agreement. 2 2. This Amended Appendix I shall become a part of the ASF Agreement and subject to its terms and shall supersede all previous fee schedules under such Agreement, including the current Appendix I thereto, as of the date hereof. IN WITNESS WHEREOF, the Fund and KFS have duly executed this Amended Appendix I as of the day and year first set forth above. KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND By: /s/ John E. Peters --------------------------------------- Title: Vice President KEMPER FINANCIAL SERVICES, INC. By: /s/ Robert Jackson --------------------------------------- Title: CFO & Sen. Exec. V.P. 2 EX-99.B10 17 LEGAL OPINION 1 EXHIBIT 99.B10 VEDDER, PRICE, KAUFMAN & KAMMHOLZ November 28, 1995 Kemper Adjustable Rate U.S. Government Fund 120 South LaSalle Street Chicago, Illinois 60603 Ladies and Gentlemen: Reference is made to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A under the Securities Act of 1933 being filed by Kemper Adjustable Rate U.S. Government Fund (the "Fund") in connection with its proposed registration of units of beneficial interest, no par value ("Shares"), in one authorized series (the "Portfolio"). We are counsel to the Fund and in such capacity are familiar with the Fund's organization and have counseled the Fund regarding various legal matters. We have examined such Fund records and other documents and certificates as we have considered necessary or appropriate for the purpose of this opinion. As to various questions of fact material to our opinion, we have relied upon statements and certificates of officers and representatives of the Fund. In our examination of such materials, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. Based upon the foregoing and upon the opinion dated June 3, 1987 by Ropes & Gray of Boston, Massachusetts, we advise you and opine that (a) the Fund is a duly authorized and validly existing voluntary association with transferrable shares under the laws of the Commonwealth of Massachusetts and is authorized to issue an unlimited number of Shares in the Portfolio; and (b) upon the issuance of the Shares in accordance with the Fund's Agreement and Declaration of Trust and the receipt by the Fund of a purchase price not less than the net asset value per Share, the Shares will be legally issued and outstanding, fully paid and non-assessable (although shareholders of the Fund may be subject to liability under certain circumstances as described in the opinion from Ropes & Gray). 2 We hereby consent to the use of this opinion in connection with said Post-Effective Amendment. Very truly yours, /s/ Vedder, Price, Kaufman & Kammholz VEDDER, PRICE, KAUFMAN & KAMMHOLZ COK/dd EX-99.B11 18 REPORT AND CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 99.B11 REPORT OF INDEPENDENT AUDITORS The Board of Trustees and Shareholders Kemper Adjustable Rate U.S. Government Fund We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Kemper Adjustable Rate U.S. Government Fund as of August 31, 1995, the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1988. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of August, 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kemper Adjustable Rate U.S. Government Fund at August 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the fiscal periods since 1988, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP Chicago, Illinois October 13, 1995 2 EXHIBIT 99.B11 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Financial Highlights" and "Independent Auditors and Reports to Shareholders" and to the use of our report dated October 13, 1995 in the Registration Statement (Form N-1A) of Kemper Adjustable Rate U.S. Government Fund, and its incorporation by reference in the related prospectus of Kemper Fixed Income Funds, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 13 to the Registration Statement under the Securities Act of 1933 (File No. 33-14832) and in this Amendment No. 14 to the Registration Statement under the Investment Company Act of 1940 (File No. 811-5195). /s/ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP Chicago, Illinois November 28, 1995 EX-99.B14(A) 19 RETIREMENT PLAN PROTOTYPE 1 EXHIBIT 99.B14.(a) KEMPER RETIREMENT PLAN PROTOTYPE A Keogh/Corporate Retirement Plan for Professionals and Small Corporations THE KEMPER RED BOOK 2 TABLE OF CONTENTS CHOOSING YOUR PLAN................................... SECTION 1 PLAN INSTALLATION FORMS.............................. SECTION 2 PARTICIPANT RECORDS ................................. SECTION 3 PLAN DOCUMENT ....................................... SECTION 4
3 CHOOSING YOUR PLAN RETIREMENT PLANNING SOLUTIONS THAT BENEFIT BOTH YOU AND YOUR EMPLOYEES Providing for retirement is an increasing concern for employers, as well as employees. With a shrinking work force, employers will have to be more competitive than ever to attract a qualified staff. The rising costs of traditional pension plans, however, can be a significant financial drain on a company's profits. So how can a company remain competitive and not risk its bottom line? Many employers have discovered that defined contribution plans such as Money Purchase and Profit Sharing plans provide a viable solution that can benefit both the company and its employees. FIND OUT IF ONE OF THESE PLANS IS RIGHT FOR YOU... With the variety of retirement plans available today, it's often difficult to know which one is best for your company's needs. If you're a sole proprietor, independent contractor, owner of a small business or in private practice, with few or no employees, and are looking for a way to save for retirement and reduce your tax liabilities, consider one of these plans. PROFIT SHARING PLAN A profit sharing plan is just that - a plan that enables the employees to participate in the profits of the company. The flexibility of contribution limits and the relative ease of maintenance make profit sharing plans an attractive alternative for both employers and employees. A profit sharing plan allows employees to participate in the company's success, thereby giving further incentive for employee productivity and loyalty. More profits mean higher contributions, up to legal limits. MONEY PURCHASE PLAN A money purchase plan shares many of the same advantages and features of a profit sharing plan, but has a higher contribution level. It has the same eligibility requirements, tax benefits and distribution choices. The difference is in the contribution limits and requirements. - Allows for higher contribution levels - Contribution levels are fixed Because there is a fixed contribution formula, required contributions can be easily computed and budgeted. Once a percentage has been determined, contributions are mandatory each year, and for the same percentage level - regardless of whether the company is profitable that year. Failure to contribute the required amount in a year could result in stiff tax penalties, and jeopardize the qualified status of the plan.
- ------------------------------------------------------------------------------------------------------------ TYPE OF PLAN PROFIT SHARING MONEY PURCHASE COMBINATION - ------------------------------------------------------------------------------------------------------------ TYPE OF CONTRIBUTION Flexible Fixed Flexible/Fixed - ------------------------------------------------------------------------------------------------------------ MAXIMUM ANNUAL 15% of 25% of 25% of CONTRIBUTION LIMIT Eligible Payroll Eligible Payroll Eligible Payroll - ------------------------------------------------------------------------------------------------------------ PARTICIPANT 25% of Compensation 25% of Compensation 25% of Compensation ANNUAL LIMIT not to Exceed $30,000 not to Exceed $30,000 not to Exceed $30,000 - ------------------------------------------------------------------------------------------------------------
4 COMBINED MONEY PURCHASE AND PROFIT SHARING PLAN Many employers like the idea of making contributions as high as 25% of eligible payroll, but are not comfortable committing to this every year. Fortunately, the IRS allows a combination or "paired" plan that gives the "best of both worlds." - Higher contribution levels of a money purchase plan - Flexible contribution limits of a profit sharing plan Paired plans combine the flexibility of a profit sharing plan with the higher contribution limits of a money purchase pension plan. A combined plan lets you enjoy control over a portion of the contribution similar to a profit sharing plan, but also offers the higher contribution limits found in a money purchase plan. Employees are assured that they will be provided with at least some level of retirement benefit. Typically, if an employer wishes to maximize the contribution, he or she would set the money purchase plan contribution at 10%, which would be mandatory each year, and allow the remaining 15% to be a part of the profit sharing plan, which is contingent on whether or not the company can afford it. That way, the employer is only locked into a 10% mandatory contribution rather than 25%. THE KEMPER RED BOOK KEOGH PROTOTYPE The Plan Document, contained in the last section of this booklet, provides the plan parameters for self-employed partnerships and corporations, and has been amended for the Tax Reform Act of 1986. Investors Fiduciary Trust Company (IFTC) will act as trustee for a plan using Kemper mutual funds. Kemper Investors Life Insurance Company (KILICO) annuities do not require a trustee. Before any contributions can be made to the plan, an Adoption Agreement (see section entitled "Plan Installation Forms") that outlines the plan parameters must be signed and dated. ELIGIBILITY Since the plan is employer-sponsored, the employer has the ability to establish minimum requirements for plan participation, generally based on age and years of service. As the employer, you decide how flexible plan participation will be, keeping within certain minimum requirements set by the IRS. Of course, eligibility requirements may be lower. Those who must be eligible for the plan are: - Any employee over age 21, AND - Employees who have had at least two years of service, AND - Employees who are not covered by a collective bargaining agreement. All employees (including leased and control group) who fulfill eligibility requirements, except for union employees covered under a collective bargaining agreement, are eligible participants in the plan. Entry dates for the plan are semi-annual. CONTRIBUTIONS One of the most important benefits of the plan is that the employer's contributions are a tax-deductible business expense. This special tax treatment makes it one of the few remaining tax shelters available. All plan participants employed on the last day of the plan year will share in the employer's contribution regardless of the hours worked during the plan year. Terminated participants will share in the employer's contribution only if they completed at least 501 hours of service during the plan year in which they terminated. Compensation is defined as an employee's total gross salary earned while the employee was actually a plan participant. Rollover contributions are allowed if the Employer wishes. Employee after-tax contributions are not allowed under this plan document. 5 CHOOSING YOUR PLAN DISTRIBUTIONS Terminated participants will receive their distribution on the 60th day of the plan year following separation of service. If the value of the account is more than $3,500 the participant must agree to take his or her money, and the participant can choose lump sum or installment payments. If the account value is $3,500 or less, the participant receives a lump sum payment. Participants are always 100% vested. Kemper Financial Services, Inc. will provide self-trusteed, variable documents which allow you to vary the plan parameters. Please contact your representative or Kemper Financial Services, Inc. at 1-800-621-5027. QUESTIONS AND ANSWERS Q. WHAT IS THE DEADLINE FOR ESTABLISHING A RETIREMENT PLAN? A. The plan must be established on or before the last day of the taxable year for which a deduction is to be taken. Q. DOES "ESTABLISH" MEAN THERE MUST BE ASSETS IN THE PLAN? A. Yes, at least $250 is required to open and establish the account in the tax year. The balance of the contribution must comply with tax deadlines. Q. WHAT IS THE DEADLINE FOR MAKING CONTRIBUTIONS ONCE THE PLAN IS ESTABLISHED? A. Contributions for any year must be made before the latest possible filing date for the Employer's federal income tax return for that year, including extensions. Q. SHOULD I BE BONDED? A. Yes, Employers should be bonded if the plan covers employees other than the owner(s) and the owner(s) spouse; the bond must cover at least 10% of the plan's assets; the face value of the bond may not be less than $1,000. Q. WHAT IS MEANT BY "YEAR OF SERVICE" WHEN DETERMINING WHO IS ELIGIBLE TO PARTICIPATE IN THE PLAN? A. "Year of Service" for purposes of eligibility means 12 consecutive months during which an employee completes at least 1,000 hours of service. The 12-month period begins on the day an employee performs his or her first hour of service. Q. WHEN DOES AN EMPLOYEE PARTICIPATE ONCE ELIGIBILITY REQUIREMENTS ARE MET? A. The employee becomes a Participant on the first day of the Plan Year, or the first day of the seventh month of the Plan Year, following satisfaction of the eligibility requirement. For example, if the Plan Year is a calendar year and an employee satisfies the eligibility requirement on March 1, he or she will enter the plan on July 1. Q. CAN THE EMPLOYEE CONTRIBUTE UNDER THIS PLAN? A. Pre-tax employee salary reduction contributions may be allowed, but only if you elect to include the 401(k) arrangement found in Article XIII of the Profit Sharing Adoption Agreement. After-tax contributions are not allowed. Q. WHAT IS SOCIAL SECURITY INTEGRATION? A. When your overall retirement plan scheme combines Social Security with your private retirement plan, this is called integration. Integration allows you to take advantage of the Social Security tax payments you already make when designing your private retirement plan's formula. The result favors the highly paid employees because they receive a larger portion of the total contribution. Contribution formulas and worksheets for self-employed participants in integrated plans are available from Kemper Financial Services upon request. Q. WHAT IS THE COMPENSATION FOR A SOLE PROPRIETOR? A. If you are a sole proprietor or your business is a partnership, you must base contributions on earned income, which is defined as net profits minus the amount you contributed to the plan. Your net profits are shown on the Schedule C form for a sole proprietor, and the schedule K-1 form for a partnership. Contributions for all other employees are based on gross earnings actually paid for services rendered. 6 Q. WHAT DOES IT MEAN TO "AMEND AND RESTATE" A PLAN? A. To amend and restate your plan means you have updated your plan in its entirety by replacing the plan document with a new plan document. This may be necessary if your existing plan document prohibits plan investments with Kemper or because of changes in the laws governing qualified retirement plans. Many employers are now formally updating their plans to comply with the Tax Reform Act of 1986. These amendments must be retroactive to the first day of your 1987 plan year unless interim amendments were adopted for the 1987 and 1988 plan years. INVESTING YOUR PLAN ASSETS One of the most important decisions you have to make is where to invest your plan's assets. The better your plan's investment performance, the easier it will be for you and your employees to retire in comfort. You'll want to select investments with a broad range of objectives to meet the diverse investment needs of your employees, and take great care in choosing the company that will manage your plan's assets. ...WITH KEMPER That's why many plans like yours invest their plan assets with Kemper. Kemper Financial Services, Inc. has managed investments for over 40 years and has more than $67 billion in assets under management. Kemper offers a variety of investment products to fit almost every investment objective. Kemper's mutual funds and annuities provide investments to suit the needs of either the aggressive or the conservative investor. Employees can select the investments that best match their specific needs and requirements. Consider Kemper's experience and professional managers when choosing the investments for your plan. FUNDING THE PLAN ...WITH MUTUAL FUNDS The Employer completes the Employer Contribution Schedule. Each eligible employee completes an Employee Enrollment Form. All necessary forms and a check made payable to IFTC should be sent to: Investors Fiduciary Trust Company Attn: Retirement Plans P.O. Box 419356 Kansas City, MO 64141-6356 The IFTC Trustee fee is $12 per account, per participant, per year, with a $24 maximum charge per participant. ...WITH ANNUITIES A KILICO Enrollment Application is completed for each plan participant. Please call Policyholder Services for the proper forms at 1-800-554-5426. The check should be made payable to Kemper Investors Life Insurance Company and mailed to: Kemper Investors Life Insurance Company P.O. Box 95963 Chicago, IL 60694 There are no trustee fees when using KILICO products. 7 CHOOSING YOUR PLAN ...WITH UNIT INVESTMENT TRUSTS For a Kemper Capital Markets enrollment kit, please call Kemper Capital Markets at 1-800-621-5024. Applications and a check made payable to IFTC should be sent to: Investors Fiduciary Trust Company Attn: Retirement Plans P.O. Box 419430 Kansas City, MO 64141-6430 The IFTC Trustee fee is $12 per account, per participant, per year, with a $24 maximum charge per participant. To obtain additional prospectuses for any of the Kemper products, containing more complete information including management fees and expenses, please contact your representative or Kemper Financial Services, Inc. at 1-800-621-5027. Please read the prospectus carefully before you invest or send money. GETTING STARTED The next two sections, "Plan Installation Forms" and "Participant Records," provide the necessary forms to complete the installation of the plan. Please read the instructions at the beginning of each section carefully before completing the applicable forms. If you are a sole proprietor and do not have any covered employees, complete the Adoption Agreement only. The last section, "Plan Document," is provided for your reference only. 8 PLAN INSTALLATION FORMS GETTING STARTED COMPLETE THE FOLLOWING DOCUMENTS AND RETURN ORIGINALS TO THE APPROPRIATE ADDRESS SHOWN UNDER THE PRECEDING SECTION ENTITLED "FUNDING THE PLAN." REMEMBER TO RETAIN A PHOTOCOPY FOR YOUR RECORDS. ADOPTION AGREEMENT Complete the information requested ONLY for the particular type of plan you've selected (either profit sharing, money purchase or a combination). ENROLLMENT FORM Photocopy and complete an enrollment form for EACH eligible participant. SUMMARY PLAN DESCRIPTION CARD Complete this card ONLY if you have Employees. ASSET TRANSFER FORM Complete this form ONLY if there are existing plan assets. 9 "LINE-BY-LINE" INSTRUCTIONS FOR COMPLETING YOUR ADOPTION AGREEMENT - Specify the type of business entity adopting the plan by checking the appropriate box. - Enter the address of the business. This may be a home address if there is no separate business address. - Enter the Employer's Taxpayer Identification Number (TIN). If you do not presently have a TIN for your business, you should apply for one using IRS Form SS-4. Form SS-4 is available from Kemper Financial Services upon request. - Enter the name of the Employer on the blank line provided. If the Employer is a sole proprietor who does not have a formal business name, enter the name of the individual adopting the plan. ARTICLE I 1.17 (A) In most situations the Plan Year End will be December 31, but if the Employer operates on a fiscal year, then enter the appropriate date. (B) If item (b) is left blank, the Limitation Year will be the same as the Plan Year. 1.18 (A) If this Adoption Agreement is used to establish a new plan, rather than amend an older plan, check item l.18(a) and skip item 1.18(b). (B) Complete item 1.18(b) if this is a restatement of an older plan. ARTICLE II 2.01 (A) Check (1) or (2) to define the minimum age requirement (if any) that must be attained before an employee is eligible to participate in the plan. (B) Check (1), (2) or (3) to define the minimum service (if any) that must be completed before an employee is eligible to participate in the plan. The plan defines a Year of Service as a 12 consecutive month period in which the employee works 1,000 hours or more. The 12 consecutive month period begins on the date the employee first performs an Hour of Service and each anniversary thereof. ARTICLE III 3.01 If this is a MONEY PURCHASE PENSION PLAN, indicate the base contribution rate in the first blank. The base contribution rate must equal or exceed 3%. If the plan will be integrated with Social Security, enter the integration rate in the second blank and complete the integration level section. 3.04 If this is a PROFIT SHARING PLAN and the contribution allocation will be integrated with Social Security, complete the integration level section 13.00. If this is a PROFIT SHARING PLAN, check here if you wish to include employee salary deferral contributions. If you do NOT want to allow employee salary deferral contributions, skip this item and go directly to the "Effective Date Addendum" of Article V. ARTICLE XIII 13.00 If this is a Profit Sharing Plan, check here if you wish to include employee salary deferral contributions. If you do not want to allow employee salary deferral contributions, skip this item and go directly to the "Effective Date Addendum." 13.05 Enter a date, which is no later than April 15th, by which a participant must notify you if he or she has exceeded the dollar limit for employee salary deferral contributions. For administrative ease, March 1 is recommended. 13.08(A) Leave blank and skip to item 13.09 if the Employer will not make regular matching contributions to the plan. Check 13.08(a) if the Employer intends to match the salary deferral contributions of ALL participants. (B) Check 13.08(b) if Highly Compensated Employees will not receive the Employer's regular matching contribution. (C) Enter the amount of the Employer's matching contribution on the line provided. Note that the employer is REQUIRED to make this matching contribution each year. (D) If 13.08(d) is left blank, all of a participant's salary deferral contributions will be matched by the Employer. Enter a dollar amount and/or percentage on the blank lines provided to limit the salary deferral contributions eligible for the matching contribution. 13.09(A) Leave blank and skip to item 13.12 if the Employer will not make Qualified Matching Contributions to the Plan. Check 13.09(a) if the Employer intends to contribute Qualified Matching Contributions for ALL participants. 10 PLAN INSTALLATION FORMS (B) Check 13.09 (b) if Highly Compensated Employees will not receive the Qualified Matching Contribution. (C) Enter the amount of the Employer's Qualified Matching Contribution on the line provided. Note that the employer is REQUIRED to make this Qualified Matching Contribution each year. (D) If (d) is left blank, all of a participant's salary deferral contributions will be eligible for the qualified matching contribution. Enter a dollar amount and/or percentage on the blank lines provided to limit the salary deferral contributions eligible for the Qualified Matching Contribution. 13.12(A) Check 13.12 (a) if the Employer intends to contribute Qualified Nonelective Contributions for ALL participants. (B) Check 13.12 (b) if Highly Compensated Employees will not receive Qualified Nonelective Contributions. (C) If (c) is checked, a participant's share of the qualified nonelective contribution will be based on the participant's total compensation. (D) If (d) is checked, only compensation up to the stated dollar amount will be used to calculate a participant's share of the qualified nonelective contribution. SPECIAL RULES FOR SALARY REDUCTION AGREEMENTS (A)(1) Check (1) and enter a percentage on the line provided if you wish to establish a maximum deferral percentage. (2) Check (2) and enter a percentage on the line provided if you wish to establish a minimum deferral percentage. (3) Check (3) if no restrictions are imposed on a participant's salary reduction contributions. (B) Check (1), (2), (3) OR (4) to restrict when a participant may stop their salary deferral contributions. (C) Check (1), (2), (3) OR (4) to indicate when a participant may resume making salary deferral contributions. (D) Check (1), (2), (3) OR (4) to indicate how frequently a participant may change the amount of his or her salary deferral contributions. ARTICLE V EFFECTIVE DATE ADDENDUM If you are restating an older plan, complete only if the effective date of the restatement is before January 1,1989 AND these specific provisions have changed as a result of the restatement. If a provision listed below has changed, the date on which that provision begins to apply may be later than your restated effective date if you check the applicable box. Indicate the later effective date by inserting a date on the line provided. If this is a NEW PLAN, skip the Effective Date Addendum and go directly to "Participation Agreement." PARTICIPATION AGREEMENT If the Employer has an ownership interest in another business which results in a controlled group of businesses as defined by the Internal Revenue Code, then each related business must sign the Participation Agreement as a Participating Employer. The "Signatory Employer" is the Employer who also signs the Execution Page of the adoption agreement. If the employer sponsoring this plan has no ownership interest in any other business, skip the Participation Agreement and go directly to "Execution Page." EXECUTION PAGE The Employer should sign and date the appropriate Adoption Agreement. The signature of the sole proprietor, general partner or corporate officer belongs on the line above "Employer." Whoever witnesses the Employer's signature should sign on the line beside "Attest." The Dealer/Agent should complete the dealer information section. 11 ADOPTION AGREEMENT #001 STANDARDIZED PROFIT SHARING/401(K) PLAN (PAIRED PROFIT SHARING PLAN) THE EMPLOYER IS A: / / sole proprietorship / / partnership / / corporation EMPLOYER'S ADDRESS: ________________________________________________________________________________ Street Address City State Zip Code EMPLOYER'S FEDERAL TAXPAYER IDENTIFICATION NUMBER (TIN):________________________ THE EMPLOYER HEREBY ESTABLISHES THE ____________________________________________ Name of Employer PROFIT SHARING PLAN in accordance with all the terms of the KEMPER RETIREMENT PLAN PROTOTYPE KEOGH/CORPORATE AND TRUST AGREEMENT attached hereto, which the Employer has received, read, accepts and hereby incorporates into this STANDARDIZED PROFIT SHARING/401(K) PLAN ADOPTION AGREEMENT #001 with the following additional terms and conditions: ARTICLE I DEFINITIONS 1.17 PLAN YEAR/LIMITATION YEAR / / (A) Plan Year means the 12 consecutive month period ending ________. / / (B) The Limitation Year is the Plan Year unless the following month is designated as the last month of the limitation year: ________. 1.18 EFFECTIVE DATE (CHOOSE ONE) / / (A) NEW PLAN. The Effective Date of the Plan is the first day of the Plan Year in which the Plan is adopted. / / (B) RESTATED PLAN. The restated Effective Date is _________. This Plan is a substitution and amendment of an existing retirement plan originally established _____________. [Note: If the restated Effective Date is earlier than January 1, 1989, see the Effective Date Addendum immediately preceding the Participation Agreement.] ARTICLE II EMPLOYEE PARTICIPANTS 2.01 ELIGIBILITY ELIGIBILITY CONDITIONS. To become a Participant in the Plan, an Employee must satisfy the following eligibility conditions: (A) Age requirement. (Choose one) / / (1) Age __________ (specify age, not exceeding 21). / / (2) No age requirement. (B) Service requirement. (Choose one) / / (1) One Year of Service. / / (2) Two Years of Service without an intervening Break in Service. See Section 2.03(a) of the Plan. / / (3) No service requirement. ENTRY DATE. Any Employee other than a Member of a Collective Bargaining Unit will become a Participant on the Plan Entry Date (if employed on that date) coincident with or immediately following the date the Employee completes the eligibility conditions described in Options (a) and (b) of this Adoption Agreement Section 2.01. 12 PLAN INSTALLATION FORMS ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES 3.01 AMOUNT The amount of the Employer's annual contribution to the Trust will equal the amount (or additional amount) the Employer may from time to time deem advisable, irrespective of whether the Employer has Net Profits. 3.04 CONTRIBUTION ALLOCATION Profit Sharing plan - Employer contributions for the plan year will be allocated to participants' accounts as follows: [NOTE: IF THE EMPLOYER WILL NOT BE INTEGRATING THE PLAN WITH SOCIAL SECURITY OR ADOPTING THE PAIRED MONEY PURCHASE PENSION PLAN #002, SKIP STEPS ONE, TWO AND THREE BELOW AND GO DIRECTLY TO STEP FOUR.] STEP ONE: Contributions will be allocated to each participant's account in the ratio that each participant's total compensation bears to all participants' total compensation, but not in excess of 3% of each participant's total compensation. STEP TWO: Any contributions remaining after the allocation in Step One will be allocated to each participant's account in the ratio that each participant's compensation for the plan year in excess of the integration level bears to the excess compensation of all participants, but not in excess of 3%. STEP THREE: Any contributions remaining after the allocation in Step Two will be allocated to each participant's account in the ratio that the sum of each participant's total compensation plus excess compensation bears to the sum of all participant's total compensation plus total excess compensation, but not in excess of the profit-sharing maximum disparity rate. STEP FOUR: Any remaining employer contributions or forfeitures will be allocated to each participant's account in the ratio that each participant's total compensation for the plan year bears to all participants' total compensation for that year. The integration level shall be equal to the amount elected by the employer in the Adoption Agreement. The taxable wage base (TWB) is the maximum amount of earnings which may be considered wages for a year under Section 3121(a)(1) of the Code in effect as of the beginning of the plan year. Compensation shall mean compensation as defined in Section 1.12 of the plan. The integration level is equal to (Choose one): / / Taxable Wage Base (TWB) / / $_______ (a dollar amount less than the TWB) / / ________ % of TWB (not to exceed 100%) The maximum Profit Sharing disparity rate is equal to the lesser of: (a) 2.7% or (b) the applicable percentage determined in accordance with the table below:
IF THE INTEGRATION LEVEL: IS MORE THAN: BUT NOT MORE THAN: THE APPLICABLE PERCENTAGE IS: - ------------------------ ------------------ ----------------------------- $0 X(*) 2.7% X(*) of TWB 80% of TWB 1.3% 80% of TWB Y(**) of TWB 2.4%
* X = the greater of $10,000 or 20% of the TWB. **Y = any amount more than 80% of the TWB but less than 100% of the TWB. If the integration level used is equal to the TWB, the applicable percentage is 2.7%. 3.17 DEFINED BENEFIT PLAN LIMITATION If a Participant is or has ever been a participant in a defined benefit plan maintained by the Employer: ________________________________________________________________ ________________________________________________________________ (In the space above, provide language which will satisfy the 1.0 limitation under Code Section 415(e). Such language must preclude employer discretion.) 13 ARTICLE XIII 401(k) ARRANGEMENT 13.00 / / CHECK THIS BOX IF THIS PLAN IS A 401(k) PLAN AND COMPLETE THE FOLLOWING: 13.01 ELIGIBILITY If the service requirement elected by the Employer at Section 2.01 of this Adoption Agreement is two (2) years, an Employee's eligibility to make elective deferrals will be determined as if the service requirement at Section 2.01 were one (1) year. 13.05 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS Participants who claim Excess Elective Deferrals for the preceding taxable year must submit their claims in writing to the plan administrator by ___________________________________________________. Specify a date no later than April 15 13.06 ACTUAL DEFERRAL PERCENTAGE TEST Qualified Matching Contributions and Qualified Nonelective Contributions may be taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentages. In determining Elective Deferrals for the purpose of the ADP test, the employer shall include Qualified Matching Contributions and Qualified Nonelective Contributions under this plan or any other plan of the employer, as provided by regulations under the Code. The amount of Qualified Matching Contributions taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentage, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be all such Qualified Matching Contributions. The amount of Qualified Nonelective Contributions taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentages, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be all such Qualified Nonelective Contributions. 13.08 MATCHING CONTRIBUTIONS The employer will make Matching Contributions to the plan on behalf of [ELECT (a) or (b) plus (c) and/or (d)]: / / (A) All participants. / / (B) All participants who are Non Highly Compensated Employees who make Elective Deferrals to the plan. / / (C) The Employer shall contribute and allocate to each participant's Matching Contribution account an amount equal to [______] percent of the participant's Elective Deferrals. / / (D) The Employer shall not match amounts provided above in excess of [$______], or in excess of [______] percent, of the participant's Compensation. 13.09 QUALIFIED MATCHING CONTRIBUTIONS The Employer will make Qualified Matching Contributions to the plan on behalf of [ELECT (a) or (b) plus (c) and/or (d)]: / / (A) All participants. / / (B) All participants who are Non Highly Compensated Employees who make Elective Deferrals to the plan. / / (C) The Employer shall contribute and allocate to each participant's Qualified Matching Contribution account an amount equal to [_____] percent of the participant's Elective Deferrals. / / (D) The Employer shall not match amounts provided above in excess of [$________], or in excess of [_______] percent, of the participant's Compensation. 14 PLAN INSTALLATION FORMS 13.10 LIMITATIONS ON MATCHING CONTRIBUTIONS In computing the Average Contribution Percentage, the Employer shall take into account, and include as Contribution Percentage Amounts Elective Deferrals and Qualified Nonelective Contributions under this plan or any other plan of the Employer, as provided by regulations. The amount of Qualified Nonelective Contributions that are taken into account as Contribution Percentage Amounts for purposes of calculating the Average Contribution Percentage, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be an amount determined by the Employer. The amount of Elective Deferrals taken into account as Contribution Percentage Amounts for purposes of calculating the Average Contribution Percentage, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be an amount determined by the Employer. 13.12 QUALIFIED NONELECTIVE CONTRIBUTIONS The Employer will make Qualified Nonelective Contributions to the plan. If the Employer does make such contributions to the plan, then the amount of such contributions for each Plan Year shall be an amount determined by the Employer. Allocation of Qualified Nonelective Contributions shall be made to the accounts of [ELECT ONE]: / / (A) All participants / / (B) Only Nonhighly Compensated participants Allocation of Qualified Nonelective Contributions shall be made [ELECT ONE]: / / (C) In the ratio that each participant's Compensation for the Plan Year bears to the total Compensation of all participants for such Plan Year. / / (D) In the ratio that each participant's Compensation not in excess of [$______] for the Plan Year bears to the total Compensation of all participants not in excess of [$______] for such Plan Year. SPECIAL RULES FOR SALARY REDUCTION AGREEMENTS The following rules and restrictions apply to an Employee's salary reduction agreement: (A) Limitation on Amount. The Employee's salary reduction contributions: (Choose at least one) / / (1) May not exceed _________% of Compensation for the Plan Year, subject to the annual additions limitation described in Part 2 of Article III of the Plan. / / (2) Based on percentages of Compensation must equal at least _________% of Compensation for the reduction period. / / (3) No maximum limitation other than the annual additions limitation. (B) An Employee may revoke, on a prospective basis, a salary reduction agreement: (Choose one) / / (1) Once during any Plan Year but not later than _________ of the Plan Year. / / (2) As of any Plan Entry Date. / / (3) As of the first day of any month. / / (4) Other (specify, but must be at least once per Plan Year). (C) An Employee who revokes his or her salary reduction agreement may file a new salary reduction agreement with an effective date: (Choose one): / / (1) No earlier than the first day of the next Plan Year. / / (2) As of any subsequent Plan Entry Date. / / (3) As of the first day of any month subsequent to the month in which he or she revoked an Agreement. / / (4) Other (specify, but must be at least once per Plan Year following the Plan Year of revocation). (D) A Participant may increase or may decrease, on a prospective basis, his salary reduction percentage or dollar amount: / / (1) As of the beginning of each payroll period. / / (2) As of the first day of each month. / / (3) As of any Plan Entry Date. / / (4) Other (specify, but must permit an increase or a decrease at least once per Plan Year). 15 ARTICLE V EFFECTIVE DATE ADDENDUM (RESTATED PLANS ONLY) The Employer must complete this addendum only if the restated Effective Date specified in Adoption Agreement Section 1.18 is earlier than January 1,1989, and if a different restated effective date applies to at least one of the provisions listed in this addendum. IDENTIFICATION OF SPECIAL EFFECTIVE DATES In lieu of the restated Effective Date in Adoption Agreement Section 1.18, the following Special Effective Dates apply: (Choose whichever elections apply) / / (A) COMPENSATION DEFINITION The Compensation definition of Section 1.12 (other than the $200,000 limitation) is effective for Plan Years beginning after ______. [Note: May not be effective later than the first day of the first Plan Year beginning after the Employer executes this Adoption Agreement to restate the Plan for the Tax Reform Act of 1986.] / / (B) ELIGIBILITY CONDITIONS The eligibility conditions specified in Adoption Agreement Section 2.01 are effective for Plan Years beginning after December 31, 1988. / / (C) CONTRIBUTION/ALLOCATION FORMULA The contribution formula elected under Adoption Agreement Section 3.01 is effective for Plan Years beginning after December 31, 1988. / / (D) ELIMINATION OF NET PROFITS The requirement for the Employer not to have net profits to contribute to this Plan is effective for Plan Years beginning after __________________. [Note: The date specified may not be earlier than December 31, 1985.] For Plan Years prior to the Special Effective Date, the terms of the Plan prior to its restatement under this Adoption Agreement will control for purposes of the designated provisions. 16 PLAN INSTALLATION FORMS PARTICIPATION AGREEMENT FOR PARTICIPATION BY RELATED GROUP MEMBERS (PLAN SECTION 1.30) The undersigned Employer, by executing this Participation Agreement, elects to become a Participating Employer in the ____________________________________________________________________ Name of Employer PROFIT SHARING PLAN as if the Participating Employer were a signatory to that Agreement. The Participating Employer accepts, and agrees to be bound by, all of the elections granted under the provisions of the Plan as made by ________________, the Signatory Employer to the Execution Page of the Adoption Agreement. 1. The Effective Date of the undersigned Employer's participation in the designated Plan is: _________________. 2. The undersigned Employer's adoption of this Plan constitutes: / / (A) the adoption of a new plan by the Employer. / / (B) the adoption of an amendment and restatement of a plan currently maintained by the Employer, identified as _________________________________________________________________ and having an original effective date of __________________________. Dated this ______ day of _______ ,19__. Attest:__________________________ By: ___________________________ Participating Employer ACCEPTANCE BY THE SIGNATORY EMPLOYER TO THE EXECUTION PAGE OF THE ADOPTION AGREEMENT AND BY THE TRUSTEE. Accepted:________________________ By:____________________________ Date Signatory Employer Accepted:________________________ Investors Fiduciary Trust Company Date By:____________________________ Authorized Signature EACH PARTICIPATING EMPLOYER MUST COMPLETE A SEPARATE PARTICIPATION AGREEMENT. TURN THE PAGE FOR IMPORTANT PLAN INFORMATION. 17 EXECUTION PAGE The Trustee, by executing this Adoption Agreement, accepts its position and agrees to all of the obligations, responsibilities and duties imposed upon the Trustee under this Plan and Trust. The Employer hereby agrees to the provisions of this Plan and Trust, and in witness of its agreement, the Employer by its duly authorized officers, has executed this Adoption Agreement on this _______ day of _________,19__. Attest:______________________________ By:__________________________________ Employer Investors Fiduciary Trust Company Accepted:____________________________ By:__________________________________ Date Authorized Signature USE OF ADOPTION AGREEMENT Failure to properly complete the elections in this Adoption Agreement may result in disqualification of the Employer's Plan. The 3-digit number assigned to this Adoption Agreement is solely for the Plan Sponsor's record keeping purposes and does not necessarily correspond to the plan number the Employer assigns to its plan for ERISA reporting purposes. The Plan Sponsor offers the following Paired Pension Plan with this Paired Profit Sharing Plan, identified by 3-digit Adoption Agreement number: 002. This Adoption Agreement may be used only in conjunction with Basic Plan Document 01. PLAN SPONSOR The Plan Sponsor identified on the first page of the basic plan document will notify all adopting Employers of any amendment to this Plan or of any abandonment or discontinuance by the Plan Sponsor of its maintenance of this Plan. For inquiries regarding the adoption of the Plan, the Plan Sponsor's intended meaning of any plan provisions or the effect of the opinion letter issued to the Plan Sponsor, please contact the Plan Sponsor at the following address and telephone number: Kemper Financial Services, Inc., 120 South LaSalle Street, Chicago, Illinois 60603, 1-800-621-1148. RELIANCE ON OPINION LETTER If the Employer does not maintain (and has never maintained) any plan other than this Plan and a Paired Pension Plan, it may rely on the Plan Sponsor's opinion letter covering this Plan for purposes of plan qualification. For this purpose, the Employer has not maintained another plan if this Plan, or the Paired Pension Plan, amended and restated that prior plan and the prior plan was the same type of plan as the restated plan. If the Employer maintains or has maintained another plan other than a Paired Pension Plan, including a welfare benefit fund, as defined in Code Section 419(e), which provides post- retirement medical benefits for key employees (as defined in Code Section 419A(d)(3)), or an individual medical account (as defined in Code Section 415(1)(2)), the Employer may not rely on this Plan's qualified status unless it obtains a determination letter from the applicable IRS Key District office. ============================================================================== FOR DEALER USE ONLY ______________________________________________________________________________ Name or Number of Dealer Address ______________________________________________________________________________ Name or Number of Dealer's Representative ______________________________________________________________________________ Representative's Phone Number ______________________________________________________________________________ Location of Dealer Office in Which Plan Opened ______________________________________________________________________________ Authorized Signature of Dealer Date 18 PLAN INSTALLATION FORMS ADOPTION AGREEMENT #002 STANDARDIZED MONEY PURCHASE PENSION PLAN (PAIRED PENSION PLAN) THE EMPLOYER IS A: / / sole proprietorship / / partnership / / corporation EMPLOYER'S ADDRESS:____________________________________________________________ Street Address City State Zip Code EMPLOYER'S FEDERAL TAXPAYER IDENTIFICATION NUMBER (TIN): ______________________ THE EMPLOYER HEREBY ESTABLISHES THE ___________________________________________ Name of Employer MONEY PURCHASE PENSION PLAN in accordance with all the terms of the KEMPER RETIREMENT PLAN PROTOTYPE KEOGH/CORPORATE and TRUST AGREEMENT attached hereto, which the Employer has received, read, accepts and hereby incorporates into this STANDARDIZED MONEY PURCHASE PENSION PLAN ADOPTION AGREEMENT #002 with the following additional terms and conditions: ARTICLE I DEFINITIONS 1.17 PLAN YEAR/LIMITATION YEAR / / (A) Plan Year means the 12 consecutive month period ending every __________. / / (B) The Limitation Year is the Plan Year unless the following month is designated as the last month of the limitation year: _______. 1.18 EFFECTIVE DATE (CHOOSE ONE) / / (A) NEW PLAN. The "Effective Date" of the Plan is the first day of the Plan Year in which the Plan is adopted. / / (B) RESTATED PLAN. The restated Effective Date is _________. This Plan is a substitution and amendment of an existing retirement plan originally established _____________. [Note: If the restated Effective Date is earlier than January 1, 1989, see the Effective Date Addendum immediately preceding the Participation Agreement.] ARTICLE II EMPLOYEE PARTICIPANTS 2.01 ELIGIBILITY ELIGIBILITY CONDITIONS. To become a Participant in the Plan, an Employee must satisfy the following eligibility conditions: / / (A) Age requirement: (Choose one) / / (1) Age ______ (specify age, not exceeding 21). / / (2) No age requirement. / / (B) Service Requirement: (Choose one) / / (1) One Year of Service. / / (2) Two Years of Service, without an intervening Break in Service. See Section 2.03(A) of the Plan. / / (3) No service requirement. ENTRY DATE. Any Employee other than a Member of a Collective Bargaining Unit will become a Participant on the Plan Entry Date (if employed on that date) coincident with or immediately following the date the Employee completes the eligibility conditions described in Options (a) and (b) of this Adoption Agreement Section 2.01. 19 ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES 3.01 AMOUNT The Employer will contribute for each participant who either completes more than 500 hours of service during the Plan Year, or is employed by the Employer on the last day of the Plan Year, an amount equal to ______% (base contribution percentage, not less than 3%) of each Participant's Compensation (as defined in Section 1.12 of the Plan) for the Plan Year, plus _________% (not to exceed the base contribution percentage by more than the lesser of: (1) the base contribution percentage, or (2) the maximum disparity rate of such Participant's Compensation in excess of the integration level. NOTE: IF THE EMPLOYER ALSO MAINTAINS PAIRED PROFIT SHARING PLAN #001, ONLY ONE OF THE PLANS MAY BE INTEGRATED. The integration level shall be equal to the amount elected by the Employer. The taxable wage base is the maximum amount of earnings which may be considered wages for a year under Section 3121(a)(1) of the Code in effect as of the beginning of the Plan Year. The integration level is equal to: (Choose one) / / Taxable Wage Base (TWB) / / $_________ (a dollar amount less than the taxable wage base) / / __________ % of TWB (not to exceed 100%) The maximum disparity rate is equal to the lesser of: (A) 5.7% (B) the applicable percentage determined in accordance with the table below.
IF THE INTEGRATION LEVEL: IS MORE THAN BUT NOT MORE THAN THE APPLICABLE PERCENTAGE IS - ------------------------- ----------------- ---------------------------- $0 X(*) 5.7% X(*) of TWB 80% of TWB 4.3% 80% of TWB Y(**) 5.4% (*) X = the greater of $10,000 or 20% of the TWB. (**) Y = any more than 80% of the TWB but less than 100% of the TWB.
If the integration level is equal to taxable wage base the applicable percentage is 5.7%. 3.17 DEFINED BENEFIT PLAN LIMITATION If a Participant is or has ever been a participant in a defined benefit plan maintained by the Employer: ______________________________________________________________________ ______________________________________________________________________ (In the space above, provide language which will satisfy the 1.0 limitation under Code Section 415(e). Such language must preclude Employer discretion.) EFFECTIVE DATE ADDENDUM (RESTATED PLANS ONLY) The Employer must complete this addendum only if the restated Effective Date specified in Adoption Agreement Section 1.18 is earlier than January 1, 1989, and a different restated effective date applies to at least one of the provisions listed in this addendum. IDENTIFICATION OF SPECIAL EFFECTIVE DATES. In lieu of the restated Effective Date in Adoption Agreement Section 1.18, the following Special Effective Dates apply: (Choose whichever elections apply) / / (A) COMPENSATION DEFINITION. The Compensation definition of Section 1.12 (other than the $200,000 limitation) is effective for Plan Years beginning after ____________. [Note: May not be effective later than the first day of the first Plan Year beginning after the Employer executes this Adoption Agreement to restate the Plan for the Tax Reform Act of 1986.] / / (B) ELIGIBILITY CONDITIONS. The eligibility conditions specified in Adoption Agreement Section 2.01 are effective for Plan Years beginning after December 31, 1988. / / (C) CONTRIBUTION/ALLOCATION FORMULA. The contribution formula elected under Adoption Agreement Section 3.01 is effective for Plan Years beginning after December 31, 1988. For Plan Years prior to the Special Effective Date, the terms of the Plan prior to its restatement under this Adoption Agreement will control for purposes of the designated provisions. 20 PLAN INSTALLATION FORMS PARTICIPATION AGREEMENT FOR PARTICIPATION BY RELATED GROUP MEMBERS (PLAN SECTION 1.30) The undersigned Employer, by executing this Participation Agreement, elects to become a Participating Employer in the _______________________________________________________________________________ Name of Employer MONEY PURCHASE PENSION PLAN as if the Participating Employer were a signatory to that Agreement. The Participating Employer accepts, and agrees to be bound by, all of the elections granted under the provisions of the Plan as made by _________, the Signatory Employer to the Execution Page of the Adoption Agreement. 1. The Effective Date of the undersigned Employer's participation in the designated Plan is: ___________________________________. 2. The undersigned Employer's adoption of this Plan constitutes: / / (A) The adoption of a new plan by the Employer. / / (B) The adoption of an amendment and restatement of a plan currently maintained by the Employer, identified as ______________________________________________________________________ and having an original effective date of ___________. Dated this ____ day of ______________, 19__. Attest: ________________________ By: ______________________________ Participating Employer ACCEPTANCE BY THE SIGNATORY EMPLOYER TO THE EXECUTION PAGE OF THE ADOPTION AGREEMENT AND BY THE TRUSTEE. Accepted: ______________________ By: _____________________________ Date Signatory Employer Accepted: ______________________ Investors Fiduciary Trust Company Date BY: _____________________________ Authorized Signature EACH PARTICIPATING EMPLOYER MUST COMPLETE A SEPARATE PARTICIPATION AGREEMENT. TURN THE PAGE FOR IMPORTANT PLAN INFORMATION. 21 EXECUTION PAGE The Trustee, by executing this Adoption Agreement, accepts its position and agrees to all of the obligations, responsibilities and duties imposed upon the Trustee under this Plan and Trust. The Employer hereby agrees to the provisions of this Plan and Trust, and in witness of its agreement, the Employer, by its duly authorized officers, has executed this Adoption Agreement on this __________ day of _______, 19__. Attest:________________________________ By:__________________________________ Employer Investors Fiduciary Trust Company Accepted:______________________________ By:__________________________________ Authorized Signature USE OF ADOPTION AGREEMENT Failure to properly complete the elections in this Adoption Agreement may result in disqualification of the Employer's Plan. The 3-digit number assigned to this Adoption Agreement is solely for the Plan Sponsor's record keeping purposes and does not necessarily correspond to the plan number the Employer assigns to its Plan for ERISA reporting purposes. The Plan Sponsor offers the following Paired Profit Sharing Plan with this Paired Pension Plan, identified by 3-digit Adoption Agreement number 001. This Adoption Agreement may be only used in conjunction with Basic Plan Document 01. PLAN SPONSOR The Plan Sponsor identified on the first page of the basic plan document will notify all adopting Employers of any amendment to this Plan or of any abandonment or discontinuance by the Plan Sponsor of its maintenance of this Plan. For inquiries regarding the adoption of the Plan, the Plan Sponsor's intended meaning of any plan provisions or the effect of the opinion letter issued to the Plan Sponsor, please contact the Plan Sponsor at the following address and telephone number: Kemper Financial Services, Inc., 120 South LaSalle Street, Chicago, Illinois 60603, 1-800-621-1148. RELIANCE ON OPINION LETTER If the Employer does not maintain (and has never maintained) any plan other than this Plan and a Paired Profit Sharing Plan, it may rely on the Plan Sponsor's opinion letter covering this Plan for purposes of plan qualification. For this purpose, the Employer has not maintained another plan if this Plan, or the Paired Profit Sharing Plan, amended and restated that prior plan and the prior plan was the same type of plan as the restated plan. If the Employer maintains or later adopts or has maintained another plan other than a Paired Profit Sharing Plan, including a welfare benefit fund, as defined in Code Section 419(e), which provides post-retirement medical benefits for key employees (as defined in Code Section 419A(d)(3)), or an individual medical account (as defined in Code Section 415(1)(2)), the Employer may not rely on this Plan's qualified status unless it obtains a determination letter from the applicable IRS Key District office. ============================================================================== FOR DEALER USE ONLY ______________________________________________________________________________ Name or Number of Dealer Address ______________________________________________________________________________ Name or Number of Dealer's Representative ______________________________________________________________________________ Representative's Phone Number ______________________________________________________________________________ Location of Dealer Office in Which Plan Opened ______________________________________________________________________________ Authorized Signature of Dealer Date 22 PLAN INSTALLATION FORMS EMPLOYEE ENROLLMENT FORM FOR MUTUAL FUNDS INSTRUCTIONS: 1. Complete this form for each participant. 2. Enclose a check for the sum of all contributions made payable to Investors Fiduciary Trust Company. 3. Deliver a prospectus(es) to each participant. (Participants should be provided with a prospectus for each fund in which they are invested.) Note: If you are enrolling more than five participants or if you are enrolling participants for a 401(k) plan, you should use the KemFlex Employer Master Account Application (Form-07) and a separate KemFlex Employee Enrollment Form (Form-36) for each employee. PARTICIPANT INFORMATION ______________________________________________________________________________ Name of Plan Date ______________________________________________________________________________ Participant Name ______________________________________________________________________________ Participant Social Security Number Participant Birthday ______________________________________________________________________________ Statement Mailing Address ______________________________________________________________________________ City State Zip Code INVESTMENT SELECTION FUND NAME AMOUNT $ _______________________________________ ______________________ _______________________________________ ______________________ _______________________________________ ______________________ TOTAL $ ______________________ THIS FORM SHOULD BE USED ONLY FOR MUTUAL FUND PURCHASES. TO FUND WITH ANNUITIES, CALL KILICO CUSTOMER SERVICE AT 1-800-554-5426 AND REQUEST FORM L-1004 (FORM L-1005 FOR 401(k) PLANS). TO FUND WITH UNIT INVESTMENT TRUSTS CONTACT UIT CUSTOMER SERVICE AT 1-800-422-2848 AND REQUEST A UIT RETIREMENT PLAN APPLICATION. 23 PLAN INSTALLATION FORMS ASSET TRANSFER FORM INSTRUCTIONS: This form is provided for your use in substituting the Kemper Red Book Keogh Retirement Plan Prototype for your present qualified defined contribution (profit sharing or money purchase pension plan). 1. Consult with your attorney or other tax advisor as to the consequences of such an amendment. 2. Contact the present custodian bank, trustee or insurance company to determine their requirements with respect to such transfer of assets. 3. Fill out the appropriate Kemper Red Book Keogh Retirement Plan Prototype Adoption Agreement and Employee Enrollment Form for Mutual Funds. Attach this Statement to it, and submit them to Investors Fiduciary Trust Company, P.O. Box 419356, Kansas City, MO 64141-6356. 4. This statement and a letter of acceptance will be sent to the former custodian, trustee or insurance company by IFTC. This statement should suffice as instruction with respect to transmitting the funds to Investors Fiduciary Trust Company, but the present custodian, trustee, or insurance company may ask you to use its own form or instructions, or impose additional requirements. 5. Indicate the total amount transferred on behalf of each participant in the "Total Account Balance" column opposite the name of each participant. We hope this information will be useful to you; if you have any questions, call Kemper's Sales Support Department at 1-800-621-5027. To:____________________________________________________________________________ Current Custodian, Trustee or Insurance Company _______________________________________________________________________________ Street Address _______________________________________________________________________________ City State Zip Code The undersigned Employer previously established a qualified retirement plan on ____________, 19____ described as: _______________________________________________________________________________ Indicate Plan Name - for example, ABC, Inc. Profit Sharing Plan The undersigned Employer has amended and restated the plan and named Investors Fiduciary Trust Company as a trustee of the Plan effective ___________, 19____. The undersigned employer hereby directs the above named custodian bank, trustee or insurance company now holding assets of the Plan to liquidate all said assets and transfer the proceeds directly to Investors Fiduciary Trust Company, P.O. Box 419356, Kansas City, MO 64141-6356, as trustee of the Plan, as amended and restated. The following is an accurate description of the allocations of Plan assets. If you are transferring any voluntary contributions, please notify us of each account balance. Participant Total Account Balance _______________________________________ _____________________________________ _______________________________________ _____________________________________ _______________________________________ _____________________________________ _______________________________________ _____________________________________ Employer's Signature Date AFTER MAKING A COPY FOR YOUR RECORDS, ATTACH THIS FORM TO THE ADOPTION AGREEMENT AND THE EMPLOYEE ENROLLMENT FORM FOR MUTUAL FUNDS (PREVIOUS PAGE). MAIL ALL FORMS TO INVESTORS FIDUCIARY TRUST COMPANY, P.O. BOX 419356, KANSAS CITY, MO 64141-6356. 24 PARTICIPANT RECORDS PARTICIPANT RECORDS The following forms allow you to complete the administrative details that are required of you as a plan sponsor. After they have been distributed to and completed by your employees, they should be kept on record in your files and should NOT be returned to Kemper. NOTICE TO INTERESTED PARTIES If you have employees, this notice should be posted with other labor relations information bulletins. BENEFICIARY FORMS Photocopy and distribute to EACH participant. Collect and file with other plan records. PRE-RETIREMENT NOTICE AND WAIVER Distribute to each affected participant (see instructions). Collect and file Waiver. DISTRIBUTION ELECTION FORM Photocopy and distribute ONLY to employees terminating employment. Collect and file with other plan records. 25 NOTICE TO INTERESTED PARTIES 1. Notice To: All Employees of ______________________________________________ Name of Employer 2. _______________________________ has ______________________________________ Name of Employer Adopted/Amended the plan described below on ______________________________________________ Date 3. Name of Plan _____________________________________________________________ 4. 3-Digit Plan Identification Number _______________________________________ 5. Opinion Letter Number / / PS-D257426a / / MP-D257427a 6. Sponsor: Kemper Growth Fund, Inc., 120 South LaSalle Street, Chicago, IL 60603 7. Employer's TIN __________________________________________________________ 8. Address of Employer _____________________________________________________ _________________________________________________________________________ 9. Address of Key Director having jurisdiction of plan _____________________ _________________________________________________________________________ 10. It ____________________ contemplated that the Plan will be submitted to is/is not the Internal Revenue Service for an advance determination as to whether or not it meets the qualification requirements of section 401 of the Internal Revenue Code with respect to its _______________________________ _________________________________________________________________________ Initial Qualification/Amendment 11. All Employees who have completed ___ Years of Service and attained age ___ are eligible to participate. 12. The IRS _________________ previously issued a determination letter with has/has not respect to the qualification of this Plan. 13. You have the right to submit to the Key District Director, at the above address, either individually or jointly with other interested parties, your comments as to whether this Plan meets the qualification requirements of the Internal Revenue Code. You may instead, individually or jointly with other interested parties, request the Department of Labor to submit, on your behalf, comments to the Key District Director regarding qualification of the Plan. If the Department declines to comment on all or some of the matters you raise, you may, individually, or jointly if your request was made to the Department jointly, submit your comments on these matters to the Key District Director. 26 PARTICIPANT RECORDS 14. The Department of Labor may not comment on behalf of interested parties unless requested to do so by the lesser of 10 Employees or 10 percent of the Employees who qualify as interested parties. The number of persons needed for the Department to comment with respect to this Plan is ______. If you request the Department to comment, your comment must in writing and must specify the matters upon which comments are requested, and must also include: (1) the information contained in items 2 through 9 of this Notice; and (2) the number of persons needed for the Department to comment. A request to the Department to comment should be addressed as follows: Administrator of Pension and Welfare Benefit Programs, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, DC 20216, Attn: 3001 Comment Request. 15. Comments submitted by you to the Key District Director must be in writing and received by him by _________________________________________________________________________ 75 days after adoption date However, if there are matters that you request the Department of Labor to comment upon on your behalf, and the Department declines, you may submit comments on these matters to the Key District Director to be received by him within 15 days from the time the Department notifies you that it will not comment on a particular matter, or by ___________________________, 75 days after adoption date whichever is later, but in no event later than ___________________________. 90 days after adoption date A request to the Department to comment on your behalf must be received by it by ___________________________ if you wish to preserve your right to 45 days after adoption date comment on a matter upon which the Department declines to comment, or by _____________________________ if you wish to waive that right. 55 days after adoption date 16. Detailed instructions regarding the requirements for notification of interested parties may be found in Sections 16, 17, and 18 of Revenue Procedure 92-6. Additional information concerning this __________________ adoption/amendment (including where applicable, an updated copy of the Plan and related Trust Agreement, a copy of the Adoption Agreement establishing the Plan, and copies of Section 16 of Revenue Procedure 92-6) is available during the hours of __________ for inspection and copying. (There is a nominal charge for copying and mailing.) 27 DESIGNATION OF BENEFICIARY ALL PARTICIPANTS MUST COMPLETE. RETURN TO YOUR EMPLOYER. _______________________________________________________________________________ Name of Plan Date _______________________________________________________________________________ Last Name First Name MI _______________________________________________________________________________ Social Security Number _______________________________________________________________________________ Date of Birth (month, day, year) Sex I hereby designate the person(s) named below as the beneficiary of my vested account(s) payable under the Plan by reason of my death. I UNDERSTAND THAT IF I DESIGNATE ANYONE OTHER THAN MY SPOUSE AS THE SOLE BENEFICIARY, THE SPOUSAL CONSENT PORTION OF THIS FORM MUST BE SIGNED IN THE PRESENCE OF A NOTARY PUBLIC OR A REPRESENTATIVE OF THE PLAN. _______________________________________________________________________________ Name of Beneficiary (Full given name) _______________________________________________________________________________ Relation to Participant _______________________________________________________________________________ Address (if different from Participant) If more than one person is named as beneficiary, any payments to which they may be entitled will be paid in equal shares to such of the designated persons as shall then be living; or if none, then pursuant to the terms of Section 8.02 of the Plan. I RESERVE THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNATION. I HEREBY REVOKE ALL PRIOR DESIGNATIONS (IF ANY) OF PRIMARY BENEFICIARIES AND CONTINGENT BENEFICIARIES. ____________________________________ ____________________________ Date of this Designation Signature of Participant CONSENT OF SPOUSE I, the undersigned spouse of the Participant named in the foregoing "Designation of Beneficiary," hereby consent to and accept the beneficiary designation, without regard to whether I survive or predecease my spouse. I understand this consent allows the beneficiary(ies) named above to be paid amounts which would otherwise be paid to me. This consent is irrevocable unless my spouse changes the designation. If my spouse changes the designation I understand I must file a similar consent to the new designation, or my consent is no longer effective. ___________________________________ ____________________________________ Date Signature of Spouse ___________________________________________________________________________ Signature of Witness Title COMPLETE AND RETURN TO EMPLOYER 28 PARTICIPANT RECORDS PRE-RETIREMENT SURVIVOR ANNUITY MEMORANDUM INSTRUCTIONS: This memorandum must be provided to married money purchase pension plan and certain profit sharing plan participants unless their spouse is the beneficiary of at least 50% of the participant's account balance. A participant should receive this memorandum during the Plan Year in which they turn age 32. They will have the right to waive it, with spousal consent, during the Plan Year in which the participant turns age 35. A married participant age 35 or older should immediately be given this memorandum and the Waiver of Pre-retirement Survivor Annuity form. ________________________________________________________________________ Plan Name of Employer PRE-RETIREMENT SURVIVOR ANNUITY. The Plan requires the Employer to distribute a pre-retirement survivor annuity to your surviving spouse if your death occurs before distributions have begun and you and your spouse are married during the one year period ending on the date of your death. Under the pre-retirement survivor annuity, your spouse will receive lifetime monthly annuity payments. The Employer will purchase the annuity contract from an insurance company using 50% of your vested account balance (including the proceeds, if any, of life insurance contracts purchased on your behalf under the Plan). The contract will be given to your surviving spouse as evidence of a right to receive the annuity payments from the insurance company. Generally, the Employer may not begin payment of the annuity prior to the date a participant would have reached age 65 without the surviving spouse's consent. However, the surviving spouse may elect to have distribution of the pre-retirement survivor annuity at any time following the participant's death. If, at the time of your death, 50% of your account balance is less than $3,500, the Employer will pay your spouse a lump sum payment instead of the annuity. WAIVER ELECTION. The Plan requires payment of the pre-retirement survivor annuity unless you have a valid waiver election in effect on the date of your death. To have a valid waiver you and your spouse must complete the waiver election form. YOUR WAIVER ELECTION IS NOT VALID UNLESS YOUR SPOUSE, DURING THE ELECTION PERIOD, ALSO CONSENTS IN WRITING TO YOUR BENEFICIARY DESIGNATION, UNLESS YOUR SPOUSE IS THE SOLE PRIMARY BENEFICIARY. Your waiver election is not valid unless you and your spouse make the election within the election period. The election period begins on the first day of the Plan Year immediately before your 35th birthday or, if later, the date you receive this notice. The election period ends on the date of your death. If you wish, you may waive the pre-retirement survivor annuity prior to the beginning of the election period. However, on the first day of the election period mentioned above, you and your spouse would have to complete a second waiver form. If you terminate employment, you may waive the pre-retirement survivor annuity at any time after the date of your termination. You may revoke or make a new waiver election as often as you like during the election period. You may revoke a waiver election without your spouse's consent, but your spouse would have to consent to a new waiver. A waiver election is valid only for the spouse consenting to the waiver. Therefore, you should inform the Employer of any change in your marital status. FINANCIAL EFFECT OF YOUR ELECTION. If you and your spouse do NOT waive the pre-retirement survivor annuity, the Employer will pay your surviving spouse the pre-retirement survivor annuity and pay the remaining value of the account to your designated beneficiary. If the Employer pays your spouse the annuity, the Plan does not need your spouse's consent to the beneficiary designation. Under a pre-retirement survivor annuity, your surviving spouse will receive lifetime income. Benefits will not continue to other beneficiaries after your spouse's death. Your surviving spouse can choose a lump sum or installment payments instead of the pre-retirement survivor annuity. If you and your spouse waive the pre-retirement survivor annuity, the Employer will pay your entire vested account balance to your designated beneficiary. The Plan generally requires payment of the death benefit in lump sum. If your beneficiary receives a lump sum payment, the Employer will provide the beneficiary a notice of the special tax benefits, if any, available for the distribution. If your vested account balance at the time of your death exceeds $3,500, your beneficiary may choose a lump sum or installment payments. Under the installment method, the Employer will continue payments from your account until the entire account has been depleted. Furthermore, your vested account balance will continue to earn investment income. If a vested account balance remains in the Plan at the time of your primary beneficiary's death, the Plan will pay the remaining account balance to your primary beneficiary's estate, unless your beneficiary designation directs otherwise. If you and your spouse waive the pre-retirement survivor annuity, your spouse must consent to the identity of the designated beneficiary but does not have to consent to the form of payment made to the beneficiary. PROCEDURE. If you and your spouse wish to have the pre-retirement survivor annuity apply, YOU DO NOT NEED TO MAKE ANY ELECTION. If you and your spouse do NOT wish to have the pre-retirement survivor annuity apply, sign the enclosed Waiver of Pre-retirement Survivor Annuity election form within the election period. We also have enclosed a Designation of Beneficiary Form. PARTICIPANTS SHOULD RETAIN THIS IN THEIR FILES 29 WAIVER OF PRE-RETIREMENT SURVIVOR ANNUITY MARRIED PARTICIPANTS MUST COMPLETE THIS FORM IF THEY WISH TO WAIVE PAYMENT OF A PRE-RETIREMENT SURVIVOR ANNUITY. RETURN TO YOUR EMPLOYER. __________________________________________________________________________ Plan Name of Employer I elect to waive payment of a pre-retirement survivor annuity if my death occurs before distributions have begun under the Plan. The Employer has given me an explanation of the terms of the Pre-retirement Survivor Annuity, my right to make this waiver election, the time period during which I may make this waiver election, and the financial effect of my election not to receive the Pre-retirement Survivor Annuity. I understand I may revoke this election at any time during the election period. ______________________________________ _______________________________________ Date Signature of Participant CONSENT OF SPOUSE I, the undersigned spouse of the Participant named above, consent to the Waiver of the Pre-retirement Survivor Annuity form of payment. I understand the terms of the Pre-retirement Survivor Annuity, my right not to consent to this waiver election, the time period during which my spouse and I may make this waiver election, and the financial effect of my election not to receive the Pre-retirement Survivor Annuity. I understand my consent is irrevocable unless my spouse revokes the waiver election. I further understand my consent is valid only if I consent, in writing, to my spouse's beneficiary designation or any change in my spouse's beneficiary designation, unless my spouse has designated me as sole primary beneficiary. ________________________________ ___________________________________________ Date Signature of Spouse ____________________________________________________________________________ Signature of Witness Title COMPLETE AND RETURN TO EMPLOYER 30 PARTICIPANT RECORDS DISTRIBUTION ELECTION PARTICIPANTS MUST COMPLETE THIS FORM ONLY IF THEIR ACCOUNT(S) IS OVER $3,500. RETURN TO YOUR EMPLOYER. _______________________________________________________________________ Plan Name of Employer A. INDICATE THE FORM OF DISTRIBUTION PAYMENT. I, the undersigned Participant, elect payment of my account balance in the following manner: (1) / / I elect to transfer my distribution directly to a Kemper IRA and defer taxes until I actually receive the money. (Complete a Kemper IRA application if electing this option.) (2) / / In a lump sum. (3) / / In a series of _______________________________ (monthly, quarterly, or annual) installments over ____ years. (4) / / In a qualified joint and survivor annuity contract. (5) / / I elect to postpone distribution until the age of 65. ___________________________________ __________________________________ Date Signature of Participant NOTE TO MARRIED MONEY PURCHASE PENSION PLAN AND CERTAIN PROFIT SHARING PLAN PARTICIPANTS: If you requested payment of your account balance in a form other than a qualified joint and survivor annuity, your spouse must consent by signing Section B. B. CONSENT OF SPOUSE I, __________________________, spouse of the Participant, hereby consent to the form of distribution payment elected above. I understand that by giving this consent I am giving up the right to receive annuity benefit payments which would otherwise be payable to me for my lifetime. I understand my consent is irrevocable unless my spouse changes the form of distribution payment. I understand any change is subject to my consent, unless my spouse elects to receive the qualified joint and survivor annuity. ___________________________________ ______________________________________ Date Signature of Participant ___________________________________ ______________________________________ Signature of Witness Title IMPORTANT NOTE: A PARTICIPANT MAY WAIVE A QUALIFIED JOINT AND SURVIVOR ANNUITY CONTRACT, AND A SPOUSE MAY CONSENT TO SUCH WAIVER PROVIDED THIS ELECTION IS MADE WITHIN 90 DAYS OF THE FIRST PLAN DISTRIBUTION. COMPLETE AND RETURN TO EMPLOYER 31 PLAN DOCUMENT RETIREMENT PLAN PROTOTYPE DOCUMENT The following Plan Document and Opinion Letters are part of your permanent plan records and may be consulted to reference specific plan provisions. 32 KEMPER RED BOOK KEOGH RETIREMENT PLAN PROTOTYPE TRUST AGREEMENT
TABLE OF CONTENTS ARTICLE I, DEFINITIONS 1.01 EMPLOYEE.............................................1 1.02 TRUSTEE..............................................1 1.03 PLAN ................................................1 1.04 ADOPTION AGREEMENT ..................................1 1.05 PLAN ADMINISTRATOR ..................................1 1.06 ADVISORY COMMITTEE...................................1 1.07 EMPLOYEE.............................................1 1.08 SELF-EMPLOYED INDIVIDUAL/OWNER-EMPLOYEE .............1 1.09 HIGHLY COMPENSATED EMPLOYEE..........................1 1.10 PARTICIPANT..........................................2 1.11 BENEFICIARY..........................................2 1.12 COMPENSATION.........................................2 1.13 EARNED INCOME .......................................3 1.14 ACCOUNT..............................................3 1.15 ACCRUED bENEFIT .....................................3 1.16 NONFORFEITABLE.......................................3 1.17 PLAN YEAR/LIMITATION YEAR............................3 1.18 EFFECTIVE DATE ......................................3 1.19 PLAN ENTRY DATE .....................................3 1.20 ACCOUNTING DATE .....................................3 1.21 TRUST................................................3 1.22 TRUST FUND ..........................................3 1.23 NONTRANSFERABLE ANNUITY .............................3 1.24 ERISA ...............................................3 1 25 CODE.................................................3 1 26 SERVICE .............................................3 1 27 HOUR OF SERVICE .....................................3 1.28 DISABILITY...........................................4 1.29 SERVICE FOR PREDECESSOR EMPLOYER ....................4 1.30 RELATED EMPLOYERS....................................4 1.31 LEASED EMPLOYEES ....................................5 1.32 SPECIAL RULES FOR OWNER-EMPLOYEES ...................5 1.33 TAXABLE WAGE BASE ...................................5 1.34 PAIRED PLANS ........................................5 1.35 MEMBER OF A COLLECTIVE BARGAINING UNIT ..............6 1.36 DESIGNATED INVESTMENT COMPANY .......................6 ARTICLE II, EMPLOYEE PARTICIPANTS 2.01 ELIGIBILITY..........................................6 2.02 YEAR OF SERVICE - PARTICIPATION .....................6 2.03 BREAK IN SERVICE - PARTICIPATION.....................6 2.04 PARTICIPATION UPON RE-EMPLOYMENT ....................6 2.05 CHANGE IN EMPLOYEE STATUS ...........................6 2.06 ELECTION NOT TO PARTICIPATE .........................6
33 PLAN DOCUMENT ARTICLE III, EMPLOYER CONTRIBUTIONS AND FORFEITURES 3.01 AMOUNT ..............................................7 3.02 DETERMINATION OF CONTRIBUTION .......................7 3.03 TIME OF PAYMENT OF CONTRIBUTION .....................7 3.04 RESERVED ............................................7 3.05 ACCRUAL OF BENEFIT ..................................7 3.06 .....................................................7 3.07 .....................................................7 3.08 .....................................................7 3.09 .....................................................7 3.10 .....................................................8 3.11 .....................................................8 3.12 .....................................................8 3.13 .....................................................8 3.14 .....................................................8 3.15 LIMITATIONS ON ALLOCATIONS ..........................8 3.16 SPECIAL ALLOCATION LIMITATION .......................9 3.17 DEFINED BENEFIT PLAN LIMITATION .....................9 3.18 DEFINITIONS - ARTICLE III ........................9-11 ARTICLE IV, PARTICIPANT CONTRIBUTIONS 4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS ............11 4.02 PARTICIPANT DEDUCTIBLE CONTRIBUTIONS ...............11 4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS .................11 4.04 PARTICIPANT CONTRIBUTION - FORFEITABILITY...........12 4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION .12 4.06 PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT..........12 ARTICLE V, TERMINATION OF SERVICE - PARTICIPANT VESTING 5.01 NORMAL RETIREMENT AGE ..............................12 5.02 VESTING ............................................12 ARTICLE VI, TIME AND METHOD OF PAYMENT OF BENEFITS 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT ..............13-15 6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT ............15-17 6.03 BENEFIT PAYMENT ELECTIONS...........................17 6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES ...............................17-19 6.05 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY ...................................19 6.06 WAIVER ELECTION - PRE-RETIREMENT SURVIVOR ANNUITY ................................19-20 6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS.......20 ARTICLE VII, TRUSTEE, POWERS AND DUTIES 7.01 INVESTMENT OF TRUST ASSETS .........................21 7.02 VOTING AND OTHER ACTION ............................21 7.03 REPORTS OF THE TRUSTEE AND EMPLOYER ................21 7.04 TRUSTEE FEES AND EXPENSES OF THE ACCOUNT ...........21 7.05 CONCERNING THE TRUSTEE .............................22 7.06 AMENDMENT ..........................................22 7.07 RESIGNATION OR REMOVAL OF TRUSTEE...................22 7.08 TERMINATION OF TRUST ...............................22 7.09 MISCELLANEOUS ......................................22 ARTICLE VIII, PARTICIPANT ADMINISTRATIVE PROVISIONS 8.01 BENEFICIARY DESIGNATION ............................23 8.02 NO BENEFICIARY DESIGNATION..........................23 8.03 PERSONAL DATA TO COMMITTEE..........................23 8.04 ADDRESS FOR NOTIFICATION............................23 8.05 ASSIGNMENT OR ALIENATION ...........................23 8.06 NOTICE OF CHANGE IN TERMS ..........................24
34 8.07 LITIGATION AGAINST THE TRUST .......................24 8.08 INFORMATION AVAILABLE...............................24 8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS ............24 8.10 PARTICIPANT DIRECTION OF INVESTMENT ................24 ARTICLE IX, ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANT'S ACCOUNTS 9.01 MEMBERS' COMPENSATION, EXPENSES ....................25 9.02 TERM ...............................................25 9.03 POWERS .............................................25 9.04 GENERAL ............................................25 9.05 FUNDING POLICY .....................................25 9.06 MANNER OF ACTION ...................................25 9.07 INTERESTED MEMBER ..................................25 9.08 INDIVIDUAL ACCOUNTS ................................25 9.09 VALUE OF PARTICIPANT'S ACCRUED BENEFIT .............26 9.10 ALLOCATIONS AND DISTRIBUTION OF NET INCOME GAIN OR lOSS .......................................26 9.11 INDIVIDUAL STATEMENT................................26 9.12 ACCOUNT CHARGED ....................................26 9.13 MISSING BENEFICIARY ................................26 ARTICLE X, PROVISIONS RELATING TO INSURANCE 10.01 INSURANCE BENEFIT OR ANNUITY ......................27 10.02 FORM OF CONTRACT AND PREMIUM ......................27 10.03 LIMITATION OF LIFE INSURANCE PROTECTION ...........27 ARTICLE XI, MISCELLANEOUS 11.01 EVIDENCE ..........................................28 11.02 NO RESPONSIBILITY FOR EMPLOYER ACTION .............28 11.03 FIDUCIARIES NOT INSURERS ..........................28 11.04 WAIVER OF NOTICE ..................................28 11.05 SUCCESSORS.........................................28 11.06 WORD USAGE ........................................28 11.07 EMPLOYER'S RIGHT TO PARTICIPATE....................28 11.08 EMPLOYMENT NOT GUARANTEED .........................28 ARTICLE XII, EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION 12.01 EXCLUSIVE BENEFIT .................................29 12.02 AMENDMENT BY EMPLOYER..............................29 12.03 AMENDMENT BY PLAN SPONSOR..........................30 12.04 DISCONTINUANCE.....................................30 12.05 MERGER/DIRECT TRANSFER.............................30 12.06 TERMINATION........................................31 ARTICLE XIII, CODE SECTION 401(k) ARRANGEMENTS 13.01 ELIGIBILITY........................................32 13.02 SALARY REDUCTION AGREEMENT ........................32 13.03 DEFINITIONS ....................................32-33 13.04 ELECTIVE DEFERRALS - CONTRIBUTION LIMITATION ......33 13.05 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS ......33-34 13.06 ACTUAL DEFERRAL PERCENTAGE TEST ...................34 13.07 DISTRIBUTION OF EXCESS CONTRIBUTIONS...............35 13.08 MATCHING CONTRIBUTIONS ............................35 13.09 QUALIFIED MATCHING CONTRIBUTIONS ..................35 13.10 LIMITATIONS ON MATCHING CONTRIBUTIONS ..........35-36 13.11 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS ....36 13.12 QUALIFIED NONELECTIVE CONTRIBUTIONS ...............36 13.13 DISTRIBUTION REQUIREMENTS..........................37
35 PLAN DOCUMENT ARTICLE I DEFINITIONS 1.01 "EMPLOYER" means each employer who adopts this Plan by executing an Adoption Agreement. 1.02 "TRUSTEE" means Investors Fiduciary Trust Company. 1.03 "PLAN" means the retirement plan established or continued by the Employer in the form of this Agreement, including the Adoption Agreement which the Employer has executed. 1.04 "ADOPTION AGREEMENT" means the document executed by the Employer and the Trustee by which the Employer establishes or continues this Plan. 1.05 "PLAN ADMINISTRATOR" is the Employer unless the Employer designates another person to hold the position of Plan Administrator. In addition to his other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under ERISA with respect to this Agreement. 1.06 "ADVISORY COMMITTEE" means the Employer's Advisory Committee as from time to time constituted. 1.07 "EMPLOYEE" means any employee of the employer maintaining the Plan or of any other employer required to be aggregated with such employer under Code Section 4l4(b), (c), (m) or (o). The term employee shall also include any leased employee deemed to be an employee of any employer described in the previous paragraph as provided in Code Section 4l4(n) or (o). 1.08 "SELF-EMPLOYED INDIVIDUAL/OWNER-EMPLOYEE." "Self-Employed Individual" means an individual who has Earned Income (or who would have had Earned Income but for the fact that the trade or business did not have net earnings) for the taxable year from the trade or business for which the Plan is established. "Owner-Employee" means a Self-Employed Individual who is the sole proprietor in the case of a sole proprietorship. If the Employer is a partnership, "Owner-Employee" means a Self-Employed Individual who is a partner and owns more than 10% of either the capital or profits interest of the partnership. 1.09 "HIGHLY COMPENSATED EMPLOYEE" means an Employee who, during the Plan Year or during the preceding 12-month period: (A) is a 5% owner of the Employer (applying the constructive ownership rules of Code Section 318, and applying the principles of Code Section 318, for an unincorporated entity); (B) has Compensation in excess of $75,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year); (C) has Compensation in excess of $50,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year) and is part of the top-paid 20% group of Employees (based on Compensation for the relevant year); (D) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer. If the Employee satisfies the definition in clause (b), (c) or (d) in the Plan Year but not during the preceding 12-month period and does not satisfy clause (a) in either period, the Employee is a Highly Compensated Employee only if he is one of the 100 most highly compensated Employees for the Plan Year. The number of officers taken into account under clause (d) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. If no Employee satisfies the Compensation requirement in clause (d) for the relevant year, the Advisory Committee will treat the highest paid officer as satisfying clause (d) for that year. For purposes of this Section, "Compensation" means Compensation as defined in Section 1.12, and Compensation must include: (i) elective deferrals under a Code Section 401(k) arrangement or under a Simplified Employee Pension maintained by the Employer; and (ii) amounts paid by the Employer which are not currently includible in the Employee's gross income because of Code Sections 125 (cafeteria plans) or 403(b) (tax-sheltered annuities). The Advisory Committee must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top paid 20% group, the top 100 paid Employees, the number of officers includible in clause (d) and the relevant Compensation, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. A calendar year election must apply to all plans and arrangements of the Employer. For purposes of applying any nondiscrimination test required under the Plan or under the Code, in a manner consistent with applicable Treasury regulations, the Advisory Committee will not treat as a separate Employee a family member (a spouse, a lineal ascendant or descendant, or a spouse of lineal ascendant or descendant) of a Highly Compensated Employee described in clause (a) of this Section, or a family member of one of the ten Highly Compensated Employees with the greatest Compensation for the Plan Year, but will treat the Highly Compensated Employee and all family members as a single Highly Compensated Employee. This aggregation rule applies to a family member even if that family member is a Highly Compensated Employee without family aggregation. 1 36 The term "Highly Compensated Employee" also includes any former Employee who separated from Service (or has a deemed Separation from Service, as determined under Treasury regulations) prior to the Plan Year, performs no Service for the Employer during the Plan Year, and was a Highly Compensated Employee either for the separation year or any Plan Year ending on or after his 55th birthday. If the former Employee's Separation from Service occurred prior to January 1, 1987, he is a Highly Compensated Employee only if he satisfied clause (a) of this Section 1.09 or received Compensation in excess of $50,000 during: (1) the year of his Separation from Service (or the prior year); or (2) any year ending after his 54th birthday. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers and the Compensation that is considered, will be made in accordance with Code Section 414(q) and the regulations thereunder. 1.10 "PARTICIPANT" is any Employee other than a Member of a Collective Bargaining Unit who is eligible to be and becomes a Participant in accordance with the provisions of Section 2.01. 1.11 "BENEFICIARY" is a person designated by a Participant who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until the Trustee has fully distributed his benefit to him. A Beneficiary's right to (and the Plan Administrator's, the Advisory Committee's or a Trustee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan. 1.12 "COMPENSATION" means compensation as that term is defined in Section 3.18(b) of the Plan. If compensation for any prior plan year is taken into account in determining an employee's contributions or benefits for the current year, the compensation for such prior year is subject to the applicable annual compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual compensation limit is $200,000. For any self-employed individual covered under the plan, compensation will mean earned income. Compensation shall include only that compensation which is actually paid to the participant during the applicable period. Except as provided elsewhere in this plan, the applicable period shall be the plan year. Furthermore, notwithstanding the above, the definition of compensation includes elective contributions made by the Employer on the Employee's behalf. "Elective contributions" are amounts excludible from the Employee's gross income under Code Section 402(a)(8) (relating to a Code Section 401(k) arrangement), Code Section 402(h) (relating to a Simplified Employee Pension), Code Section 125 (relating to a cafeteria plan) or Code Section 403(b) (relating to a tax-sheltered annuity) and contributed at the Employee's election. The term "Compensation" does not include: (A) Employer contributions (other than "elective contributions") to a plan of deferred compensation to the extent the contributions are not included in the gross income of the Employee for the taxable year in which contributed, on behalf of an Employee to a Simplified Employee Pension Plan to the extent such contributions are excludible from the Employee's gross income, and any distributions from a plan of deferred compensation, regardless of whether such amounts are includible in the gross income of the Employee when distributed. (B) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture. (C) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option. (D) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are excludible from the gross income of the Employee), other than "elective contributions," if elected in the Employer's Adoption Agreement. Any reference in this Plan to Compensation is a reference to the definition in this Section 1.12, unless the Plan reference specifies a modification to this definition. The Advisory Committee will take into account only Compensation actually paid for the relevant period. For any Plan Year beginning after December 31, 1988, the Advisory Committee must take into account only the first $200,000 (or such larger amount as the Commissioner of Internal Revenue may prescribe under Code Section 415(d)) of any Participant's Compensation, except that the dollar increase in effect on January 1 of any calendar year is effective for years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1,1990. If a plan determines compensation on a period of time that contains fewer than 12 calendar months, then the annual compensation limit is an amount equal to the annual compensation limit for the calendar year in which the compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. The $200,000 Compensation limitation applies to the combined Compensation of the Employee and of any family member aggregated with the Employee under Section 1.09 and who is either (i) the Employee's spouse; or (ii) the Employee's lineal descendant who has not attained age 19 before the close of the year. If, as a result of the application of such rules, the adjusted $200,000 limitation is exceeded, then (except for purposes of determining the portion of compensation up to the integration level if this plan provides for permitted disparity, the Advisory Committee will apply the contribution and allocation provisions of Article III by prorating the $200,000 (or adjusted) limitation among the affected individuals in proportion to each such individual's Compensation determined prior to application of this limitation. 2 37 PLAN DOCUMENT NONDISCRIMINATION. For purposes of determining whether the Plan discriminates in favor of Highly Compensated Employees: Compensation means Compensation as defined in this Section 1.12. Notwithstanding the preceding sentence, compensation for a participant in a defined contribution plan who is permanently and totally disabled (as defined in Code Section 22(e)(3)) is the compensation such Participant would have received for the limitation year if the participant had been paid at the rate of compensation paid immediately before becoming permanently and totally disabled; such imputed compensation for the disabled Participant may be taken into account only if the participant is not a highly compensated employee (as defined in Code Section 414(g)) and contributions made on behalf of such participant are nonforfeitable when made. 1.13 "EARNED INCOME" means net earnings from self-employment in the trade or business with respect to which the Employer has established the Plan, provided personal services of the individual are a material income producing factor. The Advisory Committee will determine net earnings without regard to items excluded from gross income and the deductions allocable to those items. Net earnings are reduced by contributions by the employer to a qualified plan to the extent deductible under Code Section 404. The Advisory Committee will determine net earnings after the deduction allowed to the Self-Employed Individual for all contributions made by the Employer to a qualified plan and, for Plan Years beginning after December 31, 1989, the deduction allowed to the Self-Employed under Code Section 164(f) for self-employment taxes. 1.14 "ACCOUNT" means the separate account(s) which the Advisory Committee or the Trustee maintains for a Participant under the Employer's Plan. 1.15 "ACCRUED BENEFIT" means the amount standing in a Participant's Account(s) as of any date derived from both Employer contributions and Employee contributions and earnings thereon including rollovers whether vested before or after death and including the proceeds of insurance contracts on the participant's life, if any. 1.16 "NONFORFEITABLE" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Accrued Benefit. 1.17 "PLAN YEAR" means the fiscal year, of the Plan, the consecutive month period specified in the Employer's Adoption Agreement. The Employer's Adoption Agreement also must specify the "Limitation Year" applicable to the limitations on allocations described in Article III. If the Employer maintains Paired Plans, each Plan must have the same Plan Year. 1.18 "EFFECTIVE DATE" of this Plan is the date specified in the Employer's Adoption Agreement. 1.19 "PLAN ENTRY DATE" means the first day of the Plan Year or the first day of the sixth month of the Plan Year. 1.20 "ACCOUNTING DATE" is the last day of an Employer's Plan Year. Unless otherwise specified in the Plan, the Advisory Committee will make all Plan allocations for a particular Plan Year as of the Accounting Date of that Plan Year. 1.21 "TRUST" means the separate Trust created under the Employer's Plan. 1.22 "TRUST FUND" means all property of every kind held or acquired by the Trustee under the Employer's Plan, other than incidental benefit insurance contracts. 1.23 "NONTRANSFERABLE ANNUITY" means an annuity which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than Kemper Investors Life Insurance Company. If the Trustee distributes an annuity contract, the contract must be a Nontransferable Annuity. 1.24 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. l.25 "CODE" means the Internal Revenue Code of 1986, as amended. 1.26 "SERVICE" means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees. "Separation from Service" means a separation from Service with the Employer maintaining this Plan. 1.27 "HOUR OF SERVICE" means: (A) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties for the Employer. The Advisory Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, irrespective of when paid; (B) Each Hour of Service for back pay, irrespective of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Advisory Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and 3 38 (C) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment (irrespective of whether the employment relationship is terminated) for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation, holiday, sick leave, illness, incapacity (including disability), layoff, jury duty or military duty. The Advisory Committee will credit no more than 501 Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Advisory Committee credits Hours of Service under this paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Reg. Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this paragraph (c). The Advisory Committee will not credit an Hour of Service under more than one of the above paragraphs. A computation period for purposes of this Section 1.27 is the Plan Year, Year of Service period, Break in Service period or other period, as determined under the Plan provision for which the Advisory Committee is measuring an Employee's Hours of Service. The Advisory Committee will resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee. An Employee for whom a record of hours worked is not maintained shall be credited with 45 Hours of Service for each week in which he or she completes at least one Hour of Service. Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, the Advisory Committee must credit Hours of Service during an Employee's unpaid absence period due to maternity or paternity leave. The Advisory Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The Advisory Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the Advisory Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of 8 hours per day during the absence period. The Advisory Committee will credit only the number (not exceeding 501) of Hours of Service necessary to prevent an Employee's Break in Service. The Advisory Committee credits all Hours of Service described in this paragraph to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the Advisory Committee credits these Hours of Service to the immediately following computation period. Hours of service will also be credited for any individual considered an employee for purposes of this Plan under Code Section 414(n) or Section 414(o) and the regulations thereunder. 1.28 "DISABILITY" means inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The permanence and degree of such impairment shall be supported by medical evidence. The Plan considers a Participant disabled on the date the Advisory Committee determines the Participant satisfies the definition of disability. The Advisory Committee may require a Participant to submit to a physical examination in order to confirm disability. The Advisory Committee will apply the provisions of this Section 1.28 in a nondiscriminatory, consistent and uniform manner. 1.29 "SERVICE FOR PREDECESSOR EMPLOYER" If the Employer maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as service with the Employer. If the Employer does not maintain the plan of a predecessor employer, the Plan does not credit service with the predecessor employer. 1.30 "RELATED EMPLOYERS" A related group is a controlled group of corporations (as defined in Code Section 414(b)), trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)), or an affiliated service group (as defined in Code Section 414(m) or in Code Section 414(o)). If the Employer is a member of a related group, the term "Employer" includes the related group members for purposes of crediting Hours of Service, determining Years of Service and Breaks in Service under Articles II and V, applying the limitations on allocations in Part 2 of Article III, applying the top heavy rules and the minimum allocation requirements of Article III, the definitions of Employee, Highly Compensated Employee, Compensation and Leased Employee, and for any other purpose required by the applicable Code section or by a Plan provision. However, an Employer may contribute to the Plan only by being a signatory to the Execution Page of the Adoption Agreement or to a Participation Agreement to the Employer's Adoption Agreement. If one or more of the Employer's related group members becomes Participating Employers by executing a Participation Agreement to the Employer's Adoption Agreement, the term "Employer" includes the participating related group members, for all purposes of the Plan, and "Plan Administrator" means the Employer that is the signatory to the Execution Page of the Adoption Agreement. All Employees of the Employer or of any member of the Employer's related group, are eligible to participate in the Plan, irrespective of whether the related group member directly employing the Employee is a Participating Employer. 4 39 PLAN DOCUMENT 1.31 "LEASED EMPLOYEES" The Plan treats a Leased Employee as an Employee of the Employer. A Leased Employee is an individual (who otherwise is not an Employee of the Employer) who, pursuant to a leasing agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer determined in accordance with Code Section 414(n)(6) on a substantially full-time basis for at least one year and who performs services historically performed by employees in the Employer's business field. If a Leased Employee is treated as an Employee by reason of this Section 1.31 of the Plan, "Compensation" includes Compensation from the leasing organization which is attributable to services performed for the Employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. SAFE HARBOR PLAN EXCEPTION. The Plan does not treat a Leased Employee as an Employee if the leasing organization covers the employee in a safe harbor plan and, prior to application of this safe harbor plan exception, 20% or less of the Employer's Employees (other than Highly Compensated Employees) are Leased Employees. A safe harbor plan is a money purchase pension plan providing immediate participation, full and immediate vesting, and a nonintegrated contribution formula equal to at least 10% of the employee's compensation without regard to employment by the leasing organization on a specified date. The safe harbor plan must determine the 10% contribution on the basis of compensation as defined in Code Section 415(c)(3) plus elective contributions (as defined in Section 1.12). OTHER REQUIREMENTS. The Advisory Committee must apply this Section 1.31 in a manner consistent with Code Sections 414(n) and 414(o) and the regulations issued under those Code sections. If a Leased Employee is a Participant in the Plan and also participates in a defined contribution plan maintained by the leasing organization, then the Advisory Committee will determine the Leased Employee's allocation of Employer contributions under Article III without taking into account the Leased Employee's allocation, if any, under the leasing organization's plan. 1.32 "SPECIAL RULES FOR OWNER-EMPLOYEES" The following special provisions and restrictions apply to Owner-Employees: If this plan provides contributions or benefits for one or more owner-employees who control both the business for which this plan is established and one or more other trades or businesses, this plan and the plan established for other trades or businesses must, when looked at as a single plan, satisfy sections 401(a) and (d) for the employees of this and all other trades or businesses. If the plan provides contributions or benefits for one or more owner-employees who control one or more other trades or businesses, the employees of the other trades or businesses must be included in a plan which satisfies sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for owner-employees under this plan. If an individual is covered as an owner-employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding paragraphs, an owner-employee, or two or more owner-employees, will be considered to control a trade or business if the owner-employee, or two or more owner-employees together: (1) own the entire interest in an unincorporated trade or business, or (2) in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an owner-employee, or two or more owner-employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such owner-employee, or such two or more owner-employees, are considered to control within the meaning of the preceding sentence. 1.33 "TAXABLE WAGE BASE" means 100% of the taxable wage base as determined under Section 230 of the Social Security Act in effect on the first day of the plan year. 1.34 "PAIRED PLANS" means the Employer has adopted two Standardized Plan Adoption Agreements offered with this Kemper Retirement Plan Prototype Keogh/Corporate, one Adoption Agreement being a Paired Profit Sharing Plan and one Adoption Agreement being a Paired Pension Plan. A Paired Profit Sharing Plan may include a Code Section 401(k) arrangement. A Paired Pension Plan must be a money purchase pension plan. Paired Plans must be the subject of a favorable opinion letter issued by the National Office of the Internal Revenue Service. 5 40 1.35 "MEMBER OF A COLLECTIVE BARGAINING UNIT" means any employee who is included in a unit and whose terms and conditions of employment are covered by a collective bargaining agreement between the Employer and employee representatives which does not provide for participation in the Plan, provided that there is evidence that, in connection with such agreement, retirement benefits were the subject of good-faith bargaining. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are employees who are owners, officers or executives of the Employer. 1.36 "DESIGNATED INVESTMENT COMPANY" means any registered investment company the investment manager or principal underwriter of which is Kemper Financial Services, Inc. or an affiliate. ARTICLE II EMPLOYEE PARTICIPANTS 2.01 "ELIGIBILITY" Each Employee becomes a Participant in the Plan in accordance with the participation option selected by the Employer in its Adoption Agreement. If this Plan is a restated Plan, each Employee who was a Participant in the Plan on the day before the Effective Date continues as a Participant in the Plan. 2.02 "YEAR OF SERVICE - PARTICIPATION" For purposes of an Employee's participation in the Plan under Adoption Agreement Section 2.01, the Plan takes into account all of his Years of Service with the Employer, except that if an Employee has a Break in Service before satisfying the Plan's requirement for eligibility, Service before such break will not be taken into account. "Year of Service" means a 12 consecutive month period during which the Employee completes not less than 1,000 Hours of Service, measuring the beginning of the first 12 month period from the Employment Commencement Date, and each anniversary thereof. "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for the Employer. 2.03 "BREAK IN SERVICE - PARTICIPATION" An Employee incurs a "Break in Service" if during any 12 consecutive month period he does not complete more than 500 Hours of Service with the Employer. The "12 consecutive month period" under this Section 2.03 is the same 12 consecutive month period for which the Plan measures "Years of Service" under Section 2.02. TWO-YEAR ELIGIBILITY. If the Employer elects a 2 years of service condition for eligibility purposes under Adoption Agreement Section 2.01, the Plan treats an Employee who incurs a one year Break in Service and who has never become a Participant as a new Employee on the date he first performs an Hour of Service for the Employer after the Break in Service. 2.04 "PARTICIPATION UPON RE-EMPLOYMENT" A Participant whose employment terminates re-enters the Plan as a Participant on the date of his re-employment. An Employee who satisfies the Plans' eligibility conditions but who terminates employment prior to becoming a Participant becomes a Participant on the later of the Plan Entry Date on which he would have entered the Plan had he not terminated employment or the date of his re-employment. Any Employee who terminates employment prior to satisfying the Plan's eligibility conditions becomes a Participant in accordance with Adoption Agreement Section 2.01. 2.05 "CHANGE IN EMPLOYEE STATUS" If a Participant has not incurred a Separation from Service but ceases to be eligible to participate in the Plan, by reason of becoming a member of a Collective Bargaining Unit, the Advisory Committee must treat the Participant as an excluded employee during the period such a Participant is a Member of a Collective Bargaining Unit. The Advisory Committee determines a Participant's sharing in the allocation of Employer contributions by disregarding his Compensation paid by the Employer for services rendered in his capacity as a Member of a Collective Bargaining Unit. However, during such period of exclusion, the Participant, without regard to employment classification, continues to receive credit for vesting under Article V for each included Year of Service and the Participant' Account continues to share fully in Trust Fund allocations under Section 9.11. If an excluded employee who is not a Participant becomes eligible to participate in the Plan by reason of a change in employment classification, he will participate in the Plan immediately if he has satisfied the eligibility conditions of Section 2.01 and would have been a Participant had he not been an excluded employee during his period of Service. Furthermore, the Plan takes into account all of the Participant's included Years of Service with the Employer as an Excluded Employee for purposes of vesting credit under Article V. In the event a participant is no longer a member of an eligible class of employees and becomes ineligible to participate but has not incurred a break in service, such employee will participate immediately upon returning to an eligible class of employees. If such participant incurs a break in service, eligibility will be determined under the break in service rules of the plan. 2.06 "ELECTION NOT TO PARTICIPATE" The Plan does not permit an otherwise eligible Employee nor any Participant to elect not to participate in the Plan. 6 41 PLAN DOCUMENT ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES PART 1. AMOUNT OF EMPLOYER CONTRIBUTIONS AND PLAN ALLOCATIONS: SECTIONS 3.01 THROUGH 3.06 3.01 "AMOUNT" For each Plan Year, the Employer contributes to the Trust the amount determined by application of the contribution option selected by the Employer in its Adoption Agreement. The Employer may not make a contribution to the Trust for any Plan Year to the extent the contribution would exceed the Participants' Maximum Permissible Amounts. The Trustee, upon written request from the Employer, must return to the Employer the amount of the Employer's contribution made by the Employer by mistake of fact or the amount of the Employer's contribution disallowed as a deduction under Code Section 404. The Trustee will not return any portion of the Employer's contribution under the provisions of this paragraph more than one year after: (A) The Employer made the contribution by mistake of fact; or (B) The disallowance of the contribution as a deduction, and then, only to the extent of the disallowance. The Trustee will not increase the amount of the Employer contribution returnable under this Section 3.01 for any earnings attributable to the contribution, but the Trustee will decrease the Employer contribution returnable for any losses attributable to it. The Trustee may require the Employer to furnish it whatever evidence the Trustee deems necessary to enable the Trustee to confirm the amount the Employer has requested be returned is properly returnable under ERISA. 3.02 "DETERMINATION OF CONTRIBUTION" The Employer, from its records, determines the amount of any contributions to be made by it to the Trust under the terms of the Plan. 3.03 "TIME OF PAYMENT OF CONTRIBUTION" The Employer may pay its contribution for each Plan Year in one or more installments without interest. The Employer must make its contribution to the Trustee within the time prescribed by the Code or applicable Treasury regulations. 3.04 "RESERVED" 3.05 "ACCRUAL OF BENEFIT" The accrual of benefit shall be determined on the basis of the Plan Year. In determining the amount of the Employer contribution to a participant's account, only compensation with respect to that part of a Plan Year the employee is actually a participant shall be taken into account. Employer contributions will be allocated to each Participant who either completes 500 hours of service during the Plan Year or who is employed by the Employer on the last day of the Plan Year. PART 2. LIMITATIONS ON ALLOCATIONS: SECTIONS 3.06 THROUGH 3.09 [Note: Sections 3.06 through 3.09 apply only to Participants in this Plan who do not participate, and who have never participated, in another qualified plan or in a welfare benefit fund as defined in Code Section 419(e) or an individual medical account as defined in Code Section 415(1)(2) maintained by the Employer. 3.06 The amount of Annual Additions which the Advisory Committee may allocate under this Plan on a Participant's behalf for a Limitation Year may not exceed the Maximum Permissible Amount. If the amount the Employer otherwise would contribute to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the Employer will reduce the amount of its contribution so the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. 3.07 Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Advisory Committee may determine the Maximum Permissible Amount on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Advisory Committee must make this determination on a reasonable and uniform basis for all Participants similarly situated. 3.08 As soon as is administratively feasible after the end of the Limitation Year, the Advisory Committee will determine the Maximum Permissible Amount for such Limitation Year on the basis of the Participant's actual Compensation for such Limitation Year. 3.09 If, pursuant to Section 3.08 there is an Excess Amount with respect to a Participant for a Limitation Year, the Advisory Committee will dispose of such Excess Amount as follows: 7 42 (A) The Advisory Committee will return any nondeductible voluntary Employee contributions to the Participant to the extent the return would reduce the Excess Amount. (B) If after the application of paragraph (a) an excess amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's account will be used to reduce Employer Contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary. (C) If, after the application of paragraph (b), an Excess Amount still exists, and the Plan does not cover the Participant at the end of the Limitation Year, then the Advisory Committee will hold the Excess Amount unallocated in a suspense account. The Advisory Committee will apply the suspense account to reduce Employer Contributions for all remaining Participants in the next Limitation Year, and in each succeeding Limitation Year if necessary. (D) The Advisory Committee will not distribute any Excess Amount(s) to Participants or to former Participants. If a suspense account is in existence at any time during a limitation year pursuant to this section, it will not participate in the allocation of the trust's investment gains and losses. If a suspense account is in existence at any time during a particular limitation year, all amounts in the suspense account must be allocated and reallocated to participants' accounts before any employer or any employee contributions may be made to the plan for that limitation year. [Note: Sections 3.10 through 3.15 apply if, in addition to this Plan, the Participant is covered under another qualified master or prototype defined contribution plan maintained by the Employer, a welfare benefit fund, as defined in Code Section 419(e) maintained by the Employer or an individual medical account, as defined in Code Section 415(1)(2) maintained by the Employer which provides an annual addition during any Limitation Year.] 3.10 The annual additions which may be credited to a participant's account under this plan for any such limitation year will not exceed the maximum permissible amount reduced by the annual additions credited to a participant's account under the other plans and welfare benefit funds for the same limitation year. If the annual additions with respect to the participant under other defined contribution plans and welfare benefit funds maintained by the employer are less than the maximum permissible amount and the employer contribution that would otherwise be contributed or allocated to the participant's account under this plan would cause the annual additions for the limitation year to exceed this limitation, the amount contributed or allocated will be reduced so that the annual additions under all such plans and funds for the limitation year will equal the maximum permissible amount. If the annual additions with respect to the participant under such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the maximum permissible amount, no amount will be contributed or allocated to the participant's account under this plan for the limitation year. 3.11 Prior to the determination of the Participant's actual Compensation for the Limitation Year, the Advisory Committee may determine the amounts referred to in 3.10 above on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Advisory Committee will make this determination on a reasonable and uniform basis for all Participants similarly situated. 3.12 As soon as is administratively feasible after the end of the Limitation Year, the Advisory Committee will determine the amounts referred to in 3.10 on the basis of the Participant's actual Compensation for such Limitation Year. 3.13 If pursuant to Section 3.12, a Participant's Annual Additions under this Plan and all such other plans result in an Excess Amount, such Excess Amount will consist of the Amounts last allocated. The Advisory Committee will determine the Amounts last allocated by treating the Annual Additions attributable to a welfare benefit fund or individual medical account as allocated first, irrespective of the actual allocation date under the welfare benefit fund. 3.14 If the Advisory Committee allocates an Excess Amount to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan equals the product of: (i) the total Excess Amount allocated as of such date (including any amount which the Advisory Committee would have allocated but for the limitations of Code Section 415), times (ii) the ratio of (1) the amount allocated to the Participant as of such date under this Plan divided by (2) the total amount allocated as of such date under all qualified master or prototype defined contribution plans (determined without regard to the limitations of Code Section 415). 3.15 The Advisory Committee will dispose of any Excess Amounts attributed to this Plan as provided in Section 3.09. [Note: Section 3.16 applies only to Participants who, in addition to this Plan, participate in one or more qualified plans which are qualified defined contribution plans other than a Master or Prototype plan maintained by the Employer during the Limitation Year.] 8 43 PLAN DOCUMENT 3.16 "SPECIAL ALLOCATION LIMITATION" The amount of Annual Additions which the Advisory Committee may allocate under this Plan on behalf of any Participant are limited in accordance with the provisions of Section 3.10 through 3.15, as though the other plan were a Master or Prototype plan. 3.17 "DEFINED BENEFIT PLAN LIMITATION" If the Employer maintains a defined benefit plan, or has ever maintained a defined benefit plan which the Employer has terminated, then the sum of the defined benefit plan fraction and the defined contribution plan fraction for any Participant for any Limitation Year must not exceed 1.0. The annual additions which may be credited to the participant's account under this plan for any limitation year will be limited in accordance with Section 3.17 of the adoption agreement. To the extent necessary to satisfy the limitations of this Section 3.17, the Employer will reduce the Participant's projected annual benefit under the defined benefit plan under which the Participant participates. The Employer also must provide in an addendum to its Adoption Agreement the manner in which the Plan will satisfy the top-heavy requirements of Code Section 416 after taking into account the existence (or prior maintenance) of the defined benefit plan. 3.18 "DEFINITIONS - ARTICLE III" For purposes of this Article III, the following terms mean: (A) "ANNUAL ADDITION" - The sum of the following amounts allocated on behalf of a Participant for a Limitation Year, of (i) all Employer contributions; (ii) all forfeitures; and (iii) all Employee contributions. Except to the extent provided in Treasury regulations, Annual Additions include excess contributions described in Code Section 401(k), excess aggregate contributions described in Code Section 401(m) and excess deferrals described in Code Section 402(g), irrespective of whether the plan distributes or forfeits such excess amounts. Annual Additions also include Excess Amounts reapplied to reduce Employer contributions under Section 3.09. Amounts allocated after March 31, 1984, to an individual medical account (as defined in Code Section 415(1)(2)) included as part of a defined benefit pension or annuity plan maintained by the Employer are Annual Additions. Furthermore, Annual Additions include contributions paid or accrued after December 31, 1985, for taxable years ending after December 31,1985, attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer. For this purpose, any excess amount applied in the limitation year to reduce employer contributions will be considered annual additions for such limitation year. (B) "COMPENSATION" - For purposes of applying the limitations of Part 2 of this Article III, "Compensation" means a participant's earned income, wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements and expense allowances), and excluding the following: (I) Employer contributions to a plan of deferred compensation which are not includible in the employee's gross income for the taxable year in which contributed, or employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the employee, or any distributions from a plan of deferred compensation; (II) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (III) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (IV) other amounts which received special tax benefits, or contributions made by the employer (whether or not under a salary reduction agreement) towards the purchase of an annuity described in section 403(b) of the Internal Revenue Code (whether or not the amounts are actually excludible from the gross income of the employee). For purposes of applying the limitations of this article, compensation for a limitation year is the compensation actually paid or includible in gross income during such limitation year. Notwithstanding the preceding sentence, compensation for a participant in a defined contribution plan who is permanently and totally disabled (as defined in Section 22(e)(3) of the Code) is the compensation such participant would have received for the limitation year if the participant would have received for the limitation year if the participant had been paid at the rate of compensation paid immediately before becoming permanently and totally disabled; such imputed compensation for the disabled participant may be taken into account only if the participant is not a highly compensated employee (as defined in Section 414(g) of the Code) and contributions made on behalf of such participant are nonforfeitable when made. 9 44 (C) "EMPLOYER" - The Employer that adopts this Plan and any related employers described in Section 1.30. Solely for purposes of applying the limitations of Part 2 of this Article III, the Advisory Committee will determine related employers described in Section 1.30 by modifying Code Sections 414(b) and (c) in accordance with Code Section 415(h). (D) "EXCESS AMOUNT" - The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (E) "LIMITATION YEAR" - The period selected by the Employer under Adoption Agreement Section 1.17. All qualified plans of the Employer must use the same Limitation Year. If the Employer amends the Limitation Year to a different 12 consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year. (F) "MASTER OR PROTOTYPE PLAN" - A plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (G) "MAXIMUM PERMISSIBLE AMOUNT" - The lesser of (i) $30,000 (or, if greater, one-fourth of the defined benefit dollar limitation under Code Section 415(b)(1)(A)), or (ii) 25% of the Participant's Compensation for the Limitation Year. If there is a short Limitation Year because of a change in Limitation Year, the Advisory Committee will multiply the $30,000 (or adjusted) limitation by the following fraction: Number of months in the short Limitation Year: 12 The 25% compensation limitation shall not apply to any contribution for medical benefits (within the meaning of Code Section 401(h) or 419A(f)(2) which is otherwise treated as an annual addition under Code Section 415(l)(1) or 419A(d)(2). (H) "DEFINED CONTRIBUTION PLAN" - A retirement plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which the plan may allocate to such participant's account. The Advisory Committee must treat all defined contribution plans (whether or not terminated) maintained by the Employer as a single plan. Solely for purposes of the limitations of Part 2 of this Article III, the Advisory Committee will treat employee contributions made to a defined benefit plan maintained by the Employer as a separate defined contribution plan. The Advisory Committee also will treat as a defined contribution plan an individual medical account (as defined in Code Section 415(1)(2)) included as part of a defined benefit plan maintained by the Employer and, for taxable years ending after December 31,1985, a welfare benefit fund under Code Section 419(e) maintained by the Employer to the extent there are post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)). (I) "DEFINED BENEFIT PLAN" - A retirement plan which does not provide for individual accounts for Employer contributions. The Advisory Committee must treat all defined benefit plans (whether or not terminated) maintained by the Employer as a single plan. [Note: The definitions in paragraphs (j) and (k) apply only if the limitation described in Section 3.17 applies to the Employer's Plan.] (J) "DEFINED BENEFIT PLAN FRACTION" -PROJECTED annual benefit of the Participant under the defined benefit plan(s) The lesser of (I) 125% of the dollar limitation determined under Code Section 415 (b) and (d) for the Limitation Year, or (II) 140% of the Participant's average Compensation for his high three (3) consecutive Years of Service To determine the denominator of this fraction, the Advisory Committee will make any adjustment required under Code Section 415(b) and will determine a Year of Service, unless otherwise provided in an addendum to Adoption Agreement Section 3.06, as a Plan Year in which the Employee completed at least 1,000 Hours of Service. The "projected annual benefit" is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if the plan expresses such benefit in a form other than a straight life annuity or qualified joint and survivor annuity) of the Participant under the terms of the defined benefit plan on the assumptions he continues employment until his normal retirement age (or current age, if later) as stated in the defined benefit plan, his compensation continues at the same rate as in effect in the Limitation Year under consideration until the date of his normal retirement age and all other relevant factors used to determine benefits under the defined benefit plan remain constant as of the current Limitation Year for all future Limitation Years. CURRENT ACCRUED BENEFIT. If the Participant accrued benefits in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the dollar limitation used in the denominator of this fraction will not be less than the Participant's Current Accrued Benefit. A Participant's Current Accrued Benefit is the sum of the annual benefits under such defined benefit plans which the Participant had accrued as of the end of the 1986 Limitation Year (the last Limitation Year beginning before January 1, 1987), determined without regard to any cost of living adjustment occurring after May 5, 1986. This Current Accrued Benefit rule applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 as in effect at the end of the 1986 Limitation Year. 10 45 PLAN DOCUMENT Notwithstanding the above, if the participant was a participant as of the first day of the first limitation year beginning after December 31, 1986, in one or more defined benefit plans maintained by the employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the participant had accrued as of the close of the last limitation year beginning before January 1,1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all limitation years beginning before January 1, 1987 (k) "DEFINED CONTRIBUTION PLAN FRACTION" - Section 5.5 Defined contribution fraction: A fraction, the numerator of which is the sum of the annual additions to the participant's account under all the defined contribution plans (whether or not terminated) maintained by the employer for the current and all prior limitation years (including the annual additions attributable to the participant's nondeductible employee contributions to all defined benefit plans, whether or not terminated, maintained by the employer, and the annual additions attributable to all welfare benefit funds, as defined in Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(1)(2) of the Code, maintained by the employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation years of service with the employer (regardless of whether a defined contribution plan was maintained by the employer). The maximum aggregate amount in any limitation year is the lesser of 125 percent of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code or 35 percent of the participant 's compensation for such year. If the employee was a participant as of the end of the first day of the first limitation year beginning after December 31, 1986, in one or more defined contribution plans maintained by the employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this plan. Under the adjustment, an amount equal to the product of (l) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The annual addition for any limitation year beginning before January 1, 1987, shall not be recomputed to treat all employee contributions as annual additions. The average compensation for the three consecutive years of service with the employer that produces the highest average. ARTICLE IV PARTICIPANT CONTRIBUTIONS 4.01 "PARTICIPANT ON DEDUCTIBLE CONTRIBUTIONS" This Plan does not permit Participant nondeductible contributions. If, prior to the adoption of this Plan, the Plan accepted Participant nondeductible contributions for a Plan Year beginning after December 31, 1986, those contributions must satisfy the requirements of Code Section 401(m) and must be maintained in a separate account which will be nonforfeitable at all times. This Section 4.01 does not prohibit the Plan's acceptance of Participant nondeductible contributions prior to the first Plan Year commencing after the Plan Year in which the Employer adopts this Plan. 4.02 "PARTICIPANT DEDUCTIBLE CONTRIBUTIONS" The Plan will not accept Participant deductible contributions which are made for a taxable year beginning after December 31, 1986. Contributions made prior to that date will be maintained in a separate account which will be nonforfeitable at all times. The account will share in the gains and losses of the trust in the same manner as described in Section 9.10 of the Plan. No part of the deductible voluntary contribution account will be used to purchase life insurance. Subject to Article VI, joint and survivor annuity requirements (if applicable), the participant may withdraw any part of the deductible voluntary contribution account by making a written application to the Advisory Committee. 4.03 "PARTICIPANT ROLLOVER CONTRIBUTIONS" Any Participant, with the Employer's written consent and after filing with the Employer the form prescribed by the Advisory Committee, may contribute cash or other property to the Trust other than as a voluntary contribution if the contribution is a "rollover contribution" which the Code permits an employee to transfer either directly or indirectly from one qualified plan to another qualified plan. Before accepting a rollover contribution, the Trustee may require an Employee to furnish satisfactory evidence that the proposed transfer is in fact a "rollover contribution" which the Code permits an employee to make to a qualified plan. A rollover contribution is not an Annual Addition under Part 2 of Article III. 11 46 The Employer will invest the rollover contribution in a segregated investment Account for the Participant's sole benefit unless the Employer in its sole discretion, agrees to invest the rollover contribution as part of the Trust Fund. The Employer will not have any investment responsibility with respect to a Participant's segregated rollover Account. The Participant, however, from time to time, may direct the Employer in writing as to the investment of his segregated rollover Account in shares of a Designated Investment Company, annuity contract(s) or life insurance sold or distributed by Kemper Financial Services, Inc. A Participant's segregated rollover Account alone will bear any extraordinary expenses resulting from investments made at the direction of the Participant. As of the Accounting Date (or other valuation date) for each Plan Year, the Advisory Committee will allocate and credit the net income (or net loss) from a Participant's segregated rollover Account and the increase or decrease in the fair market value of the assets of a segregated rollover Account solely to that Account. The Employer is not liable nor responsible for any loss resulting to any Beneficiary, nor to any Participant, by reason of any sale or investment made or other action taken pursuant to and in accordance with the direction of the Participant. In all other respects, the Employer will administer and distribute a rollover contribution in the same manner as any Employer contribution made to the Trust. An eligible Employee, prior to satisfying the Plan's eligibility conditions, may make a rollover contribution to the Trust to the same extent and in the same manner as a Participant. If an Employee makes a rollover contribution to the Trust prior to satisfying the Plan's eligibility conditions, the Advisory Committee and Trustee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions under the Plan until he actually becomes a Participant in the Plan. If the Employee has a Separation from Service prior to becoming a Participant, the Trustee will distribute his rollover contribution Account to him as if it were an Employer contribution Account. 4.04 "PARTICIPANT CONTRIBUTION - FORFEITABILITY" A Participant's Accrued Benefit is, at all times, 100% Nonforfeitable. 4.05 "PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION" A Participant, by giving prior written notice to the Trustee, may withdraw all or any part of the value of his Accrued Benefit derived from his Participant contributions described in this Article IV. A distribution of Participant contributions must comply with the joint and survivor requirements described in Article VI, if those requirements apply to the Participant. A Participant may not exercise his right to withdrawn the value of his Accrued Benefit derived from his Participant contributions more than once during any Plan Year. The Trustee, in accordance with the direction of the Advisory Committee, will distribute a Participant's unwithdrawn Accrued Benefit attributable to his Participant contributions in accordance with the provisions of Article VI applicable to the distribution of the Participant's Nonforfeitable Accrued Benefit. 4.06 "PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT" The Advisory Committee must maintain, or must direct the Trustee to maintain, a separate Account(s) in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan derived from his Participant contributions. A Participant's Accrued Benefit derived from his Participant contributions as of any applicable date is the balance of his separate Participant contribution Account(s). A separate account will be maintained by the trustee for the nondeductible employee contribution of each participant. ARTICLE V TERMINATION OF SERVICE - PARTICIPANT VESTING 5.01 "NORMAL RETIREMENT AGE" Normal Retirement Age is age 65. 5.02 "VESTING" All contributions made by or on behalf of each participant, together with all earnings thereon, shall immediately become, and at all times shall remain, fully vested in such participant, and nonforfeitable. The minimum allocation required (to the extent required to be nonforfeitable under Section 416(b)) may not be forfeited under Code Sections 411(a)(3)(B) or 411(a)(3)(D). 12 47 PLAN DOCUMENT ARTICLE VI TIME AND METHOD OF PAYMENT OF BENEFITS 6.01 "TIME OF PAYMENT OF ACCRUED BENEFIT" Unless, pursuant to Section 6.03, the Participant or the Beneficiary elects in writing to a different time or method of payment, the Advisory Committee will direct the Trustee to commence distribution of a Participant's Nonforfeitable Accrued Benefit in accordance with this Section 6.01. A Participant must consent, in writing, to any distribution required under this Section 6.01 if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $3,500 and the Participant has not attained the later of Normal Retirement Age or age 62. Furthermore, the Participant's spouse also must consent, in writing, to any distribution, for which Section 6.04 requires the spouse's consent. For all purposes of this Article VI, the term "annuity starting date" means the first day of the first period for which the Plan pays an amount as an annuity or in any other form. A distribution date under this Article VI unless otherwise specified within the Plan, is the 60th day of the Plan Year, or as soon as administratively practicable following that distribution date. For purposes of the consent requirements under this Article VI, if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of any distribution, exceeds $3,500, the Advisory Committee must treat that present value as exceeding $3,500 for purposes of all subsequent Plan distributions to the Participant. If the value of a participant's vested account balance derived from employer and employee contribution exceeds (or at the time of any prior distribution exceeded) $3,500, and the account balance is immediately distributable, the participant and the participant's spouse (or where either the participant or the spouse has died, the survivor) must consent to any distribution of such account balance. The consent of the participant and the participant's spouse shall be obtained in writing within the 90-day period ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid an annuity or any other form. The plan administrator shall notify the participant and the participant's spouse of the right to defer any distribution until the participant's account balance is no longer immediately distributable. Such notification shall include a general description of the material features, and explanation of the relative values of, the optional forms of benefit available under the plan in a manner that would satisfy the notice requirements of Code Section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the annuity starting date. Notwithstanding the foregoing, only the participant need consent to the commencement of a distribution in the form of a qualified joint and survivor annuity while the account balance is immediately distributable. (Furthermore, if payment in the form of a qualified joint and survivor annuity is not required with respect to the participant pursuant to Section 6.04(E) of the plan, only the participant need consent to the distribution of an account balance that is immediately distributable.) Neither the consent of the participant nor the participant's spouse shall be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or to the extent that a distribution is required to satisfy Code Sections 401(a)(9) or 415. In addition, upon termination of this plan, if the plan does not offer an annuity option (purchased from a commercial provider) and if the employer or any entity within the same controlled group as the employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code), the participant's account balance may, without the participant's consent, be distributed to the participant. However, if any entity within the same controlled group as the employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code) then the participant's account balance will be transferred, without the participant's consent, to the other plan if the participant does not consent to an immediate distribution. Notwithstanding the foregoing, only the participant need consent to the commencement of a distribution in the form of a qualified joint and survivor annuity while the account balance is immediately distributable. (Furthermore, if payment in the form of a qualified joint and survivor annuity is not required with respect to the participant pursuant to Section 6.04(E) of the plan, only the participant need consent to the distribution for an account balance that is immediately distributable). Neither the consent of the participant nor the participant's spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of this plan, if the plan does not offer an annuity option (purchased from a commercial provider), the participant's account balance may, without the participant's consent, be distributed to the participant or transferred to another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) within the same controlled group. An account balance is immediately distributable if any part of the account balance could be distributed to the participant (or surviving spouse) before the participant attains or would have attained if not deceased the later of normal retirement age or age 62. For purposes of determining the applicability of the foregoing consent requirements to distributions made before the first day of the first plan year beginning after December 31, 1988, the participant's vested account balance shall not include amounts attributable to accumulated deductible employee contributions within the meaning of Section 72(o)(5)(B) of the Code. (A) SEPARATION FROM SERVICE FOR A REASON OTHER THAN DEATH. For a Participant who separates from Service with the Employer for a reason other than death, the Advisory Committee will direct the Trustee to commence distribution of the Participant's Accrued Benefit, as follows: (1) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT NOT EXCEEDING $3,500. In a lump sum, on the 60th day following the close of the Plan Year in which the Participant's Separation from Service occurs. 13 48 (2) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. In a form and at the time elected by the Participant, pursuant to Section 6.03. In the absence of an election by the Participant, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a lump sum (or, if applicable, the normal annuity form of distribution required under Section 6.04), on the 60th day following the close of the Plan Year in which the latest of the following events occurs: (a) the Participant attains Normal Retirement Age; (b) the Participant attains age 62; or (c) the Participant separates from Service. Notwithstanding the foregoing, the failure of a participant and spouse to consent to a distribution while a benefit is immediately distributable shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this section. (3) DISABILITY. If the Participant terminates employment because of disability, in lump sum, no later than the 60th day following the close of the Plan Year in which the participant terminates employment because of disability, subject to the requirements of this Article VI and subject to the applicable mandatory commencement dates described in Paragraphs (1) and (2). (B) REQUIRED BEGINNING DATE. If any distribution commencement date described under Paragraph (A) of this Section 6.01, either by Plan provision or by Participant election (or nonelection), is later than the Participant's Required Beginning Date, the Advisory Committee instead must direct the Trustee to make distribution under this Section 6.01 on the Participant's Required Beginning Date. A Participant's Required Beginning Date is the April 1 following the close of the calendar year in which the Participant attains age 70-1/2. However, if the Participant, prior to incurring a Separation from Service, attained age 70-1/2 by January 1, 1988, and, for the five Plan Year period ending in the calendar year in which he attained age 70-1/2 and for all subsequent years, the Participant was not a more than 5% owner (as defined in Section 1.09(a)), the Required Beginning Date is the April 1 following the close of the calendar year in which the Participant separates from Service, or, if earlier, the April 1 following the close of the calendar year in which the Participant becomes a more than 5% owner. Furthermore, if a Participant attained age 70-1/2 during 1988 and did not incur a Separation from Service prior to January 1,1989, his Required Beginning Date is April 1, 1990. A mandatory distribution at the Participant's Required Beginning Date will be in lump sum (or, if applicable, the normal annuity form of distribution required under Section 6.04) unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment. (1) GENERAL RULE. The required beginning date of a participant is the first day of April of the calendar year following the calendar year in which the participant attains age 70-1/2. (2) TRANSITIONAL RULES. The required beginning date of a participant who attains age 70-1/2 before January 1, 1988, shall be determined in accordance with (a) or (b) below: (A) NON-FIVE PERCENT OWNERS. The required beginning date of a participant who is not a five-percent owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70-1/2 occurs. (B) FIVE-PERCENT OWNERS. The required beginning date of a participant who is a five-percent owner during any year beginning after December 31, 1979, is the first day of April following the later of: (i) the calendar year in which the participant attains age 70-1/2, or (ii) the earlier of the calendar year with or within which ends the plan year in which the participant becomes a five-percent owner, or the calendar year in which the participant retires. The required beginning date of a participant who is not a five-percent owner who attains age 70-1/2 during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. (3) FIVE-PERCENT OWNER. A participant is treated as a five-percent owner for purposes of this section if such participant is a five-percent owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 but without regard to whether the plan is top-heavy) at any time during the plan year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent plan year. (4) Once distributions have begun to a five-percent owner under this section, they must continue to be distributed, even if the participant ceases to be a five-percent owner in a subsequent year. (C) DEATH OF THE PARTICIPANT. The Advisory Committee will direct the Trustee, in accordance with this Section 6.01(C), to distribute to the Participant's Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the Trust at the time of the Participant's death. (1) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT DOES NOT EXCEED $3,500. The Advisory Committee, subject to the requirements of Section 6.04, must direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit in a single cash sum, as soon as administratively practicable following the Participant's death or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the Participant's death. 14 49 PLAN DOCUMENT (2) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEED $3,500. The Advisory Committee will direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit at the time and in the form elected by the Participant or, if applicable by the Beneficiary, as permitted under this Article VI. In the absence of an election, subject to the requirements of Section 6.04, the Advisory Committee will direct the Trustee to distribute the Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum on the first distribution date following the close of the Plan Year in which the Participant's death occurs or, if later, the first distribution date following the date the Advisory Committee receives notification of or otherwise confirms the Participant's death. If the death benefit is payable to the Participant's surviving spouse in full, the surviving spouse, in addition to the distribution options provided in this Section 6.01(C), may elect distribution at any time or in any form (other than a joint and survivor annuity) this Article VI would permit for a Participant. Subject to Article VI Joint and Survivor Annuity Requirements, the requirements of this Article shall apply to any distribution of a participant's interest and will take precedence over any inconsistent provisions of this plan. Unless otherwise specified, the provisions of this Article apply to the calendar year beginning after December 31, 1984. All distributions required under this Article shall be determined and made in accordance with the proposed regulations under Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed regulations. 6.02 "METHOD OF PAYMENT OF ACCRUED BENEFIT" Subject to the annuity distribution requirements, if any, prescribed by Section 6.04, and any restrictions prescribed by Section 6.03, a Participant or Beneficiary may elect distribution under one, or any combination, of the following methods: (a) by payment in a lump sum; or (b) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life or life expectancy of the Participant, or the joint and last survivor life or life expectancy of the Participant and an individual the Participant designates as his Beneficiary (his "designated Beneficiary"). The distribution options permitted under this Section 6.02 are available only if the present value of the Participant Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $3,500. To facilitate installment payments under this Article VI, the Advisory Committee may direct the Trustee to segregate all or any part of the Participant's Accrued Benefit in a separate Account. The Trustee will invest the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated Account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. A Participant or Beneficiary may elect to receive an installment distribution in the form of a Nontransferable Annuity Contract. Under an installment distribution, the Participant or Beneficiary, at any time, may elect to accelerate the payment of all, or any portion, of the Participant's unpaid Nonforfeitable Accrued Benefit, subject to the requirements of Section 6.04. (A) MINIMUM DISTRIBUTION REQUIREMENTS FOR PARTICIPANTS. The Advisory Committee may not direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit, nor may the Participant elect to have the Trustee distribute his Nonforfeitable Accrued Benefit, under a method of payment which, as of the Required Beginning Date, does not satisfy the minimum distribution requirements under Code Section 401(a)(9) and the applicable Treasury regulations. The minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the Participant's life expectancy or, if applicable, the joint and last survivor expectancy of the Participant and his designated Beneficiary (as determined under Section 8.01, subject to the requirements of the Code Section 401(a)(9) regulations). The Advisory Committee will increase the Participant's Nonforfeitable Accrued Benefit, as determined on the relevant valuation date, for contributions allocated after the valuation date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the valuation date and by December 31 of the valuation calendar year. For purposes of this valuation, the Advisory Committee will treat any portion of the minimum distribution for the first distribution calendar year made after the close of that year as a distribution occurring in that first distribution calendar year. In computing a minimum distribution the Advisory Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9. The Advisory Committee, only upon the participant's written request, will not compute the minimum distribution for a calendar year subsequent to the first calendar year for which the Plan requires a minimum distribution by redetermining the applicable life expectancy. Otherwise, the Advisory Committee will redetermine the joint life and last survivor expectancy of the Participant and a nonspouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant's life expectancy. If the Participant's spouse is not his designated Beneficiary, a method of payment to the Participant (whether by Participant election or by Advisory Committee direction) may not provide more than incidental benefits to the Beneficiary. For Plan Year beginning after December 31, 1988, the Plan must satisfy the minimum distribution incidental benefit ("MDIB") requirement in the Treasury regulations issued under Code Section 401(a)(9) for distributions made on or after the Participant's Required Beginning Date and before the Participant's death. To satisfy the MDIB requirement, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lesser number. Following the Participant's death, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor. 15 50 For Plan Years beginning prior to January l, 1989, the Plan satisfies the incidental benefits requirement if the distributions to the Participant satisfied the MDIB requirement or if the present value of the retirement benefits payable solely to the Participant is greater than 50% of the present value of the total benefits payable to the Participant and his Beneficiaries. The Advisory Committee must determine whether benefits to the Beneficiary are incidental as of the date the Trustee is to commence payment of the retirement benefits to the Participant, or as of any date the Trustee redetermines the payment period to the Participant. The minimum distribution for the first distribution calendar year is due by the Participant's Required Beginning Date. The minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant's Required Beginning Date falls, is due by December 31 of that year. If the Participant receives distribution in the form of a Nontransferable Annuity Contract, the distribution satisfies this Section 6.02(A) if the contract complies with the requirements of Code Section 401(a)(9) and the applicable Treasury regulations. (B) MINIMUM DISTRIBUTION REQUIREMENTS FOR BENEFICIARIES. If any portion of the Participant's interest is payable to a designated beneficiary, method of distribution to the Participant's Beneficiary must satisfy Code Section 401(a)(9) and the applicable Treasury regulations. If the Participant's death occurs after his Required Beginning Date or, if earlier, the date the Participant commences an irrevocable annuity pursuant to Section 6.04, the method of payment to the Beneficiary must provide for completion of payment over a period which does not exceed the payment period which had commenced for the Participant. If the Participant's death occurs prior to his Required Beginning Date, and the Participant had not commenced an irrevocable annuity pursuant to section 6.04, the method of payment to the Beneficiary, subject to Section 6.04, must provide for completion of payment to the Beneficiary over a period not exceeding (i) by December 31 of the calendar year containing the fifth anniversary of the Participant's; or (ii) if the Beneficiary is a designated Beneficiary, the designated Beneficiary's life expectancy. The Advisory Committee may not direct payment of the Participant's Nonforfeitable Accrued Benefit over a period described in clause (ii) unless the Trustee will commence payment to the designated Beneficiary no later than the December 31 following the close of the calendar year in which the Participant's death occurred or, if later, and the designated Beneficiary is the Participant's surviving spouse, December 31 of the calendar year in which the Participant would have attained age 70-1/2. If the Trustee will make distribution in accordance with clause (ii), the minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the designated Beneficiary's life expectancy. The Advisory Committee must use the unisex life expectancy multiples under Treas. Section Reg. 1.72-9 for purposes of applying this paragraph. The Advisory Committee, only upon the written request of the Participant or of the Participant's surviving spouse, may recalculate the life expectancy of the Participant's surviving spouse no more frequently than annually, but may not recalculate the life expectancy of a nonspouse designated Beneficiary after the Trustee commences payment to the designated Beneficiary. The Advisory Committee will apply this paragraph by treating any amount paid to the Participant's child, which becomes payable to the Participant's surviving spouse upon the child's attaining the age of majority, as paid to the Participant' surviving spouse. Upon the Beneficiary's written request, the Advisory Committee must direct the Trustee to accelerate payment of all, or any portion, of the Participant's unpaid Accrued Benefit, as soon as administratively practicable following the effective date of that request. If the participant has not made an election pursuant to this Section 6.02 by the time of his or her death, the participant's designated beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Section, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the participant. If the participant has no designated beneficiary, or if the designated beneficiary does not elect a method of distribution, distribution of the participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the participant's death. For purposes of this Section 6.02, if the surviving spouse dies after the participant, but before payments to such spouse begin, the provisions of this Section 6.02, with the exception of paragraph (b) therein, shall be applied as if the surviving spouse were the participant. For the purposes of this Section 6.02, distribution of a participant's interest is considered to begin on the Participant's required beginning date (or the date distribution is required to begin to the surviving spouse). If distribution in the form of an annuity irrevocably commences to the Participant before the required beginning date, the date distribution is considered to begin is the date distribution actually commences. APPLICABLE LIFE EXPECTANCY. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or designated Beneficiary as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated such succeeding calendar year. 16 51 PLAN DOCUMENT DISTRIBUTION CALENDAR YEAR. A calendar year for which a minimum distribution is required. For distributions beginning before the participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the participant's required beginning date. For distributions beginning after the participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to this Section 6.02 above. 6.03 "BENEFIT PAYMENT ELECTIONS" Not earlier than 90 days before nor later than 30 days before the Participant's annuity starting date, the Plan Administrator must provide a benefit notice to a Participant who is eligible to make an election under this Section 6.03. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Participant's right to defer distribution until he attains the later of Normal Retirement Age or age 62. If a Participant or Beneficiary makes an election prescribed by this Section 6.03, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with that election. Any election under this Section 6.03 is subject to the requirements of Section 6.02 and of Section 6.04. The Participant or Beneficiary must make an election under this Section 6.03 by filing his election with the Advisory Committee at any time before the Trustee otherwise would commence to pay a Participant's Accrued Benefit in accordance with the requirements of Article VI. (A) PARTICIPANT ELECTIONS AFTER SEPARATE FROM SERVICE. If the present value of a Participant's Nonforfeitable Accrued Benefit exceeds $3,500, he may elect to have the Trustee commence distribution as of any distribution date, but not earlier than the first distribution date of the first Plan Year following the Participant's separation from service. The Participant may reconsider an election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date. A Participant who has not separated from Service may elect distribution as of any distribution date following his attainment of Normal Retirement Age. (B) PARTICIPANT ELECTIONS PRIOR TO TERMINATION OF EMPLOYMENT. No distribution options are permitted prior to a Participant's Separation of Service. (C) DEATH BENEFIT ELECTIONS. If the present value of the deceased Participant's Nonforfeitable Accrued Benefit exceeds $3,500, the Participant's Beneficiary may elect to have the Trustee distribute the Participant's Nonforfeitable Accrued Benefit in a form and within a period permitted under Section 6.02. The Beneficiary's election is subject to any restrictions designated in writing by the Participant and not revoked as of his date of death. (D) TRANSITIONAL ELECTIONS. Notwithstanding the provisions of Section 6.01 and 6.02, if the Participant (or Beneficiary) signed a written distribution designation prior to January 1, 1984, the Advisory Committee must distribute the Participant's Nonforfeitable Accrued Benefit in accordance with that designation, subject however, to the requirements, if applicable, of Sections 6.04, 6.05 and 6.06. This Section 6.03(D) does not apply to a pre-1984 distribution designation, and the Advisory Committee will not comply with that designation, if any of the following applies: (1) the method of distribution would have disqualified the Plan under Code Section 401(a)(9) as in effect on December 31, 1983; (2) the Participant did not have an Accrued Benefit as of December 31, 1983; (3) the distribution designation does not specify the timing and form of the distribution and the death Beneficiaries (in order of priority); (4) the substitution of a Beneficiary modifies the payment period of the distribution; or, (5) the Participant (or Beneficiary) modifies or revokes the distribution designation. In the event of a revocation, the Plan must distribute, no later than December 31 of the calendar year following the year of revocation, the amount which the Participant would have received under Section 6.02(A) if the election had not been in effect or, if the Beneficiary revokes the election, the amount which the Beneficiary would have received under Section 6.02(B) if the election had not been in effect. The Advisory Committee will apply this Section 6.03(D) to rollovers and transfers in accordance with Part J of the Code Section 401(a)(9) regulations. 6.04 "ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES" (A) JOINT AND SURVIVOR ANNUITY. The Advisory Committee must direct the Trustee to distribute a married or unmarried Participant's Nonforfeitable Accrued Benefit in the form of a qualified joint and survivor annuity, unless the Participant makes a valid waiver election (described in Section 6.05) within the 90 day period ending on the annuity starting date. The participant may elect to have such annuity distributed upon attainment of the earliest retirement age under the plan. The earliest retirement age is the earliest date on which, under the plan, the participant could elect to receive retirement benefits. If, as of the annuity starting date, the participant is married, a qualified joint and survivor annuity is an immediate annuity which is purchasable with the Participant's Nonforfeitable Accrued Benefit and which provides a life annuity for the Participant and a survivor annuity payable for the remaining life of the Participant's surviving spouse equal to not less than 50% and not more than 100% of the amount of the annuity payable during the life of the Participant. If, as of the annuity starting date, the Participant is not married, a qualified joint and survivor annuity is an immediate life annuity for the Participant which is purchasable with the Participant's Nonforfeitable Accrued Benefit. On or before the annuity starting date, the Advisory Committee, without Participant or spousal consent, must direct the Trustee to pay the Participant's Nonforfeitable Accrued Benefit in a lump sum, in lieu of a qualified joint and survivor annuity, in accordance with Section 6.01, if the Participant's Nonforfeitable Accrued Benefit is not greater than $3,500. This Section 6.04(A) applies only to a Participant who has completed at least one Hour of Service with the Employer after August 23, 1984. 17 52 (B) PRE-RETIREMENT SURVIVOR ANNUITY. If a married Participant dies prior to his annuity starting date, the Advisory Committee will direct the Trustee to distribute a portion of the Participant's Nonforfeitable Accrued Benefit to the Participant's surviving spouse in the form of a pre-retirement survivor annuity, unless the Participant has a valid waiver election (as described in Section 6.06) in effect within the election period, or unless the Participant and his spouse were not married throughout the one year period ending on the date of his death. The surviving spouse may elect to have such annuity distributed within a reasonable period after the participant's death. The period which begins on the first day of the plan year in which the participant attains age 35 and ends on the date of the participant's death. If a participant separates from service prior to the first day of the plan year in which age 35 is attained, with respect to the account balance as of the date of separation, the election period shall begin on the date of separation. A pre-retirement survivor annuity is an annuity which is purchasable with 50% of the Participant's Nonforfeitable Accrued Benefit (determined as of the date of the Participant's death) and which is payable for the life of the Participant's surviving spouse. The value of the pre-retirement survivor annuity is attributable to Employer contributions and to Employee contributions in the same proportion as the Participant's Nonforfeitable Accrued Benefit is attributable to those contributions. If the present value of the pre-retirement survivor annuity does not exceed $3,500, the Advisory Committee, on or before the annuity starting date (as determined under Section 6.01(C)), must direct the Trustee to make a lump sum distribution to the Participant's surviving spouse, in lieu of a pre-retirement survivor annuity. This Section 6.04(B) applies only to a Participant who dies after August 22, 1984, and either (i) completes at least one Hour of Service with the Employer after August 22, 1984, or (ii) separated from Service with at least 10 Years of Service (as defined in Section 5.06) and completed at least one Hour of Service with the Employer in a Plan Year beginning after December 31, 1975. (C) SURVIVING SPOUSE ELECTIONS. If the present value of the pre-retirement survivor annuity exceeds $3,500, the Participant's surviving spouse may elect to have the Trustee commence payment of the pre-retirement survivor annuity at any time following the date of the Participant's death, but not later than the mandatory distribution periods described in Section 6.02, and may elect either or any combination of the two forms of payment described in Section 6.02, in lieu of the pre-retirement survivor annuity. In the absence of an election by the surviving spouse, the Advisory Committee must direct the Trustee to distribute the pre-retirement survivor annuity on the first distribution date following the close of the Plan Year in which the latest of the following events occurs (i) the Participant's death; (ii) the date the Advisory Committee receives notification of or otherwise confirms the Participant's death; (iii) the date the Participant would have attained Normal Retirement Age; or (iv) the date the Participant would have attained age 62. (D) SPECIAL RULES. If the Participant has in effect a valid waiver election regarding the qualified joint and survivor annuity or the pre-retirement survivor annuity, the Advisory Committee must direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with Sections 6.01, 6.02 and 6.03. For purposes of applying this Article VI, the Advisory Committee treats a former spouse as the Participant's spouse or surviving spouse, and a current spouse will not be treated as the spouse or surviving spouse, to the extent provided under a qualified domestic relations order described in Section 6.07. The provisions of this Section 6.04, and of Sections 6.05 and 6.06, apply separately to the portion of the Participant's Nonforfeitable Accrued Benefit subject to the qualified domestic relations order and to the portion of the Participant's Nonforfeitable Accrued Benefit not subject to that order. The spouse (surviving spouse) is the spouse or surviving spouse of the participant, provided that a former spouse will be treated as the spouse or surviving spouse and a current spouse will not be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code. (E) PROFIT SHARING PLAN EXCEPTION. If the Plan is a profit sharing plan, the preceding provisions of this Section 6.04 do not apply to any Participant in the Plan except: (1) a Participant as respects whom the Plan is a direct or indirect transferee from a plan subject to the Code Section 417 requirements and the Plan received the transfer after December 31, 1984, unless the transfer is an elective transfer described in Section 12.06; (2) a Participant who elects a life annuity distribution (if Section 12.02 of the Plan requires the Plan to provide a life annuity distribution option); and (3) a Participant whose benefits under a defined benefit plan maintained by the Employer are offset by benefits provided under this Plan. Sections 6.05 and 6.06 only apply to Participants to whom the preceding provisions of this Section 6.04 apply. This Section shall apply to a participant in a profit-sharing plan, and to any distribution, made on or after the first day of the first plan year beginning after December 31, 1988, from or under a separate account attributable solely to accumulated deductible employee contributions, as defined in Section 72(o)(5)(B) of the Code, and maintained on behalf of a participant in a money purchase pension plan (including a target benefit plan), if the following conditions are satisfied: (1) the participant does not or cannot elect payments in the form of a life annuity; and (2) on the death of a participant, the participant's vested account balance will be paid to the participant's surviving spouse, but if there is no surviving spouse, or if the surviving spouse has consented in a manner conforming to a qualified election, then to the participant's designated beneficiary. The surviving spouse may elect to have distribution of the vested account balance commence within the 90-day period following the date of the participant's death. The account balance shall be adjusted for gains or losses occurring after the participant's death in accordance with the provision of the plan governing the adjustment of account balances for other types of distributions. This section Section 6.04(E) shall not be operative with respect to a participant in a profit-sharing plan if the plan is a direct or indirect transferee of a defined benefit plan, money purchase plan, a target benefit plan, stock bonus, or profit-sharing plan which is subject to the survivor annuity requirements of Section 401(a)(11) and Section 417. If this Section 6.04(E) is operative, then the provisions of this Article, other than this Section 6.04, shall be inoperative. 18 53 The participant may waive the spousal death benefit described in this Section at any time provided that no such waiver shall be effective unless it satisfies the conditions of Section 6.05 (other than the notification requirement referred to therein) that would apply to the participant's waiver of the qualified pre-retirement survivor annuity. For purposes of this Section 6.04(E), vested account balance shall mean, in the case of a money purchase pension plan or a target benefit plan, the participant's separate account balance attributable solely to accumulated deductible employee contributions within the meaning of Section 72(o)(5)(B) of the Code. In the case of a profit-sharing plan, vested account balance shall have the same meaning as Nonforfeitable Accrued Benefit. 6.05 "WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY" Not earlier than 90 days before nor later than 30 days before the Participant's annuity starting date, the Plan Administrator must provide the Participant a written explanation of the terms and conditions of the qualified joint and survivor annuity, the Participant's right to make, and the effect of, an election to waive the joint and survivor form of benefit, the rights of the Participant's spouse regarding the waiver election and the Participant's right to make, and the effect of, a revocation of a waiver election. The Plan does not limit the number of times the Participant may revoke a waiver of the qualified joint and survivor annuity or make a new waiver during the election period. A married Participant's waiver election is not valid unless (a) the Participant's spouse (to whom the survivor annuity is payable under the qualified joint and survivor annuity) has consented in writing to the waiver election, the spouse's consent acknowledges the effect of the election, and a notary public or the Plan Administrator (or his representative) witnesses the spouse's consent, (b) the election designates a specific beneficiary, including any class of beneficiaries or any contingent beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the participant without any further spousal consent; (c) the spouse consents to the alternate form of payment designated by the Participant or to any change in that designated form of payment, and (d) unless the spouse is the Participant's sole primary Beneficiary, the spouse consents to the Participant's Beneficiary designation or to any change in the Participant's Beneficiary designation. The spouse's consent to a waiver of the qualified joint and survivor annuity is irrevocable, unless the Participant revokes the waiver election. The spouse may execute a blanket consent to any form of payment designation or to any Beneficiary designation made by the Participant, if the spouse acknowledges the right to limit that consent to a specific designation but, in writing, waives that right. The consent requirements of this Section 6.05 apply to a former spouse of the Participant, to the extent required under a qualified domestic relations order described in Section 6.07. A revocation of a prior waiver may be made by a participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the participant has received notice as provided in this Section 6.05. The Plan Administrator will accept as valid a waiver election which does not satisfy the spousal consent requirements if the Plan Administrator establishes the Participant does not have a spouse, the Plan Administrator is not able to locate the Participant's spouse, the Participant is legally separated or has been abandoned (within the meaning of State law) and the Participant has a court order to that effect, or other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Participant) may give consent. Any consent obtained from a spouse shall be effective only with respect to such spouse. 6.06 "WAIVER ELECTION - PRE-RETIREMENT SURVIVOR ANNUITY" The Plan Administrator must provide a written explanation of the pre-retirement survivor annuity to each married Participant, within the following period which ends last: (1) the period beginning on the first day of the Plan Year in which the Participant attains age 32 and ending on the last day of the Plan Year in which the Participant attains age 35; (2) a reasonable period ending after an Employee becomes a Participant; (3) a reasonable period ending after the joint and survivor rules become applicable to the Participant; or (4) a reasonable period ending after a fully subsidized pre-retirement survivor annuity no longer satisfies the requirements for a fully subsidized benefit. A reasonable period described in clauses (2), (3) and (4) is the two-year period beginning one year before and ending one year after the applicable event. If the Participant separates from Service before attaining age 35, clauses (1), (2), (3) and (4) do not apply and the Plan Administrator must provide the written explanation within the two-year period beginning one year before and ending one year after the Separation from Service. The written explanation must describe, in a manner consistent with Treasury regulations, the terms and conditions of the pre-retirement survivor annuity comparable to the explanation of the qualified joint and survivor annuity required under Section 6.05. The Plan does not limit the number of times the Participant may revoke a waiver of the pre-retirement survivor annuity or make a new waiver during the election period. A Participant's waiver election of the pre-retirement survivor annuity is not valid unless (a) the Participant makes the waiver election no earlier than the first day of the Plan Year in which he attains age 35 and (b) the Participant's spouse (to whom the pre-retirement survivor annuity is payable) satisfies the consent requirements described in Section 6.05, except the spouse need not consent to the form of benefit payable to the designated Beneficiary. The spouse's consent to the waiver of the pre-retirement survivor annuity is irrevocable, unless the Participant revokes the waiver election. Irrespective of the time of election requirement described in clause (a), if the Participant separates from Service prior to the first day of the Plan Year in which he attains age 35, the Plan Administrator will accept a waiver election as respects the Participant's Accrued Benefit attributable to his Service prior to his Separation from Service. If the participant thereafter returns to employment with the employer, the applicable period for such participant shall be redetermined. Pre-age 35 19 54 waiver: A participant who will not yet attain age 35 as of the end of any current Plan Year may make a special qualified election to waive the qualified pre-retirement survivor annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the participant will attain age 35. Such election shall not be valid unless the participant receives a written explanation of the qualified pre-retirement survivor annuity in such terms as are comparable to the explanation required under Section 6.05. Qualified pre-retirement survivor annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the participant attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this Article. Notwithstanding the other requirements of this Section 6.06, the respective notices prescribed by this Section need not be given to a participant if (1) the plan "fully subsidizes" the costs of a qualified joint and survivor annuity or qualified pre-retirement survivor annuity, and (2) the plan does not allow the participant to waive the qualified joint and survivor annuity or qualified pre-retirement survivor annuity and does not allow a married participant to designate a nonspouse beneficiary. For purposes of this Section 6.06, a plan fully subsidizes the costs of a benefit if no increase in cost, or decrease in benefits to the participant may result from the participant's failure to elect another benefit. Any consent obtained from a spouse shall be effective only with respect to such spouse. 6.07 "DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS" Nothing contained in this Plan prevents the Trustee, in accordance with the direction of the Advisory Committee, from complying with the provisions of a qualified domestic relations order (as defined in Code Section 414(p)). This Plan specifically permits distribution to an alternate payee under a qualified domestic relations order at any time, irrespective of whether the Participant has attained his earliest retirement age (as defined under Code Section 414(p)) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of earliest retirement age is available only if: (l) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee's benefits under the Plan exceeds $3,500, and if the order requires, the alternate payee consents to any distribution occurring prior to the Participant's attainment of earliest retirement age. Nothing in this Section 6.07 permits a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not permitted under the Plan. The Plan Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of its determination. The Plan Administrator must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. If any portion of the Participant's Nonforfeitable Accrued Benefit is payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, the Advisory Committee must make a separate accounting of the amounts payable. If the Plan Administrator determines the order is a qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Advisory Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the Plan Administrator does not make its determination of the qualified status of the order within the 18-month determination period, the Advisory Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Plan Administrator later determines the order is a qualified domestic relations order. To the extent it is not inconsistent with the provisions of the qualified domestic relations order, the Advisory Committee may direct the Trustee to invest any partitioned amount in a segregated subaccount or separate account and to invest the account in Federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated subaccount remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. The Trustee will make any payments or distributions required under this Section 6.07 by separate benefit checks of other separate distribution to the alternate payee(s). 20 55 PLAN DOCUMENT ARTICLE VII TRUSTEE, POWERS AND DUTIES 7.01 "INVESTMENT OF TRUST ASSETS" The Trustee shall accept and hold in the Trust such contributions of money on behalf of the Employer and Participants as it may receive from time to time, but not more frequently than once each month, from the Employer. All such contributions of money shall be accompanied by written instructions from the Employer specifying the Participants' sub-accounts to which they are to be credited, the amount to be invested in and the choice of Designated Investment Company stock, and by furnishing such instructions the Employer represents to the Trustee that the same are in accordance with any uniform rules adopted by the Employer and made known to Participants. If written instructions are not received, or if received, are in the opinion of the Trustee unclear, the Trustee may hold all or a portion of the contributions in cash without liability for rising security prices or distributions, pending receipt of written instructions or clarification. A Participant, through his Employer, may request an exchange of all or part of the investment company shares held hereunder for any other investment company shares eligible for purchase under the Plan, upon terms and conditions and within the limitations imposed by the then current prospectuses of the respective investment companies. Investment in shares of the Designated Investment Company shall be made at the price and in the manner in which such shares are then being publicly offered by such investment company. All dividends and capital gain distributions received on such shares shall be reinvested in such shares. If any distribution on shares of the fund may be received at the election of the shareholder in additional shares or in cash or other property, the Trustee shall elect to receive it in additional shares. Sales charges attributable to the acquisition of shares shall be charged to the account of the Participant for which such shares are acquired. All investment company shares acquired by the Trustee shall be registered in the name of the Trustee or of its registered nominee. The Employer shall remit directly to the insurance company any premiums life insurance or annuities which constitute contributions under the Plan, and the Trustee shall have no duty to account therefor. Any such life insurance and/or annuity contracts shall be issued in restricted and nontransferable form and be held by the Employer. 7.02 "VOTING AND OTHER ACTIONS" The Trustee shall deliver, or cause to be executed and delivered, to the Employer all notices, prospectuses, financial statements, proxies, and proxy soliciting material relating to shares of Designated Investment Company stock held pursuant to the Plan. The Trustee shall not vote any of the shares of the Fund held hereunder. 7.03 "REPORTS OF THE TRUSTEE AND EMPLOYER" The Trustee shall keep accurate and detailed records of all receipts, investments, disbursements and other transactions under this Trust. Not later than forty-five (45) days after the close of each Plan Year (or after the Trustee's resignation or removal pursuant to Section XI hereof), the Trustee shall file with the Employer and each Participant or Beneficiary for whom account is maintained by the Trustee under this Agreement a written report or reports reflecting the receipts, disbursements and other transactions effected by it during such Plan Year (or period ending with such resignation or removal) and the assets and liabilities of such account at its close. Upon the expiration of a period of sixty (60) days immediately following the date on which such reports are filed, the Trustee shall be forever released and discharged from all liability and accountability to anyone with respect to its acts, transactions, duties, obligations or responsibility as shown in or reflected by such reports, except with respect to any such acts or transactions as to which written objections have been filed with the Trustee within such sixty day period. The Employer shall furnish to the Trustee, and the Trustee shall furnish to the Employer, such information relevant to the Plan and Trust as may be required under the Internal Revenue Code and any Regulations issued or forms adopted by the Treasury Department thereunder. The Trustee shall keep such records, make such identifications, and file with the Internal Revenue Service such returns and other information concerning the Trust as may be required of it under the Internal Revenue Code and any Regulations issued or forms adopted by the Treasury Department thereunder. 7.04 "TRUSTEE FEES AND EXPENSES OF THE ACCOUNT" Any income taxes or other taxes of any kind whatsoever that may be levied or assessed upon or in respect of the Trust, any transfer taxes incurred in connection with the investment and reinvestment of the assets of the Trust, all other administrative expenses incurred by the Trustee in the performance of its duties including fees for legal services rendered to the Trustee, and such compensation to the Trustee as may be agreed upon from time to time between the Trustee and the Employer shall be paid from the assets of the Trust and shall, unless allocable to the Accounts of specific Participants, be charged proportionately to their respective accounts. 21 56 7.05 "CONCERNING THE TRUSTEE" The Trustee shall not be responsible in any way for the collection of contributions provided for under the Plan, the purpose or propriety of any distribution made pursuant to Section V hereof, or any other action taken at the Employer's request. Nor shall the Trustee be responsible for the administration of the Plan, its validity or effect, or the qualification of the Plan or of the Trust Agreement under the provisions of the Internal Revenue Code. The Trustee shall not be required to examine the Plan or be charged with notice of its provisions. The Trustee shall not be required to take any action upon receipt of any notice from the Internal Revenue Service except to forward a copy thereof to the Employer with a request for written instructions. The Employer shall at all times fully indemnify and save harmless the Trustee, its successors and assigns, from and against any and all loss resulting from liability to which the Trustee may be subject by reason of any act or conduct (except willful misconduct or gross negligence) in its capacity as Trustee hereunder, including all expenses reasonably incurred in its defense, in case the Employer fails to provide such defense. The Trustee shall be under no duty to take any action other than as herein specified with respect to the Trust unless the Employer shall furnish the Trustee with instructions in proper form and as authorized by the terms of the Plan; or to defend or engage in any suit with respect to the Trust unless the Trustee shall have first agreed in writing to do so and shall have been fully indemnified to the satisfaction of the Trustee. The Trustee shall be protected in acting upon any written order from the Employer or any other notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed, and, so long as it acts in good faith, in taking or omitting to take any other action. The Trustee shall not be liable for interest on any cash or cash balances maintained in the Trust pending investment in accordance with appropriate directions from the Employer. 7.06 "AMENDMENT" If the Employer's plan fails to attain or retain qualification, such plan will no longer participate in the prototype Plan and will be considered an individually designed plan. 7.07 "RESIGNATION OR REMOVAL OF TRUSTEE" The Trustee may resign at any time upon thirty (30) days notice in writing to the Employer, and may be removed by the Employer at any time upon thirty (30) days notice in writing to the Trustee. Upon such resignation or removal, the Employer shall appoint a successor Trustee. Upon receipt by the Trustee of written acceptance of such appointment by the successor Trustee, the Trustee shall transfer and pay over to such successor the assets of the Trust Account and all records pertaining thereto. The Trustee is authorized, however, to reserve such sum of money as it may deem advisable for payment of all its fees, compensation, costs and expenses, or for payment of any other liability constituting a charge on or against the assets of the Trust or on or against the Trustee, with any balance of such reserve remaining after the payment of all such items to be paid over to the successor Trustee. The successor Trustee shall hold the assets paid over to it under terms similar to those of this Agreement that qualify under section 401 of the Code. If within thirty (30) days after the Trustee's resignation or removal the Employer has not appointed a successor Trustee which has accepted such appointment, the Trustee shall, unless it elects to terminate the Trust pursuant to Section XII, appoint such successor itself. 7.08 "TERMINATION OF TRUST" The Trustee may elect to terminate the Trust if within thirty (30) days after its resignation or removal pursuant to Section X the Employer has not appointed a successor Trustee which has accepted such appointment. The Trustee shall terminate the Trust upon receiving notice of the Employer's death, if the Employer is a sole proprietor, or upon receiving notice of the termination of the partnership, if the Employer is a partnership, or upon receiving notice of the dissolution of the corporation, if the Employer is a corporation, unless provision is made by a successor to the business of the Employer for the continuation of the Plan and this Agreement upon terms satisfactory to the Trustee. Termination of the Trust shall be effected by distributing all assets thereof to the Participants and their designated beneficiaries pursuant to the direction of the Employer (or in the absence of such direction as determined by the Trustee), as on the termination of the Plan. Upon the completion of such distribution, the Trustee shall be relieved from all further liability with respect to all amounts so paid. 7.09 "MISCELLANEOUS" At no time shall it be possible for any part of the assets of the Trust to be used for or diverted to purposes other than for the exclusive benefit of Participants and Beneficiaries. Any notice from the Trustee to the Employer, Participant or Beneficiary provided for in this Agreement shall be effective if sent by first class mail to the last address of record. Upon receipt of a written request from the Employer, the Trustee shall transfer the assets in the Trust for a Participant to any other qualified plan maintained by the Employer for the benefit of such Participant; and the Trustee shall have no further liability under the Plan and Trust with respect to any assets so transferred. This Agreement shall bind and inure to the benefit of the personal representatives, successors and assigns of the Employer and the Trustee. 22 57 PLAN DOCUMENT ARTICLE VIII PARTICIPANT ADMINISTRATIVE PROVISIONS 8.01 "BENEFICIARY DESIGNATION" Any Participant may from time to time designate, in writing, any person or persons, contingently or successively, to whom the Trustee will pay his Accrued Benefit (including any life insurance proceeds payable to the Participant's Account) on event of his death and the Participant may designate the form and method of payment. The Advisory Committee will prescribe the form for the written designation of Beneficiary and, upon the Participant's filing the form with the Advisory Committee, the form effectively revokes all designations filed prior to that date by the same Participant. COORDINATION WITH SURVIVOR REQUIREMENTS. If the joint and survivor requirements of Article VI apply to the Participant, this Section 8.01 does not impose any special spousal consent requirements on the Participant's Beneficiary designation. However, in the absence of spousal consent (as required by Article VI) to the Beneficiary designation: (1) any waiver of the joint and survivor annuity or of the pre-retirement survivor annuity is not valid; and (2) if the Participant dies prior to his annuity starting date, the Beneficiary designation will apply only to the portion of the death benefit which is not payable as a pre-retirement survivor annuity. PROFIT SHARING PLAN EXCEPTION. If the Plan is a profit sharing plan, and the Employer elects to apply the joint and survivor requirements only to Participants described in Section 6.04(E), the Beneficiary designation of a married Participant who is not described in Section 6.04(E) is not valid unless the Participant's spouse consents (in a manner described in Section 6.05) to the Beneficiary designation. The spousal consent requirement in this paragraph does not apply if the Participant and his spouse are not married throughout the one year period ending on the date of the Participant's death, or if the Participant's spouse is the Participant's sole primary Beneficiary. 8.02 "NO BENEFICIARY DESIGNATION" If a Participant fails to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a Participant predeceases him or dies before complete distribution of the Participant's Accrued Benefit as prescribed by the Participant's Beneficiary form, then the Trustee will pay the Participant's Accrued Benefit in accordance with Section 6.02 in the following order of priority: (A) The Participant's surviving spouse; (B) The Participant's surviving children, including adopted children, in equal shares; (C) The Participant's surviving parents, in equal shares; or (D) The legal representative of the estate of the last to die of the Participant and his Beneficiary. The Advisory Committee will direct the Trustee as to the method and to whom the Trustee will make payment under this Section 8.02. If a benefit is forfeited because the participant or beneficiary cannot be found, such benefit will be reinstated if a claim is made by the participant or beneficiary. 8.03 "PERSONAL DATA TO COMMITTEE" Each Participant and each Beneficiary of a deceased Participant must furnish to the Advisory Committee such evidence, data or information as the Advisory Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the Advisory Committee, provided the Advisory Committee advises each Participant of the effect of his failure to comply with its request. 8.04 "ADDRESS FOR NOTIFICATION" Each Participant and each Beneficiary of a deceased Participant must file with the Advisory Committee from time to time, in writing, his post office address and any change of post office address. Any communication, statement or notice addressed to a Participant, or Beneficiary, at his last post office address filed with the Advisory Committee, or as shown on the records of the Employer, binds the Participant, or Beneficiary, for all purposes of this Plan. 8.05 "ASSIGNMENT OR ALIENATION" Subject to Code Section 414(p) relating to qualified domestic relations orders or domestic relations orders entered into before January 1, 1985, neither a Participant nor a Beneficiary may anticipate, assign or alienate voluntarily or involuntarily (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Furthermore, a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process. 23 58 8.06 "NOTICE OF CHANGE IN TERMS" The Plan Administrator, within the time prescribed by ERISA and the applicable regulations, must furnish all Participants and Beneficiaries a summary description of any material amendment to the Plan or notice of discontinuance of the Plan and all other information required by ERISA to be furnished without charge. 8.07 "LITIGATION AGAINST THE TRUST" A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of ERISA or to enforce any provisions of ERISA or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan. 8.08 "INFORMATION AVAILABLE" Any Participant in the Plan or any Beneficiary may examine copies of the Plan description, latest annual report, any bargaining agreement, this Plan and Trust, contract or any other instrument under which the Plan was established or is operated. The Plan Administrator will maintain all of the items listed in this Section 8.08 in his office, or in such other place or places as he may designate from time to time in order to comply with the regulations issued under ERISA, for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary the Plan Administrator must furnish him with a copy of any item listed in this Section 8.08. The Plan Administrator may make a reasonable charge to the requesting person for the copy so furnished. 8.09 "APPEAL PROCEDURE FOR DENIAL OF BENEFITS" The Plan Administrator must provide adequate notice in writing to any Participant or to any Beneficiary ("Claimant") whose claim for benefits under the Plan the Advisory Committee has denied. The Plan Administrator's notice to the Claimant must set forth: (A) The specific reason for the denial; (B) Specific references to pertinent Plan provisions on which the Advisory Committee based its denial; (C) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and (D) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the Advisory Committee within 75 days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the Advisory Committee in writing within the 75-day period will render the Advisory Committee's determination final, binding and conclusive. If the Claimant should appeal to the Advisory Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. The Claimant, or his duly authorized representative, may review pertinent Plan documents. The Advisory Committee will re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Advisory Committee must advise the Claimant of its decision within 60 days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60-day limit unfeasible, but in no event may the Advisory Committee render a decision respecting a denial for a claim for benefits later than 120 days after its receipt of a request for review. The Plan Administrator's notice of denial of benefit must identify the name of each member of the Advisory Committee and the name and address of the Advisory Committee member to whom the Claimant may forward his appeal. 8.10 "PARTICIPANT DIRECTION OF INVESTMENT" A Participant has the right to direct the Employer with respect to the investment or re-investment of the assets comprising the Participant's individual Account only if the Employer consents in writing to permit such direction. If the Employer consents to Participant direction of investment, the Employer and each Participant must execute a letter agreement as a part of this Plan containing such conditions, limitations and other provisions they deem appropriate before the Employer will follow any Participant direction as respects the investment or re-investment of any part of the Participant's individual Account. The Employer is not liable for any loss, nor is liable for any breach, resulting from a Participant's direction of the investment of any part of his individual Account. 24 59 PLAN DOCUMENT ARTICLE IX ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS 9.01 "MEMBERS' COMPENSATION, EXPENSES" The Employer must appoint an Advisory Committee to administer the Plan, the members of which may or may not be Participants in the Plan, or which may be the Plan Administrator acting alone. The members of the Advisory Committee will serve without compensation for services as such, but the Employer will pay all expenses of the Advisory Committee, including the expense for any bond required under ERISA. 9.02 "TERM" Each member of the Advisory Committee serves until the appointment of his successor. 9.03 "POWERS" In case of a vacancy in the membership of the Advisory Committee, the remaining members of the Advisory Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the Advisory Committee pending the filling of the vacancy. 9.04 "GENERAL" The Advisory Committee has the following powers and duties: (A) To select a Secretary, who need not be a member of the Advisory Committee; (B) To determine the rights of eligibility of an Employee to participate in the Plan, the value of a Participant's Accrued Benefit and the Nonforfeitable percentage of each Participant's Accrued Benefit; (C) To adopt rules of procedure and regulations necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Agreement; (D) To enforce the terms of the Plan and the rules and regulations it adopts; (E) To direct the Trustee as respects the crediting and distribution of the Trust; (F) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan; (G) To furnish the Employer with information which the Employer may require for tax or other purposes; (H) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; (I) To establish and maintain a funding standard account and to make credits and charges to the account to the extent required by and in accordance with the provisions of the Code. The Advisory Committee must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner. 9.05 "FUNDING POLICY" The Advisory Committee will review, not less often than annually, all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan's objectives. 9.06 "MANNER OF ACTION" The decision of a majority of the members appointed and qualified controls. 9.07 "INTERESTED MEMBER" No member of the Advisory Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the Advisory Committee. 9.08 "INDIVIDUAL ACCOUNTS" The Advisory Committee will maintain, or direct the Trustee to maintain, a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan. The Advisory Committee will make its allocations, or request the Trustee to make its allocations, to the Accounts of the Participants in accordance with the provisions of Section 9.11. The Advisory Committee may direct the Trustee to maintain a temporary segregated investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations under Section 9.11. The Advisory Committee must maintain records of its activities. 25 60 9.09 "VALUE OF PARTICIPANT'S ACCRUED BENEFIT" The value of each Participant's Accrued Benefit consists of that proportion of the net worth (at fair market value) of the Employer's Trust Fund which the net credit balance in his Account (exclusive of the cash value of incidental benefit insurance contracts) bears to the total net credit balance in the Accounts (exclusive of the cash value of the incidental benefit insurance contracts) of all Participants plus the cash surrender value of any incidental benefit insurance contracts held by the Employer on the Participant's life. For purposes of a distribution under the Plan, the value of a Participant's Accrued Benefit is its value as of the valuation date immediately preceding the date of the distribution. 9.10 "ALLOCATIONS AND DISTRIBUTION OF NET INCOME GAIN OR LOSS" A "valuation date" under this Plan is each Accounting Date. As of each valuation date, the Advisory Committee must adjust Accounts to reflect net income, gain or loss since the last valuation date. The valuation period is the period beginning the day after the last valuation date and ending on the current valuation date. The assets of the trust will be valued annually at fair market value as of the last day of the plan year. On such date, the earnings and losses of the trust will be allocated to each participant's account in the ratio that such account balance bears to all account balances. TRUST FUND ACCOUNTS. The allocation provisions of this paragraph apply to all Participant Accounts other than segregated investment Accounts. The Advisory Committee first will adjust the Participant Accounts, as those Accounts stood at the beginning of the current valuation period, for amounts charged during the valuation period to the Accounts in accordance with Section 9.12 (relating to distributions) and Section 10.01 (relating to insurance premiums), for the cash value of incidental benefit insurance contracts and for the amount of any Account which the Trustee has fully distributed since the immediately preceding valuation date. The Advisory Committee subject to Section 9.12, will allocate the net income, gain or loss pro rata to the adjusted Participant Accounts. The allocable net income, gain or loss is the net income (or net loss), including the increase or decrease in the fair market value of assets, since the last valuation date. SEGREGATED INVESTMENT ACCOUNTS. A segregated investment Account receives all income it earns and bears all expense or loss it incurs. ADDITIONAL RULES. An Excess Amount or suspense account described in Part 2 of Article III does not share in the allocation of net income, gain or loss described in this Section 9.10. If the Employer's Plan includes a Code Section 401(k) arrangement, the Employer may specify in its Adoption Agreement alternate valuation provisions authorized by that Adoption Agreement. This Section 9.10 applies solely to the allocation of net income, gain or loss of the Trust. The Advisory Committee will allocate the Employer contributions in accordance with Article III. 9.11 "INDIVIDUAL STATEMENT" As soon as practicable after the Accounting Date of each Plan Year, but within the time prescribed by ERISA and the regulations under ERISA, the Plan Administrator will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his Accrued Benefit in the Trust as of that date and such other information ERISA requires be furnished the Participant or Beneficiary. No Participant, except a member of the Advisory Committee, has the right to inspect the records reflecting the Account of any other Participant. 9.12 "ACCOUNT CHARGED" The Advisory Committee will charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made. 9.13 "MISSING BENEFICIARY" If the Employer shall be unable to locate any Beneficiary entitled to receive payment of any death benefit payable hereunder, after reasonable search, for a period of two years after such benefit becomes payable, the amount of such benefit shall cease to be payable to such Beneficiary, and shall become payable instead to the personal representative of such former Participant. 26 61 PLAN DOCUMENT ARTICLE X PROVISIONS RELATING TO INSURANCE 10.01 "INSURANCE BENEFIT ANNUITY" The Employer in accordance with the direction of the respective Participants in accordance with any uniform rules adopted by the Employer and made known to Participants may elect to invest contributions to the Plan in incidental life insurance benefits or one or more annuity contracts distributed by Kemper Financial Services, Inc. or an affiliate, provided, however, that: (A) ORDINARY LIFE. The premiums paid for ordinary life insurance on the life of a Participant must at all times be less than 50% of the Employer contributions made on behalf of such Participant. For purposes of these incidental insurance provisions, ordinary life insurance contracts are contracts with both nondecreasing death benefits and nonincreasing premiums. (B) TERM. The premiums paid for term, universal and all other life insurance which is not ordinary life insurance on the life of any Participant may not exceed 25% of the Employer contributions made on behalf of such Participant. (C) COMBINATION. If both ordinary life and term insurance are purchased on the life of any Participant, the sum of the term insurance premium plus one-half of the ordinary life premiums may not exceed 25% of the Employer contributions made on behalf of such Participant. (D) ANNUITIES. The terms of any annuity contract purchased and distributed by the Plan to a Participant shall comply with the requirements of this Plan. Such direction of the participant's creates a segregated asset account. Except as provided in this Section 10.01 and Section 8.10, each participant will have a ratable interest in all assets of the trust. It will be the Employer's responsibility to see that the limitations of this Article X are not exceeded. 10.02 "FORM OF CONTRACT AND PREMIUM" The Employer shall apply for any contract under this Article X and each application for contract, and the contracts themselves, shall nominate and designate the Participant as sole owner, but each contract shall be held by the Employer and shall be restricted and not transferable. The Employer shall pay directly to the insurance company all amounts pursuant to an election under this Article X and shall charge the premiums on any such contract(s) against the contributions by or on behalf of such Participant. After payment of any premium, the Employer shall remit the balance of such contributions to the Trustee hereunder. The Employer shall hold all contracts issued under the Plan and fully account for same to the Trustee upon written request. In the event of any conflicts between the terms of this Plan and the terms of any insurance contracts hereunder, the Plan provisions shall control. Any dividends or credits earned on insurance contracts will be allocated to the participant's account derived from employer contributions for whose benefit the contract is held. 10.03 "LIMITATION OF LIFE INSURANCE PROTECTION" The Employer shall not continue any life insurance protection for any Participant beyond his actual termination of employment. If the Employer holds any insurance contract(s) on the life of a Participant when the Participant terminates his employment, subject to Article VI, the Employer shall transfer the contract(s) to the Participant endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Plan; subject, however, to restrictions as to surrender or payment of benefits as the issuing insurance company may permit and as the Employer shall direct. Subject to Article VI, Joint and Survivor Annuity Requirements, the contracts on a participant's life will be converted to cash or an annuity or distributed to the participant upon commencement of benefits. 27 62 ARTICLE XI MISCELLANEOUS 11.01 "EVIDENCE" Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. Both the Advisory Committee and the Trustee are fully protected in acting and relying upon any evidence described under the immediately preceding sentence. 11.02 "NO RESPONSIBILITY FOR EMPLOYER ACTION" Neither the Trustee nor the Advisory Committee has any obligation or responsibility with respect to any action required by the Plan to be taken by the Employer, any Participant or eligible Employee, or for the failure of any of the above persons to act or make any payment or contribution, or to otherwise provide any benefit contemplated under this Plan. Furthermore, the Plan does not require the Trustee or the Advisory Committee to collect any contribution required under the Plan, or to determine the correctness of the amount of any Employer contribution. Neither the Trustee nor the Advisory Committee need inquire into or be responsible for any action or failure to act on the part of the others. Any action required of a corporate Employer must be by its Board of Directors or its designate. 11.03 "FIDUCIARIES NOT INSURERS" The Trustee, the Advisory Committee, the Plan Administrator and the Employer in no way guarantee the Trust Fund from loss or depreciation. The Employer does not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Advisory Committee and the Trustee to make any payment from the Trust Fund at any time and all times is limited to the then available assets of the Trust. 11.04 "WAIVER OF NOTICE" Any person entitled to notice under the Plan may waive the notice. 11.05 "SUCCESSORS" The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns, and upon the Trustee, the Advisory Committee, the Plan Administrator and their successors. 11.06 "WORD USAGE" Words used in the masculine also apply to the feminine where applicable, and wherever the context of the Employer's Plan dictates, the plural includes the singular and the singular includes the plural. 11.07 "EMPLOYER'S RIGHT TO PARTICIPATE" If the Employer's Plan fails to attain or retain qualification under section 401 of the Code, the Plan will no longer participate in this Kemper Simplified Prototype Retirement Plan and will be considered an individually-designed plan. 11.08 "EMPLOYMENT NOT GUARANTEED" Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification of amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, gives any Employee, Employee-Participant or any Beneficiary any right to continue employment, any legal or equitable right against the Employer, or Employee of the Employer, or against the Trustee, or its agents or employees, or against the Plan Administrator, except as expressly provided by the Plan, the Trust, ERISA or by a separate agreement. 28 63 PLAN DOCUMENT ARTICLE XII EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION 12.01 "EXCLUSIVE BENEFIT" Any contribution made by the employer because of a mistake of fact must be returned to the employer within one year of the contribution. In the event that the Commissioner of Internal Revenue determines that the plan is not initially qualified under the Internal Revenue Code, any contribution made incident to that initial qualification by the employer must be returned to the employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the employer's return for the taxable year in which the plan is adopted, or such later date as the Secretary of the Treasury may prescribe. 12.02 "AMENDMENT BY EMPLOYER" The Employer may change the choice of options in the adoption agreement and add overriding language in the adoption agreement when such language is necessary to satisfy Section 415 or Section 416 of the Code because of the required aggregation of multiple plans, and add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the plan to be treated as individually designed. An employer that amends the plan for any other reason, including a waiver of the minimum funding requirement under Section 412(d), will no longer participate in this master or prototype plan and will be considered to have an individually designed plan. No amendment may authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. No amendment may cause or permit any portion of the Trust Fund to revert to or become a property of the Employer. The Employer also may not make any amendment which affects the rights, duties or responsibilities of the Trustee, the Plan Administrator or the Advisory Committee without the written consent of the affected Trustee, the Plan Administrator or the affected member of the Advisory Committee. If the plan's vesting schedule is amended, or the plan is amended in any way that directly or indirectly affects the computation of the participant's nonforfeitable percentage or if the plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each participant with at least 3 years of service with the employer may elect, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable percentage computed under the plan without regard to such amendment or change. For participants who do not have at least one hour of service in any plan year beginning after December 31, 1988, the preceding sentence shall be applied by substituting "five years of service" for "three years of service" where such language appears. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: (1) 60 days after the amendment is adopted; (2) 60 days after the amendment becomes effective; or (3) 60 days after the participant is issued written notice of the amendment by the employer or plan administrator. Furthermore, if the vesting schedule of a plan is amended, in the case of an employee who is a participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such employee's right to his employer-derived accrued benefit will not be less than his percentage computed under the plan without regard to such amendment. CODE SECTION 411(D)(6) PROTECTED BENEFITS. An amendment (including the adoption of this Plan as a restatement of an existing plan) may not decrease a Participant's Accrued Benefit, except to the extent permitted under Code Section 412(c)(8), and may not reduce or eliminate Code Section 411 (d)(6) protected benefits determined immediately prior to the adoption date (or, if later, the effective date) of the amendment. An amendment reduces or eliminates Code Section 411 (d)(6) protected benefits if the amendment has the effect of either (1) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in Treasury regulations), or (2) except as provided by Treasury regulations, eliminating an optional form of benefit. The Advisory Committee must disregard an amendment to the extent application of the amendment would fail to satisfy this paragraph. If the Advisory Committee must disregard an amendment because the amendment would violate clause (1) or clause (2), the Advisory Committee must maintain a schedule of the early retirement option or other optional forms of benefit the Plan must continue for the affected Participants. The Employer must make all amendments in writing. Each amendment must state the date to which it is either retroactively or prospectively effective. See Section 11.08 for the effect of certain amendments adopted by the Employer. 29 64 12.03 "AMENDMENT BY PLAN SPONSOR" The Plan Sponsor, without the Employer's consent, may amend the Plan and Trust, from time to time, in order to conform the Plan and Trust to any requirement for qualification of the Plan and Trust under the Internal Revenue Code. The Plan Sponsor may not amend the Plan in any manner which would modify any election made by the Employer under the Plan without the Employer's written consent. For purposes of sponsoring organization amendments, the mass submitter shall be recognized as the agent of the sponsoring organization. If the sponsoring organization does not adopt the amendments made by the mass submitter, it will no longer be identical to or a minor modifier of the mass submitter plan. 12.04 "DISCONTINUANCE" The Employer has the right, at any time, to suspend or discontinue its contributions under the Plan, and to terminate, at any time, this Plan and the Trust created under this Agreement. The Plan will terminate upon the first to occur of the following: (A) The date terminated by action of the Employer; (B) The date the Employer is judicially declared bankrupt or insolvent, unless the proceeding authorizes continued maintenance of the Plan; (C) The dissolution, merger, consolidation or reorganization of the Employer or the sale by the Employer of all or substantially all of its assets, unless the successor or purchaser makes provision to continue the Plan, in which event the successor or purchaser must substitute itself as the Employer under this Plan. In the event of a complete discontinuance of contributions under the plan, the account balance of each affected participant will be nonforfeitable. 12.05 "MERGER/DIRECT TRANSFER" The Trustee may not consent to, or be a party to, any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation or transfer (if the plan is then terminated), the surviving Plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the Plan terminated immediately before the merger or consolidation or transfer. The Trustee possesses the specific authority to enter into merger agreements or direct transfer of assets agreements with the trustees of other retirement plans described in Code Section 401(a), including an elective transfer, and to accept the direct transfer of plan assets, or to transfer plan assets, as a party to any such agreement. The Trustee may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan's eligibility conditions. If the Trustee accepts such a direct transfer of plan assets, the Advisory Committee and Trustee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions under the Plan until he actually becomes a Participant in the Plan. The Trustee, after August 9,1988, may not consent to, or be a party to a merger, consolidation or transfer of assets with a defined benefit plan, except with respect to an elective transfer. The Trustee will hold, administer and distribute the transferred assets as a part of the Trust Fund and the Trustee must maintain a separate Employer contribution Account for the benefit of the Employee on whose behalf the Trustee accepted the transfer in order to reflect the value of the transferred assets. Unless a transfer of assets to this Plan is an elective transfer, the Plan will preserve all Code Section 411(d)(6) protected benefits with respect to those transferred assets, in the manner described in Section 13.02. A transfer is an elective transfer if: (1) the transfer satisfies the first paragraph of this Section 13.06; (2) the transfer is voluntary, under a fully informed election by the Participant; (3) the Participant has an alternative that retains his Code Section 411(d)(6) protected benefits (including an option to leave his benefit in the transferor plan, if that plan is not terminating); (4) the transfer satisfies the applicable spousal consent requirements of the Code; (5) the transferor plan satisfies the joint and survivor notice requirements of the Code, if the Participant's transferred benefit is subject to those requirements; (6) the Participant has a right to immediate distribution from the transferor plan, in lieu of the elective transfer; (7) the transferred benefit is at least the greater of the single sum distribution provided by the transferor plan for which the Participant is eligible or the present value of the Participant's accrued benefit under the transferor plan payable at that plan's normal retirement age; (8) the Participant has a 100% Nonforfeitable interest in the transferred benefit; and (9) the transfer otherwise satisfies applicable Treasury regulations. An elective transfer may occur between qualified plans of any type. Any direct transfer of assets from a defined benefit plan after August 9, 1988, which is not an elective transfer will render the Employer's Plan individually designed. DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(K). If the Plan receives a direct transfer (by merger or otherwise) of elective contributions (or amounts treated as elective contributions) under a Plan with a Code Section 401(k) arrangement, the distribution restrictions of Code Sections 401(k)(2) and (10) continue to apply to those transferred elective contributions. 30 65 PLAN DOCUMENT 12.06 "TERMINATION" Upon termination of the Plan, the distribution provisions of Article VI remain operative, with the following exceptions: (1) If the present value of the Participant's Nonforfeitable Accrued Benefit does not exceed $3,500, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum as soon as administratively practicable after the Plan terminates; and (2) If the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $3,500, the Participant or the Beneficiary, in addition may elect to have the Trustee commence distribution of his Nonforfeitable Accrued Benefit as soon as administratively practicable after the Plan terminates. To liquidate the Trust, the Advisory Committee will purchase a deferred annuity contract for each Participant which protects the Participant's distribution rights under the Plan, if the Participant's Nonforfeitable Accrued Benefit exceeds $3,500 and the Participant does not elect an immediate distribution pursuant to Paragraph (2). The Trust will continue until the Trustee in accordance with the direction of the Advisory Committee has distributed all of the benefits under the Plan. On each valuation date, the Advisory Committee will credit any part of a Participant's Accrued Benefit retained in the Trust with its proportionate share of the Trust's income, expenses, gains and losses, both realized and unrealized. Upon termination of the Plan, the Amount, if any, in a suspense account under Article III will revert to the Employer, subject to the conditions of the Treasury regulations permitting such a reversion. A resolution or amendment to freeze all future benefit accrual but otherwise to continue maintenance of this Plan, is not a termination for purposes of this Section 12.06. DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(K). If the Employer's Plan includes a Code Section 401(k) arrangement or if transferred assets described in Section 13.06 are subject to the distribution restrictions of Code Sections 401(k)(2) and (10), the special distribution provisions of this Section 12.06 are subject to the restrictions of this paragraph. The portion of the Participant's Nonforfeitable Accrued Benefit attributable to elective contributions (or to amounts treated under the Code Section 401(k) arrangement as elective contributions) is not distributable on account of Plan termination, as described in this Section 12.06, unless: (a) the Participant otherwise is entitled under the Plan to a distribution of that portion of his Nonforfeitable Accrued Benefit; or (b) the Plan termination occurs without the establishment of a successor plan. A successor plan under clause (b) is a defined contribution plan (other than an ESOP) maintained by the Employer (or by a related employer) at the time of the termination of the Plan or within the period ending twelve months after the final distribution of assets. A distribution made after March 31, 1988, pursuant to clause (b), must be part of a lump sum distribution to the Participant of his Nonforfeitable Accrued Benefit. In the event of the termination or partial termination of the plan, the account balance of each affected participant will be nonforfeitable. 31 66 ARTICLE XIII CODE SECTION 401(k) ARRANGEMENTS 13.01 "ELIGIBILITY" This Article XIII applies to an Employer's Plan only if the Plan includes a Code Section 401(k) arrangement. An employee's eligibility to make Elective Deferrals may not be conditioned upon the completion of more than one (1) year of service or the attainment of more than age twenty-one (21). An employee's eligibility to receive Matching Contributions, Qualified Matching Contributions, or Qualified Nonelective Contributions may be conditioned upon the completion of up to two (2) years of service. No contributions or benefits (other than Matching Contributions or Qualified Matching Contributions) may be conditioned upon an employee's Elective Deferrals. The Employer must specify a reasonable period in the Adoption Agreement of at least once each calendar year during which a participant may elect to commence Elective Deferrals. Such election may not be made retroactively. A participant's election to commence elective Deferrals must remain in effect until modified or terminated. The Employer must also specify in the Adoption Agreement a reasonable period at least once each calendar year to terminate an election or to modify the amount or frequency of his or her Elective Deferrals. 13.02 "SALARY REDUCTION AGREEMENT" The Employer will elect in its Adoption Agreement the terms of the Code Section 401(k) arrangement under the Plan. Any Employee eligible to participate in the Plan may file a salary reduction agreement with the Advisory Committee. The salary reduction agreement may not be effective earlier than the following date which occurs last: (i) the Employee's Plan Entry Date (or, in the case of a reemployed Employee, his reparticipation date under Article II); (ii) the execution date of the Employee's salary reduction agreement; (iii) the date the Employer adopts the Code Section 401(k) arrangement by executing the Adoption Agreement; or (iv) the effective date of the Code Section 401(k) arrangement, as specified in the Employer's Adoption Agreement. A salary reduction agreement must specify the amount of Compensation (as defined in Section 1.12) or percentage of Compensation the Employee wishes to defer. The salary reduction agreement will apply only to Compensation which becomes currently available to the Employee after the effective date of the salary reduction agreement. The Employer will apply a reduction election to all Compensation (and to increases in such Compensation) unless the Employee specifies in his salary reduction agreement to limit the election to certain Compensation. The Employer will specify in Adoption Agreement Section 3.01 the rules and restrictions applicable to the Employee's salary reduction agreements, however, under no circumstances, may a salary reduction agreement or other deferral mechanism be adopted retroactively. 13.03 "DEFINITIONS" For purposes of this Article XIII: (1) "ACTUAL DEFERRAL PERCENTAGE" shall mean, for a specified group of participants for a Plan Year, the average of the ratios (calculated separately for each participant in such group) of (1) the amount of employer contributions actually paid over to the trust on behalf of such participant for the Plan Year to (2) the participant's Compensation for such Plan Year to (whether or not the employee was a participant for the entire Plan Year). Employer contributions on behalf of any participant shall include: (1) any Elective Deferrals made pursuant to the participant's deferral election, including Excess Elective Deferrals of Highly Compensated Employees, but excluding Elective Deferrals that are taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals); and (2) at the election of the employer, Qualified Nonelective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an employee who would be a participant but for the failure to make Elective Deferrals shall be treated as a participant on whose behalf no Elective Deferrals are made. (2) "AGGREGATE LIMIT" shall mean the sum of (i) 125 percent of the greater of the ADP of the Nonhighly Compensated Employees for the Plan Year or the ACP of Nonhighly Compensated Employees under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the CODA and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in (i) above, and "greater" is substituted for "lesser" after "two plus the" in (ii), if it would result in a larger Aggregate Limit. (3) "AVERAGE CONTRIBUTION PERCENTAGE" shall mean the average of the Contribution Percentages of the Eligible Participants in a group. (4) "CONTRIBUTION PERCENTAGE" shall mean the ratio (expressed as a percentage) of the participant's Contribution Percentage Amounts to the participant's Compensation for the Plan Year (whether or not the employee was a participant for the entire Plan Year). 32 67 PLAN DOCUMENT (5) "CONTRIBUTION PERCENTAGE AMOUNTS" shall mean the sum of the Employee Contributions, Matching Contributions, and Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test) made under the plan on behalf of the participant for the Plan Year. If so elected in the adoption agreement the employer may include Qualified Nonelective Contributions in the Contribution Percentage Amounts. The employer also may elect to use Elective Deferrals in the Contribution Percentage Amounts so long as the ADP test is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. (6) "ELECTIVE DEFERRALS" shall mean any employer contributions made to the plan at the election of the participant, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a participant's Elective Deferral is the sum of all Employer contributions made on behalf of such participant pursuant to an election to defer under any qualified CODA as described in Code Section 401(k), any simplified employee pension cash or deferred arrangement as described in Code Section 402(h)(1)(B), any eligible deferred compensation plan under Code Section 457, any plan as described under Code Section 501(c)(18), and any employer contributions made on behalf of a participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction agreement. (7) "ELIGIBLE PARTICIPANT" shall mean any employee who is eligible to make an Employee Contribution, or an Elective Deferral (if the employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. (8) "EXCESS AGGREGATE CONTRIBUTIONS" shall mean, with respect to any Plan Year, the excess of: (a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (b) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). (9) "EXCESS CONTRIBUTIONS" shall mean, with respect to any Plan Year, the excess of: (a) The aggregate amount of employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). (10) "EXCESS ELECTIVE DEFERRALS" shall mean those Elective Deferrals that are includible in a participant's gross income under Section 402(g) of the Code to the extent such participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code section. Excess Elective Deferrals shall be treated as annual additions under the plan. (11) "MATCHING CONTRIBUTION" shall mean an employer contribution made to this or any other defined contribution plan on behalf of a participant on account of an Employee Contribution made by such participant, or on account of a participant's Elective Deferral, under a plan maintained by the employer. (12) "QUALIFIED NONELECTIVE CONTRIBUTIONS" shall mean contributions (other than Matching Contributions or Qualified Matching Contributions) made by the employer and allocated to participants' accounts that the participants may not elect to receive in cash until distributed from the plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions. 13.04 "ELECTIVE DEFERRALS - CONTRIBUTION LIMITATION" No participant shall be permitted to have Elective Deferrals made under this plan, or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect at the beginning of such taxable year. 13.05 "DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS" A participant may assign to this plan any Excess Elective Deferrals made during a taxable year of the participant by notifying the plan administrator on or before the date specified in the adoption agreement of the amount of the Excess Elective Deferrals to be assigned to the plan. 33 68 Notwithstanding any other provision of the plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any participant to whose account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. Determination of income or loss: Excess Elective Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Elective Deferrals is the sum of: (1) income or loss allocable to the participant's Elective Deferral account for the taxable year multiplied by a fraction, the numerator of which is such participant's Excess Elective Deferrals for the year and the denominator is the participant's account balance attributable to Elective Deferrals without regard to any income or loss occurring during such taxable year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the participant's taxable year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. 13.06 "ACTUAL DEFERRAL PERCENTAGE TEST" The Actual Deferral Percentage (hereinafter "ADP") for participants who are Highly Compensated Employees for each Plan Year and the ADP for participants who are Nonhighly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The ADP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for participants who are Nonhighly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The ADP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for participants who are Nonhighly Compensated Employees for the same Plan Year multiplied by 2.0, provided that the ADP for participants who are Highly Compensated Employees does not exceed the ADP for participants who are Nonhighly Compensated Employees by more than two (2) percentage points. SPECIAL RULES: 1. The ADP for any participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Section 401(k) of the Code, that are maintained by the employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. 2. In the event that this plan satisfies the requirements of Ssections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this plan, then this Section shall be applied by determin- ing the ADP of employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. 3. For purposes of determining the ADP of a participant who is a five-percent owner or one of the ten most highly paid Highly Compensated Employees, the Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) and Compensation of such participant shall include the Elective Deferrals (and, if applicable Qualified Nonelective Contributions and Qualified Matching Contributions, or both) and Compensation for the Plan Year of Family Members (as defined in Section 414(g)(6) of the Code). Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate employees in determining the ADP both for participants who are Nonhighly Compensated Employees and for participants who are Highly Compensated Employees. 4. For purposes of determining the ADP test, Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. 5. The employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Nonelective Contributions of Qualified Matching Contributions, or both, used in such test. 6. The determination and treatment of the ADP amounts of any participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 34 69 PLAN DOCUMENT 13.07 "DISTRIBUTION OF EXCESS CONTRIBUTIONS" Notwithstanding any other provision of this plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to participants to whose accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the employer maintaining the plan with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such employees. Excess Contributions shall be allocated to Participants who are subject to the family member aggregation rules of Section 414(g)(6) of the Code in the manner prescribed by the regulations. Excess Contributions (including the amounts recharacterized) shall be treated as annual additions under the plan. Determination of Income or Loss: Excess Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Contributions is the sum of: (1) income or loss allocable to the participant's Elective Deferral account (and, if applicable, the Qualified Nonelective Contribution account or the Qualified Matching Contribution account or both) for the Plan Year multiplied by a fraction, the numerator of which is such participant's Excess contributions for the year and the denominator is the participant's account balance attributable to Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if any of such contributions are included in the ADP test) without regard to any income or loss occurring during such Plan Year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. Accounting for Excess Contributions: Excess Contributions shall be distributed from the participant's Elective Deferral account and Qualified Matching Contribution account (if applicable) in proportion to the participant's Elective Deferrals and Qualified Matching Contributions (to the extent used in the ADP test) for the Plan Year. Excess Contributions shall be distributed from the participant's Qualified Nonelective Contribution account only to the extent that such Excess Contributions exceed the balance in the participant's Elective Deferral account and Qualified Matching Contribution account. 13.08 "MATCHING CONTRIBUTIONS" If elected by the employer in the adoption agreement, the employer will make Matching Contributions to the plan. 13.09 "QUALIFIED MATCHING CONTRIBUTIONS" If elected by the employer in the adoption agreement, the employer will make Qualified Matching Contributions to the plan. 13.10 "LIMITATIONS ON MATCHING CONTRIBUTIONS" The ACP for participants who are Highly Compensated Employees for each Plan Year and the ACP for participants who are Nonhighly Compensated Employees for the same Plan Year must satisfy one of the following tests: (A) The ACP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for participants who are Nonhighly Compensated Employees for the same Plan Year multiplied by 1.25; or (B) The ACP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for participants who are Nonhighly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ACP for participants who are Highly Compensated Employees does not exceed the ACP for participants who are Nonhighly Compensated Employees by more than two (2) percentage points. SPECIAL RULES: 1. Multiple Use: If one or more Highly Compensated Employees participate in both a CODA and a plan subject to the ACP test maintained by the employer and the sum of the ADP or ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with such Highly Compensated Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP or ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP or ACP tests. Multiple use does not occur if either the ADP or ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP or ACP of the Nonhighly Compensated Employees. 2. For purposes of this Section, the Contribution Percentage for any participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in Section 401(a) of the Code, or arrangements described in Section 401(k) of the Code that are maintained by the employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. 35 70 3. In the event that this plan satisfies the requirements of Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this plan, then this Section shall be applied by determining the Contribution Percentage of employees as if all such plans were a single plan. For plan years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. 4. For purposes of determining the Contribution percentage of a participant who is a five-percent owner or one of the most highly paid Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of Family Members (as defined in Section 414(g)(6) of the Code). Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate employees in determining the Contribution Percentage both for participants who are Nonhighly Compensated Employees and for participants who are Highly Compensated Employees. 5. For purposes of determining the Contribution Percentage test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the trust. Matching Contributions and Qualified Nonelective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. 6. The employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Nonelective Contributions or Qualified Matching Contributions, or both, used in such test. 7. The determination and treatment of the Contribution Percentage of any participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 13.11 "DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS" Notwithstanding any other provision of this plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to participants whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions shall be allocated to participants who are subject to the family member aggregation rules of Section 414(g)(6) of the Code in the manner prescribed by the regulations. If such Excess Aggregate Contributions are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the employer maintaining the plan with respect to those amounts. Excess Aggregate Contributions shall be treated as annual additions under the plan. Determination of Income or Loss: Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Aggregate Contributions is the sum of: (1) income or loss allocable to the participant's Employee Contribution account, Matching Contribution account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified Nonelective Contribution account and Elective Deferral account for the Plan Year multiplied by a fraction, the numerator of which is such participant's Excess Aggregate Contributions for the year and the denominator is the participant's account balance(s) attributable to Contribution Percentage Amounts without regard to any income or loss occurring during such Plan Year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. Accounting for Excess Aggregate Contributions: Excess Aggregate Contributions shall be distributed on a pro rata basis from the participant's Matching Contribution account and qualified Matching Contribution account (and, if applicable, the participant's Qualified Nonelective Contribution account or Elective Deferral account, or both). Such determination shall be made after first determining Excess Elective Deferrals pursuant to Section 13.03(10) and then determining Excess Contributions pursuant to Section 13.03(9). 13.12 "QUALIFIED NONELECTIVE CONTRIBUTIONS" The employer may elect to make Qualified Nonelective Contributions under the plan on behalf of employees as provided in the adoption agreement. In addition, in lieu of distributing Excess Contributions as provided in Section 13.07 of the plan, or Excess Aggregate Contributions as provided in Section 13.11 of the plan, and to the extent elected by the employer in the adoption agreement, the employer may make Qualified Nonelective Contributions on behalf of Nonhighly Compensated Employees that are sufficient to satisfy either the Actual Deferral Percentage test or the Average Contribution Percentage test, or both, pursuant to regulations under the Code. 36 71 PLAN DOCUMENT 13.13 "DISTRIBUTION REQUIREMENTS" Elective Deferrals, Qualified Nonelective Contributions, and Qualified Matching Contributions, and income allocable to each are not distributable to a participant or his or her beneficiary or beneficiaries, in accordance with such participant's or beneficiary or beneficiaries election, earlier than upon separation from service, death, or disability. Such amounts may also be distributed upon: 1. Termination of the plan without the establishment of another defined contribution plan. 2. The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or business of such corporation if such corporation continues to maintain this plan after the disposition, but only with respect to employees who continue employment with the corporation acquiring such assets. 3. The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) if such corporation continues to maintain this plan, but only with respect to employees who continue employment with such subsidiary. 4. The attainment of age 59-1/2. All distributions that may be made pursuant to one or more of the foregoing distributable events are subject to the spousal and participant consent requirements (if applicable) contained in Sections 401(a)(11) and 417 of the Code. 37 72 IRS Letters Serial No. D257426a Serial No. D257427a Dated: 3/19/91 73 AMENDATORY AGREEMENT Adoption of 401(a)(31) Model Amendment (Revenue Procedure 93-12) Kemper Growth Fund, as Prototype Plan Sponsor ("Sponsor"), makes this Amendatory Agreement to the Kemper Retirement Plan Prototype. WITNESSETH WHEREAS, it is necessary to amend the Prototype Plan basic plan document to provide plan participants with the option of electing a direct transfer of any eligible rollover distribution to an eligible retirement plan; and WHEREAS, the Prototype Plan gives the Sponsor authority, without the approval of any adopting employer, to make amendments necessary to conform the Prototype Plan to any requirement for qualification under the Internal Revenue Code. NOW THEREFORE, in consideration of the above premises, the Sponsor as designated agent for all sponsoring organizations for purposes of making plan amendments hereby amends the Prototype Plan to include the following amendment, as an appendix to the basic plan document. This amendment, which is identical to the model language in the Appendix of Revenue Procedure 93-12, applies to any plan maintained by an employer under the Prototype Plan. APPENDIX TO BASIC PLAN DOCUMENT ARTICLE VI 6.02(C). THIS ARTICLE APPLIES TO DISTRIBUTIONS MADE ON OR AFTER JANUARY 1, 1993. Notwithstanding any provision of the plan to the contrary that would otherwise limit a distributee's election under the Article, a Distributee may elect, at the time and in the manner prescribed by the plan administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. 6.02(D). DEFINITIONS. (1) ELIGIBLE ROLLOVER DISTRIBUTION: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is on of a series of substantially equal periodic payments (not less frequently than annually) make for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) ELIGIBLE RETIREMENT PLAN: An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) DISTRIBUTEE: A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (4) DIRECT ROLLOVER: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. With respect to each adopting employer's plan maintained under this Prototype Plan, this amendment is effective as of January 1, 1993. IN WITNESS WHEREOF, the Sponsor has executed this Amendatory Agreement on the 20th day of January, 1993. Kemper Growth Fund By /s/ Paul Murphy ----------------------------------------------------------- "Sponsor's" Authorized Representative 74 APPENDIX ARTICLE B RESOLVED, that Kemper Growth Fund ("Sponsor"), in its capacity as a prototype sponsoring organization under IRS Revenue Procedure 89-9, amend the Prototype Plan basic plan document by adopting Appendix Article B, a copy of which is attached to this resolution. The amendment will be effective for all adopting employers of the Prototype Plan for plan years beginning after December 31, 1993. Adopted this seventeenth day of February, 1994. Kemper Financial Services, Inc. By: Paul Murphy ------------------------------------------- *Sponsor's Authorized Representative ARTICLE B APPENDIX TO BASIC PLAN DOCUMENT This Article is necessary to comply with the Omnibus Budget Reconciliation Act of 1993 (OBRA '93) and is an integral part of the basic plan document. Section 11.07 applies to any modification or amendment of this Article. In addition to other applicable limitations set forth in the plan, and notwithstanding any other provision of the plan to the contrary, for plan years beginning on or after January 1, 1994, the annual compensation of each employee taken into account under the plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For plan years beginning on or after January 1, 1994, any reference in this plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current plan year, the compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first plan year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. 75 Kemper Financial Services, Inc. 120 South LaSalle Street Chicago, IL 60603 EX-99.B14(B) 20 INDIVIDUAL RETIREMENT TRUST ACCT. 1 EXHIBIT 99.B14.(b) INDIVIDUAL RETIREMENT TRUST ACCOUNT FORM (UNDER SECTION 408(a) OF THE INTERNAL REVENUE CODE) KEEP FOR YOUR RECORDS. FORM 5305 DO NOT FILE WITH INDIVIDUAL RETIREMENT TRUST ACCOUNT INTERNAL REVENUE (REV. OCTOBER 1992) SERVICE DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE State of } SS / / Amendment ---------------------------------------------------------------------------- County of --------------------------------------------------------------------------- Grantor's name Grantor's date of birth --------------------------------- -------------------------------------- Grantor's address Grantor's social security number ------------------------------ ---------------------------- Trustee's name INVESTORS FIDUCIARY TRUST COMPANY ------------------------------------------------------------------------------------------------ Trustee's address or principal place of business KANSAS CITY, MISSOURI --------------------------------------------------------------
The Grantor whose name appears above is establishing an Individual Retirement Account under section 408(a) to provide for his or her retirement and for the support of his or her beneficiaries after death. The Trustee named above has given the Grantor the disclosure statement required under Regulations section 1.406-6. The Grantor has assigned the trust __________ dollars ($_______) in cash. The Grantor and the Trustee made the following agreement: ARTICLE I The Trustee may accept additional cash contributions on behalf of the Grantor for a tax year of the Grantor. The total cash contributions are limited to $2,000 for the tax year unless the contribution is a rollover described in section 402(c) (but only after December 31, 1992), 403(a)(4), 403(b)(8), 408(d)(3), or an employer contribution to a simplified employee pension plan as described in section 408(1). Rollover contributions before January 1, 1993, include rollovers described in section 402(a)(5), 402(a)(7), 403(a)(4), 403(b)(8), 408(d)(3) or an employer contribution to a simplified employee pension plan described in section 408(k). ARTICLE II The Grantor's interest in the balance in the trust account is nonforfeitable. ARTICLE III 1. No part of the trust funds may be invested in life insurance contracts, nor may the assets of the trust account be commingled with other property except in a common trust fund or common investment fund (within the meaning of section 408(a)(5). 2. No part of the trust funds may be invested in collectibles (within the meaning of section 408(m). ARTICLE IV 1. Notwithstanding any provision of this agreement to the contrary, the distribution of the Grantor's interest in the trust account shall be made in accordance with the following requirements and shall otherwise comply with section 408(a)(6) and Proposed Regulations section 1.408-8, including the incidental death benefit provisions of Proposed Regulations section 1. 401(a)(9)-2, the provisions of which are herein incorporated by reference. 2. Unless otherwise elected by the time distributions are required to begin to the Grantor under paragraph 3, or to the surviving spouse under paragraph 4, other than in the case of a life annuity, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Grantor and the surviving spouse and shall apply to all subsequent years. The life expectancy of a nonspouse beneficiary may not be recalculated. 3. The Grantor's entire interest in the trust account must be, or begin to be, distributed by the Grantor's required beginning date, April 1 following the calendar year end in which the Grantor reaches age 70 1/2. By that date, the Grantor may elect, in a manner acceptable to the trustee, to have the balance in the trust account distributed in: (A) A single sum payment. (B) An annuity contract that provides equal or substantially equal monthly, quarterly, or annual payments over the life of the grantor. (C) An annuity contract that provides equal or substantially equal monthly, quarterly, or annual payments over the joint and last survivor lives of the Grantor and his or her designated beneficiary. (D) Equal or substantially equal annual payments over a specified period that may not be longer than the Grantor's life expectancy. (E) Equal or substantially equal payments over a specified period that may not be longer than the joint life and last survivor expectancy of the Grantor and his or her designated beneficiary. 4. If the Grantor dies before his or her entire interest is distributed to him or her, the entire remaining interest will be distributed as follows: (A) If the Grantor dies on or after distribution of his or her interest has begun, distribution must continue to be made in accordance with paragraph 3. (B) If the Grantor dies before distribution of his or her interest has begun, the entire remaining interest will, at the election of the Grantor or, if the Grantor has not so elected, at the election of the beneficiary or beneficiaries, either (I) Be distributed by the December 31 of the year containing the fifth anniversary of the Grantor's death, or (II) Be distributed in equal or substantially equal payments over the life or life expectancy of the designated beneficiary or beneficiaries starting by December 31 of the year following the year of the Grantor's death. If, however, the beneficiary is the Grantor's surviving spouse, then this distribution is not required to begin before December 31 of the year in which the Grantor would have turned age 70 1/2. (C) Except where distribution in the form of an annuity meeting the requirements of section 408(b)(3) and its related regulations has irrevocably commenced, distributions are treated as having begun on the Grantor's required beginning date, even though payments may actually have been made before that date. (D) If the Grantor dies before his or her entire interest has been distributed and if the beneficiary is other than the surviving spouse, no additional cash contributions or rollover contributions may be accepted in the account. 5. In the case of a distribution over life expectancy in equal or substantially equal annual payments, to determine the minimum annual payment for each year, divide the Grantor's entire interest in the trust as of the close of business on December 31 of the preceding year by the life expectancy of the Grantor (or the joint life and last survivor expectancy of the Grantor and the Grantor's designated beneficiary, or the life expectancy of the designated beneficiary, whichever applies). In the case of distributions under paragraph 3, determine the initial life expectancy (or joint life and last survivor expectancy) using the attained ages of the Grantor and designated beneficiary as of their birthdays in the year the Grantor reaches age 70 1/2. In the case of a distribution in accordance with paragraph 4(b)(ii), determine life expectancy using the attained age of the designated beneficiary as of the beneficiary's birthday in the year distributions are required to commence. 6. The owner of two or more individual retirement accounts may use the "alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum distribution requirements described above. This method permits an individual to satisfy these requirements by taking from one individual retirement account the amount required to satisfy the requirement for another. 2 INDIVIDUAL RETIREMENT TRUST ACCOUNT FORM (CONTINUED) ARTICLE V 1. The Grantor agrees to provide the Trustee with information necessary for the Trustee to prepare any reports required under section 408(i) and Regulations 1.408-5 and 1.408-6. 2. The Trustee agrees to submit reports to the Internal Revenue Service and the Grantor as prescribed by the Internal Revenue Service. ARTICLE VI Notwithstanding any other articles which may be added or incorporated, the provisions of Articles I through III and this sentence will be controlling. Any additional articles that are not consistent with section 408(a) and related regulations will be invalid. ARTICLE VII This agreement will be amended from time to time to comply with the provisions of the Code and related regulations. Other amendments may be made with the consent of the persons whose signature appear below. ARTICLE VIII 1. DEFINITIONS: "Designated Investment Company" shall mean any Kemper Mutual Fund, or any other registered investment company with the same investment advisor or principal underwriter, if certified to the Trustee as being available for investment pursuant to this trust. 2. INVESTMENT OF ACCOUNT ASSETS: The amount of each contribution shall be applied to the purchase of shares of a Designated Investment Company at the price and in the manner in which such shares are then being publicly offered by such investment company. All dividends and capital gain distributions received on the shares of a Designated Investment Company other than Kemper Bond Enhanced Securities Trust shall be reinvested in such shares. Any distributions from the Kemper Bond Enhanced Securities Trust shall be invested in one of the other Designated Investment Companies set forth in the prospectus and selected by the Grantor, or in the absence of a selection will be invested in the Kemper Money Market Fund-Government Securities Portfolio. 3. DISTRIBUTIONS: Notwithstanding the provisions of Article IV, if the Grantor or a beneficiary does not choose a method of distribution in accordance with Article IV, the Trustee is authorized, but is not required, to elect a distribution option other than a single sum payment, to make distributions pursuant to such election in kind, and to liquidate sufficient shares of a Designated Investment Company to withhold federal income tax from distributions as required by law. Further, the Trustee shall not be responsible for any distribution or failure to distribute in the absence of written instructions acceptable to the Trustee from the Trustee from the Grantor or beneficiary in accordance with Article IV including, but not limited to, any tax or penalty resulting from such distribution or failure to distribute. 4. AMENDMENT AND TERMINATION: The Grantor may, at any time, and from time to time, terminate the Trust in whole or in part by delivering to the Trustee a signed written copy of such termination and the Grantor delegated to the Trustee the right to amend the Trust (including retroactive amendments) by written notice to the Grantor mailed to his last address known to the Trustee, and the Grantor shall be deemed to have consented to any such amendment, provided that no amendment shall cause or permit any part of the asset of the Trust Account to be diverted to purposes other than for the exclusive benefit of the Grantor or beneficiaries, and no amendment shall be made except in accordance with any applicable laws and regulations affecting this Trust. 5. RESIGNATION OR REMOVAL OF TRUSTEE: The Trustee may resign at any time upon thirty (30) days of notice in writing to the Grantor, and may be removed by the Grantor at any time upon thirty (30) days notice in writing to the Trustee. Upon such resignation or removal, the Grantor shall appoint a successor Trustee, which successor shall be a "bank" as defined in section 408(n). Upon receipt by the Trustee of written acceptance of such appointment by the successor Trustee, the Trustee shall transfer and pay over to such successor the assets of the Trust Account and all records pertaining thereto. The Trustee is authorized, however, to reserve such sum of money as it may deem advisable for payment of all its fees, compensation, costs and expenses, or for payment of any other liability constituting a charge on or against the assets of the Trust Account or on or against the Trustee, which any balance of such reserve remaining after the payment of such items to be paid over to the successor Trustee. The successor Trustee shall hold the assets paid over to it under terms similar to those of this Agreement that qualify under the provisions of the Internal Revenue Code. If within thirty (30) days after the Trustee's resignation or removal the Grantor has not appointed a successor trustee, which has accepted with appointment, the Trustee shall appoint such successor itself. 6. TRUSTEE'S ANNUAL FEES: The Grantor shall be charged by the Trustee for its services here-under in such amount as the Trustee shall establish from time to time. Sufficient shares may be liquidated from the Trust Account to pay the fee. The annual fee in effect on the date of this agreement is set forth in the Application Guide. A different fee may be substituted at any time upon written notice to the Grantor. A Grantor who does not consent to such new fee should terminate this agreement pursuant to Paragraph 4 of Article IX within 30 days of the notice to the new fee. If no such termination is made within 30 days of the notice of the new fee, the Grantor will be deemed to have consented to the new fee. 7. STATE LAW REQUIREMENTS: This Trust shall be construed, administered and enforced according to the laws of the State of Missouri. 8. EXCESS CONTRIBUTIONS: If, because of an erroneous assumption as to earned income for any other reason, a contribution which is an excess contribution is made on behalf the Grantor for any year, adjustment of such excess contribution shall be in accordance with the provisions of this paragraph. The full amount of such excess contribution and net income attributable thereto shall be distributed to the Grantor, in cash or kind upon written notice to the Trustee from the Grantor which states the amount of such excess contribution. 9. INALIENABILITY OF BENEFITS: The benefits provided hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such benefits to be subjected shall not be recognized, except to such extent as may be required by law. 10. EXCHANGE PRIVILEGE: With respect to any of the Designated Investment Company shares, the Grantor may, upon submission of written instructions acceptable to the Trustee, cause such shares to be exchanged for shares of any other Designated Investment Company meeting the requirements of this Trust upon the terms and within the limitations imposed by the then current prospectus of such investment company. 11. DESIGNATION OF BENEFICIARY: The Grantor shall have the right, by written notice to the Trustee, to designate or change a beneficiary to receive any benefit to which such Grantor may be entitled in the event of the Grantor's death prior to the complete distribution of such benefit. If no such designation is in effect on a Grantor's death, the beneficiary shall be the Grantor's estate. 12. RESPONSIBILITY AS TO CONTRIBUTIONS OR DISTRIBUTIONS: Neither the Trustee nor the Designated Investment Company will under any circumstances be responsible for the timing, purpose or propriety of any contribution or of any distribution made hereunder, nor shall the Trustee or the Designated Investment Company incur any liability or responsibility for any tax imposed account of any such contribution or distribution. Without limiting the generality of the foregoing, neither the Trustee nor the Designated Investment Company is obligated to make any distribution absent a specific direction from the Grantor or the designated beneficiary to do so. [KEMPER MUTUAL FUNDS LOGO] INVESTMENT MANAGER: Kemper Financial Services, Inc. PRINCIPAL UNDERWRITER: Kemper Distributors, Inc. 120 South LaSalle Street Chicago, Illinois 60603 Trustee Signature INVESTORS FIDUCIARY TRUST COMPANY Grantor's Signature - -------------------------------------------------------------------------------- IRA-10B 2/95 203932 3 IRA DISCLOSURE STATEMENT IMPORTANT--PLEASE RETAIN IRAs: AN INTRODUCTION WHAT IS AN IRA? Your Individual Retirement Account (IRA) is a trust created for the exclusive benefit of you and your beneficiaries. It is created by a written instrument that meets the following requirements: - - Contribution restrictions stated in Article I of the trust instrument. - - Investment restrictions stated in Article III of the trust instrument. - - Distribution of benefits requirements contained in Article IV of the trust instrument. - - The trustee is a bank as defined in the Internal Revenue Code. - - You will have a non-forfeitable interest in your account. ESTABLISHING THE PLAN HOW DO I ESTABLISH MY KEMPER IRA? Read this disclosure statement and retain it for your files. Complete and sign the correct application. (2 applications are necessary if both you and your spouse wish to establish an IRA). MAKE CHECK PAYABLE TO THE KEMPER FUND OF YOUR CHOICE, AND MAIL COMPLETED APPLICATION AND CONTRIBUTION TO: INVESTORS FIDUCIARY TRUST COMPANY (IFTC) P.O. BOX 419356 KANSAS CITY, MO 64141-6356 MAY I REVOKE MY IRA? You have the right to revoke your account within seven days of the date on which your application was signed. To revoke your account write to IFTC at the address referenced above. ELIGIBILITY WHO CAN ADOPT AN IRA? You may adopt an IRA if you are receiving compensation from employment, earnings from self-employment or alimony, and have not attained age 70 1/2. You may also adopt an IRA if you have received a qualifying rollover distribution from another plan within the preceding 60 days or if you wish to transfer assets from another IRA. See "Rollover/Transfer of Assets" section on the following page. WHAT ABOUT A NON-WORKING SPOUSE? A spousal IRA allows an individual who qualifies for an IRA and his or her non-working spouse to set up two IRA accounts: one for each spouse. See "Contribution Limits" section below. CONTRIBUTION LIMITS HOW MUCH CAN I CONTRIBUTE EACH YEAR? If you are receiving compensation you may contribute the lesser of $2,000 or 100% of your compensation. For a year in which you are receiving compensation, but your spouse is not, you can set up an IRA for your spouse and contribute the lesser of: $2,250 or 100% of your compensation. The maximum contribution must be split between the two accounts so that no more than $2,000 is placed in either account. No contribution will be allowed for the year in which you attain age 70 1/2 and thereafter. FOR MY IRA, WHAT IS CONSIDERED COMPENSATION? Compensation is defined as wages, salaries or professional fees, other amounts received for personal services actually rendered (including income earned from self-employment), and any taxable alimony received. It does not include earnings from property such as interest, rents and dividends. If your compensation is not includable in gross income (such as income earned from sources outside the United States, it is not treated as compensation in determining the maximum limitation for the deduction. WHEN CAN A CONTRIBUTION BE MADE? Your annual contribution may be made during the taxable year or no later than the due date for filing your federal income tax return not including extensions. WHAT HAPPENS IF I OVER-CONTRIBUTE TO MY IRA? There is a 6% annual excise tax on contributions to an IRA over the annual contributions limit. However, if you withdraw the excess contribution and earnings thereon from the IRA before the due date for filing your federal income tax return (including extensions) for the year of the excess contribution, the excise tax is not imposed, the withdrawn contribution is not taxable and the withdrawn earnings are taxable in the year the excess contribution was made. If the excess is not withdrawn, you may use the excess as part of next year's contribution by reducing the next year's contribution by the amount of the excess. You will, however, be liable for the 6% excise tax on the over-contributed amount for each year it remains an excess contribution. HOW DOES MY MARITAL STATUS AFFECT MY IRA? Since a contribution is available to each eligible individual, both husband and wife can contribute if each individually is eligible and each adopts a separate individual retirement savings program. The contribution limitation is computed separately for each spouse, whether or not they file a joint tax return. CAN MY EMPLOYER CONTRIBUTE TO MY IRA? Yes, but these contributions are included in your gross income as compensation and must be claimed as a deduction on your federal income tax return, just as if you had received the money and made the contribution. DEDUCTION LIMITS HOW MUCH CAN I DEDUCT EACH YEAR? If you and your spouse are not covered by a retirement plan at work, the amount you can deduct is the same as the amount you can contribute (see "Contribution Limit" above). If you or your spouse are covered by a retirement plan at work, the $2,000 limit is reduced $10 for each $50 that your adjusted gross income exceeds: $40,000 (married filing jointly), $25,000 (single), or $0 (married filing separately), and the $2,250 limit is reduced $10 for each $44.44 that your adjusted gross income exceeds $40,000. DISTRIBUTION FROM YOUR IRA WHEN CAN I TAKE MONEY OUT OF MY IRA? You can begin to take money out of your IRA without penalty after age 59 1/2, but you must begin to take money out by April 1 following the year in which you attain age 70-1/2. WHAT IF I TAKE A DISTRIBUTION BEFORE AGE 59 1/2? There is an additional tax equal to 10% of the taxable amount of a distribution before age 59 1/2, unless you are disabled or take your distributions as a series of substantially equal periodic payments over your life or life expectancy or the joint lives or life expectancies of you and your beneficiary. The amounts of such periodic payments may not be changed before the later of five years or at attainment of age 59 1/2. HOW ARE MY DISTRIBUTIONS TAXED? The distributions are generally taxed as ordinary income in the year they are received. Distributions are non-taxable to the extent they represent a return of non-deductible contributions. The non-taxable percentage of such a distribution is determined by dividing the undistributed non-deductible contributions to all your IRAs by the total value of all your IRAs (including SEPs and rollover IRAs). DO I HAVE A CHOICE ON HOW TO RECEIVE MY DISTRIBUTIONS UPON RETIREMENT? Yes, subject to the minimum distribution incidental benefit (MDIB) requirement described below, distributions may be taken as: - - Regular payments over the joint lives or life expectancies of you and your designated beneficiary. - - An annuity purchased with the money in your IRA payable over the joint lives or life expectancies of you and your beneficiary. - - Annuity or regular payments over any period shorter than the above. - - A lump sum. WHAT IS THE MINIMUM ANNUAL DISTRIBUTION? The amount to be distributed for each year (commencing with the year in which you attain age 70 1/2) must be at least an amount equal to the quotient obtained by dividing the value of the IRA by your life expectancy or by the joint and last survivor life expectancy of you and your designated beneficiary, subject to the MDIB requirement described on the next page. The minimum distribution for the year in which you attain age 70 1/2 may be deferred until April 1 of the following year. Note that if you elect to defer the minimum distribution for the year you attain age 70 1/2 to the following year, you will be required to take 2 years' minimum distributions in that year. Life expectancy and joint and last survivor expectancy are computed by use of the tables contained in IRS Publication 590. For purposes of this computation, the life expectancy of you or your spouse may be recalculated annually, while the life expectancy of a nonspouse beneficiary may not be recalculated. 4 IRA DISCLOSURE STATEMENT (CONTINUED) WHAT IS THE MINIMUM DISTRIBUTION INCIDENTAL BENEFIT (MDIB) REQUIREMENT? The MDIB Requirement requires that a death benefit under an IRA be incidental to the primary purpose of the IRA which is to provide your retirement benefits. Thus, if your designated beneficiary is more than 10 years younger, you must assume he or she is exactly 10 years younger than you to determine your joint and last survivor life expectancy. WHAT IF I HAVE MORE THAN ONE IRA? If you have more than one IRA, you may take the total amount of your minimum distribution amounts from one IRA or you may allocate it among your IRAs. WHAT IF I TAKE AN AMOUNT LESS THAN DESCRIBED ABOVE? A 50% excise tax will be imposed on the difference between the minimum payout required and the amount actually paid, unless the underdistribution was due to reasonable cause. WHAT ABOUT FEDERAL INCOME TAX WITHHOLDING? The Trustee may be required to withhold 10% from any taxable distribution from an IRA unless you elect no withholding at the time your distributions begin. Whether or not you allow the Trustee to withhold, you may be required to make quarterly estimated tax payments. SPECIAL CONSIDERATIONS CAN I USE MY IRA AS COLLATERAL FOR A LOAN? No. If you use any portion of your IRA as security for a loan the portion so used will be treated as distributed to you. HAS THIS PLAN BEEN SUBMITTED TO THE IRS FOR APPROVAL? The use of IRS Form 5305 (included in this packet) makes such submission unnecessary. ROLLOVER/TRANSFER OF ASSETS DO DISTRIBUTIONS FROM MY EMPLOYER'S TAX-QUALIFIED PLAN QUALIFY FOR IRA ROLLOVER TREATMENT? Yes, part or all of a lump-sum distribution or a series of distributions if made during one calendar year as the result of termination of employment, attainment of age 59 1/2, disability, death, or plan termination may be rolled over into an IRA. You do not have to roll over the total taxable amount of the distribution, but whatever portion is not rolled over will be taxed as ordinary income in the year received and will not qualify for either long-term capital gains or special averaging. The maximum amount that can be rolled over is the total distribution minus the dollar amount of any voluntary non-deductible contributions you made. Please consult your accountant regarding current IRS regulations on the tax treatment of rollovers from tax-qualified plans. WHEN MUST THE ROLLOVER BE COMPLETED? The check and application must be sent to the IRA trustee within 60 days of receipt of a qualifying distribution. CAN I TAKE A TAX DEDUCTION FOR A ROLLOVER? No. You are not allowed to take a tax deduction for the amount transferred from a qualified employer's plan or retirement savings program to an IRA. WHAT IS THE DIFFERENCE BETWEEN A ROLLOVER AND A DIRECT TRANSFER OF ASSETS? With a rollover, you actually receive the distribution from an IRA or qualified employer's plan. A direct transfer of assets occurs when the existing trustee or custodian makes the check payable and sends the distribution directly to the new trustee or custodian. A rollover distribution from an IRA may be made to you only once a year. The one year period begins on the date you receive the IRA distribution. There is no minimum holding period for a direct transfer of assets from one trustee to another. WHAT STEPS DO I NEED TO TAKE TO PROCESS A ROLLOVER OR DIRECT TRANSFER OF ASSETS? You can do a rollover by notifying your current IRA trustee or custodian in writing that you wish to take a distribution from your IRA and roll over to a new IRA. Once the distribution is received you may either endorse the check over to the new trustee or deposit the check received and issue a new check for the amount received to the new trustee and send it along with an IRA Application to the new trustee. To accomplish a direct transfer of assets, you simply notify your existing trustee in writing of your intentions. Then send a copy of the letter along with an IRA application to the new trustee. Your old trustee will send your distribution directly to the new trustee. REPORTING REQUIREMENTS DOES THE IRA REQUIRE A LOT OF PAPERWORK EACH YEAR? No, unless you have to pay an excise or penalty tax or you received a nontaxable distribution or you made a nondeductible contribution (other than a rollover), no special income tax return is required. If an excise or penalty tax is due you must file IRS Form 5329 with your Form 1040. If you designate an IRA contribution as nondeductible you must attach Form 8606 to your 1040 for the year of the nondeductible contribution and for any year you take a non-deductible distribution (other than a rollover to another IRA). SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) DOES THE KEMPER IRA QUALIFY FOR A SEP? Yes, but the SEP must be established and maintained by your employer. More information about establishing a SEP is available from Kemper upon request. WHAT IS THE MAXIMUM DEDUCTION FOR A SEP-IRA? The lesser of 15% of your compensation with respect to the sponsoring employer or $30,000. FINANCIAL DISCLOSURE WHAT ELSE DO I NEED TO KNOW ABOUT KEMPER'S IRAs? Information about the fund or trust you have selected is included in the appropriate prospectus. The acquisition cost and how the value of your account changes are described in the prospectus. A SHARES If $1,000 is invested in Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small Capitalization Equity Fund, Kemper International Fund or Kemper Blue Chip Fund, the amount of the sales charge will be $57.50. If $1,000 is invested in Kemper Target Equity Funds, the amount of the sales charge will be $50. If $1,000 is invested in Kemper High Yield Fund, Kemper Income and Capital Preservation Fund, Kemper Diversified Income Fund, Kemper Global Income Fund, Kemper U.S. Mortgage Fund or Kemper U.S. Government Securities Fund, the amount of the sales charge will be $45. If $1,000 is invested in Kemper Adjustable Rate U.S. Government Fund or Kemper Short-Intermediate Government Fund, the amount of the sales charge will be $35. If $1,000 is invested in Kemper Money Market Fund-Government Securities Portfolio or Kemper Money Market Fund-Money Market Portfolio, there will be no sales charge. B SHARES If $1,000 is invested in Kemper Mutual Funds B shares, there is no initial sales charge. B shares are subject to an annual distribution fee and, on redemption, may be subject to a contingent deferred sales charge and have a conversion priveledge to A shares after 6 years. C SHARES If $1,000 is invested in Kemper Mutual Funds C shares, there is no initial sales charge. C shares are subject to an annual distribution fee and have no conversion priveledge. There is an annual $12 trustee fee for the Kemper Family of Funds. An individual holding two or more accounts in Kemper Family of Funds will be charged a maximum of $24. The fees may be paid either by separate check or will be automatically deducted from your account by IFTC. This fee is subject to change as provided in Article IX, Paragraph 6 of the trust instrument. These fees are paid either by a separate check or by the liquidation of sufficient shares or units. If not paid by a separate check, IFTC will automatically deduct the annual trustee fee on or about May 1. If an account is opened after May 1, IFTC will deduct the $12 annual trustee fee on or about December 1 in the year the account is opened. (See "Application Guide" for more details.) This fee is subject to change upon notice by IFTC to you as provided in Article IX, Paragraph 6 of the trust instrument. The deadline for an IRA contribution is generally April 15 of the year following the taxable year for which the contribution will apply. IFTC and Kemper will not be responsible for postal delays or delays resulting from incomplete applications. Applications received by IFTC postmarked after the deadline and improperly completed applications will be returned to the sender. IRA-10A 7/94 [KEMPER MUTUAL FUNDS LOGO] 203921 5 IRA APPLICATION (PLEASE PRINT) FOR ASSISTANCE IN COMPLETING THIS FORM, CALL KEMPER SHAREHOLDER SERVICES AT 1-800-621-1048. 1. INFORMATION ABOUT YOU For internal use only Name ___________________________________________________________________________ Address ________________________________________________________________________ City _______________________________ State _____________________ Zip ___________ Daytime Phone Number(_____)_____________________________________________ Social Security Number ________/___________/_________ Date of Birth ____/____/____ 2. YOUR BENEFICIARIES (PLEASE INCLUDE SOCIAL SECURITY NUMBERS FOR ALL BENEFICIARIES) Primary Beneficiary Name _____________________________________ Secondary Beneficiary Name ________________________________________ Address ______________________________________________________ Address ___________________________________________________________ City _____________________________ State __________ Zip ______ City _____________________________ State _______________ Zip ______ Relationship__________________________________________________ Relationship ______________________________________________________ SS#_____________/_____/__________ Date of Birth ____/____/____ SS# _______________ /______ /__________ Date of Birth ____/____/____ 3. TYPE OF IRA (CHECK ONLY ONE) / / Individual / / Simplified Employee Plan (SEP) / / Spousal 4. TYPE OF TRANSACTION (CHECK ALL BOXES THAT APPLY) / / Contribution: (CIRCLE ONE) A. Individual B. Employer (ONLY APPLIES TO SEPS) / / Direct Transfer of Assets (PLEASE ATTACH IRA TRANSFER FORM) / / Rollover from: (CIRCLE ONE) A. Another Annual B. Another IRA, where the initial contribution C. A Qualified Contribution IRA was from a qualified retirement plan Retirement Plan / / I have reached the age of 59 1/2 and am eligible to take a distribution without tax penalty from my IRA: (CIRCLE ONE) A. IRA Distribution Form B. Please send my is attached dividends in cash 5. YOUR INVESTMENT CHOICES ($250 MINIMUM PER FUND TO ESTABLISH AN IRA. $50 IF NUMBER 7 [BANK DIRECT DEPOSIT] SELECTED.) (SEE FRONT CARD FOR FUND NAMES. NOTE NUMBER 9 BELOW REGARDING RECEIPT OF PROSPECTUS.) / / A Shares / / B Shares / / C Shares 199___ 199___ (PLEASE CHOOSE SHARE CLASS) (CIRCLE ONE) (CIRCLE ONE) Indiv/Employer Indiv/Employer Contribution Contribution Rollover Transfer Fund Name _____________________________ $__________ $__________ $__________ __________% Fund Name _____________________________ $__________ $__________ $__________ __________% Fund Name _____________________________ $__________ $__________ $__________ __________% Trustee Fee (OPTIONAL) $____________ 6. TELEPHONE EXCHANGES I authorize exchanges between Kemper Mutual Funds upon instruction from any person by telephone. / / YES / / NO NOTE: IF NEITHER BOX IS CHECKED, THE TELEPHONE EXCHANGE PRIVILEGE WILL BE PROVIDED. 7. BANK DIRECT DEPOSIT I authorize the Fund's agent to draw checks or initiate Automated Clearing House ("ACH") debits against the bank account on the attached voided check in the amount of $_____ (minimum $50), beginning on the ____ day of _____ month and on the same day of each month thereafter. If the date falls on a weekend or holiday, funds will be invested on the next business day. The investment will be applied to the following Fund account(s). A $50 minimum per Fund applies. Fund Name ______________________________ $_______________ (NOTE: THE BANK ACCOUNT MUST Fund Name ______________________________ $_______________ HAVE CHECK OR DRAFT WRITING Fund Name ______________________________ $_______________ PRIVILEGES.) 8. YOUR FINANCIAL REPRESENTATIVE Representative _____________________________ Name of Firm ________________________________________________________ Address_____________________________________ City __________________________ State __________________ Zip ________ Rep. Daytime Phone (___)___________ Rep.#____________ Dealer #______________ Branch #______________ 9. YOUR SIGNATURE BY SIGNING THIS APPLICATION ESTABLISHING AN IRA, THE UNDERSIGNED: - - Establishes an Individual Retirement Account pursuant to the Employee Retirement Income Security Act of 1974 and in accordance with all the terms of the Trust Agreement on Form 5305; - - Appoints Investors Fiduciary Trust Company, or its successors, as Trustee of the account; - - States that he or she has received, read, accepts and specifically incorporates herein the Trust Agreement on Form 5305 and Disclosure Statement; - - Agrees to promptly give instructions to the Trustee necessary to enable the Trustee to carry out its duties under the Trust Agreement and; - - Agrees that he or she has received and read the prospectus for the investment(s) selected and that this account will be subject to the prospectus as amended from time to time. Under penalties of perjury, I certify that the number shown on this form is my correct social security number, and that I have not been notified by the IRS that I am subject to back-up withholding. I certify that I have the power and authority to establish this account and select the privileges requested. Account holders can request the following telephone privilege on this application: telephone exchange transactions. Please note that the telephone exchange privilege is automatic unless the account holder refuses it. Neither a Fund nor its agents will be liable for any loss, expense or cost arising out of any telephone request pursuant to this privilege, including any fraudulent or unauthorized request, and THE ACCOUNT HOLDER WILL BEAR THE RISK OF LOSS, so long as the Fund or its agent reasonably believes, based upon reasonable verification procedures, that the telephonic instructions are genuine. The verification procedures include recording instructions, requiring certain identifying information before acting upon instructions, and sending written confirmations. Your Signature _________________________________________________ Date ____________________________________________________________ IRA-10 2/95 203911
6 IRA APPLICATION GUIDE 1. INFORMATION ABOUT YOU Fill this section out completely. 2. YOUR BENEFICIARIES You can change your beneficiaries by writing a letter of instruction to Investors Fiduciary Trust Company, c/o Kemper Service Company, P.O. Box 419415, Kansas City, MO 64141-6415. Reference your name, fund, and fund account number. If you have more than one beneficiary, please identify the primary and secondary beneficiary. 3. TYPE OF IRA INDIVIDUAL: A working individual may contribute up to $2,000 or 100% of compensation, whichever is less. SIMPLIFIED EMPLOYEE PLAN (SEP): Must be established and maintained by the employer. The maximum contribution is the lesser of 15% of your compensation or $30,000. For more information on establishing a SEP, call Kemper Shareholder Services at 1-800-621-1048. SPOUSAL: Two applications are necessary if both you and your spouse wish to establish an IRA. If you're contributing for both you and your non-working spouse, the maximum contribution is the lesser of 100% of your compensation or $2,250. The maximum contribution must be split between the two accounts so that no more than $2,000 is placed in either account. 4. TYPE OF TRANSACTION DIRECT TRANSFER OF ASSETS: When changing custodians on an existing IRA, the IRA must be released by the present custodian. To obtain information concerning the transfer of IRA assets call Kemper Shareholder Services at 1-800-621-1048. ROLLOVER: With a rollover, you actually receive a distribution from an IRA, or qualified employer's plan. Once the distribution is received, you may either endorse the check over to the new trustee or deposit the check received and, within 60 days of receipt, issue a new check for the amount received to the new trustee and send it along with an IRA Application to the new trustee. You may roll over your IRA as many times as you wish. However, each time you do roll over, the funds must remain with the new trustee for at least 12 months. (PLEASE NOTE: CONTACT YOUR ACCOUNTANT ABOUT THE TAX CONSEQUENCES OF RECEIVING A CASH DISTRIBUTION FROM YOUR EMPLOYER'S TAX-QUALIFIED PLAN BEFORE FORWARDING A CHECK TO KEMPER TO OPEN AN IRA. UNDER CURRENT IRS PROVISIONS, THERE MAY BE TAX LIABILITY ASSOCIATED WITH TAKING PHYSICAL POSSESSION OF YOUR DISTRIBUTION, INSTEAD OF AUTOMATICALLY TRANSFERRING YOUR BALANCE INTO A KEMPER IRA). 5. YOUR INVESTMENT CHOICES Elect your investment choice(s) from among the Kemper Funds for which you have received a prospectus. The minimum investment to establish an IRA is $250 per Fund; the minimum subsequent investment is $50. The minimum initial investment is $50 per Fund if the Bank Direct Deposit option is selected. TRUSTEE FEE There is an annual $12 trustee fee for the Kemper Family of Funds. An individual holding two or more accounts in Kemper Family of Funds will be charged a maximum of $24. The fees may be paid either by separate check or will be automatically deducted from your account by Investors Fiduciary Trust Company. This fee is subject to change as provided in Article IX of the Individual Retirement Trust Account Form. WHEN AND HOW THE $12 FEE IS AUTOMATICALLY DEDUCTED If the $12 annual trustee fee is not paid by separate check, Investors Fiduciary Trust Company will automatically deduct the $12 fee from your account. Annual trustee fees are assessed on a calendar year basis. If you opened your account prior to May 1st of the calendar year, the fee will be deducted on May 1st. If you opened your account after May 1st of that calendar year, the $12 fee will be deducted on December 1st. In every calendar year after the year in which you opened your account, the fee will be deducted on May 1st. WHAT TO DO IF YOU ELECT TO PAY THE $12 ANNUAL FEE DIRECTLY - - You may pay the first year fee by including $12 with your first contribution and making the proper entry in Section 5 of the IRA Application. - - If you elect to send in the $12 annual fee by separate check in subsequent years, make sure to do so prior to the May 1st automatic deduction. Send a letter referencing the exact name on your account, the fund name and the account number. Make your check payable to Investors Fiduciary Trust Company and mail to Investors Fiduciary Trust Company, c/o Kemper Service Company, P.O. Box 419356, Kansas City, MO 64141-6356. 6. TELEPHONE EXCHANGES To make exchanges, call 1-800-621-1048. Please see the prospectus for exchange privilege limitations. The exchange privilege may be modified, suspended or terminated by a Fund. 7. BANK DIRECT DEPOSIT With Bank Direct Deposit, you can make automatic contributions for as little as $50 from your checking account into your Kemper IRA. There is no service charge, no checks to write and it's a great way to invest for the future. 8. YOUR FINANCIAL REPRESENTATIVE You must complete this section if you have a financial representative. The information is necessary for proper identification of the account and can be obtained from your representative. 9. YOUR SIGNATURE Please be sure to sign and date this section. 10. RETURN YOUR APPLICATION IF NOT A TRANSFER... Mail the IRA APPLICATION, a check made payable to Kemper Fund of your choice (and the IRA DISTRIBUTION FORM if applicable) to: INVESTORS FIDUCIARY TRUST COMPANY - C/O KEMPER SERVICE COMPANY P.O. BOX 419356 - KANSAS CITY, MO 64141-6356 FOR TRANSFERS ONLY... Mail the IRA Application, IRA Transfer Form (and the IRA Distribution form if applicable) to: INVESTORS FIDUCIARY TRUST COMPANY - C/O KEMPER SERVICE COMPANY P.O. BOX 419222 - KANSAS CITY, MO 64141-6222 FOR MORE INFORMATION If you need further information, please contact your financial representative directly or call Kemper Shareholder Services at 1-800-621-1048 7:00 a.m. to 6:00 p.m. Central Time (Monday-Friday) and 9:00 a.m. to 2:00 p.m. (Saturday). If you have tax or legal questions, contact your tax advisor or any district office of the IRS. [KEMPER MUTUAL FUNDS LOGO] EX-99.B18 21 MULTI DISTRIBUTION SYSTEM PLAN 1 EXHIBIT 99.B18 KEMPER MUTUAL FUNDS MULTI-DISTRIBUTION SYSTEM PLAN WHEREAS, each investment company adopting this Multi-Distribution System Plan (each a "Fund" and collectively the "Funds") is an open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"); WHEREAS, Kemper Financial Services, Inc. ("KFS") and/or Dreman Value Advisors, Inc. ("DVA") serves as investment adviser and Kemper Distributors, Inc. ("KDI") serves as principal underwriter for each Fund; WHEREAS, each Fund has a non-Rule 12b-1 administrative services agreement with KDI providing for a service fee at an annual rate of up to .25% of average daily net assets ("Administrative Plan"); WHEREAS, each Fund has established a Multi-Distribution System enabling each Fund, as reflected in its prospectus, to offer investors the option of purchasing shares (a) with a front-end sales load (which may vary among Funds) and a service fee (the "Front-End Load Option" or "Class A shares"); (b) without a front-end sales load, but subject to a Contingent Deferred Sales Charge ("CDSC") (which may vary among Funds), a Rule 12b-1 plan providing for a distribution fee and a service fee (the "Deferred Option" or "Class B shares"); (c) without a front-end sales load or CDSC but subject to a Rule 12b-1 Plan providing for a distribution fee and to a service fee (the "Level Load Option" or "Class C shares"); and (d) for certain Funds, without a front-end load, CDSC, distribution fee or service fee ("Institutional Option" or "Class I shares"); and WHEREAS, Rule 18f-3 under the 1940 Act permits open-end management investment companies to issue multiple classes of voting stock representing interests in the same portfolio notwithstanding Sections 18(f)(1) and 18(i) under the 1940 Act if, among other things, such investment companies adopt a written plan setting forth the separate arrangement and expense allocation of each class and any related conversion features or exchange privileges; NOW, THEREFORE, each Fund, wishing to be governed by Rule 18f-3 under the 1940 Act, hereby adopts this Multi-Distribution System Plan as follows: 2 1. Each class of shares will represent interests in the same portfolio of investments of a Fund (or series), and be identical in all respects to each other class, except as set forth below. The only differences among the various classes of shares of the same Fund (or series) will relate solely to: (a) different distribution fee payments associated with any Rule 12b-1 Plan for a particular class of shares and any other costs relating to implementing or amending such Plan (including obtaining shareholder approval of such Plan or any amendment thereto), which will be borne solely by shareholders of such classes; (b) different service fees; (c) different shareholder servicing fees; (d) different Class Expenses, which will be limited to the following expenses determined by the Trustees to be attributable to a specific class of shares: (i) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses, and proxy statements to current shareholders of a specific class; (ii) Securities and Exchange Commission (the "Commission") registration fees incurred by a specific class; (iii) litigation or other legal expenses relating to a specific class; (iv) Trustee fees or expenses incurred as a result of issues relating to a specific class; and (v) accounting expenses relating to a specific class; (e) the voting rights related to any 12b-1 Plan affecting a specific class of shares; (f) conversion features; (g) exchange privileges; and (h) class names or designations. Any additional incremental expenses not specifically identified above that are subsequently identified and determined to be properly applied to one class of shares of a Fund (or series) shall be so applied upon approval by a majority of the Trustees of such Fund, including a majority of the Trustees who are not interested persons of the Fund. 2. Under the Multi-Distribution System, certain expenses may be attributable to a Fund, but not to a particular series or class thereof. All such expenses will be borne by each class on the basis of the relative aggregate net assets of the classes, except in the case of a Fund that has series, in which case they will first be allocated among series, based upon the relative aggregate net assets of such series. Expenses that are attributable to a particular series, but not to a particular class thereof, will be borne by each class of such series on the basis of the relative aggregate net assets of the classes. Notwithstanding the foregoing, the underwriter, the investment manager or other provider of services to any Fund may waive or reimburse the expenses of a specific class or classes to the extent permitted under Rule 18f-3 under the 1940 Act. A class of shares may be permitted to bear expenses that are directly attributable to such class including: (a) any distribution fees associated with any Rule 12b-1 Plan for a particular class and any other costs relating to implementing or amending such Plan (including obtaining shareholder approval of such Plan or any amendment thereto); (b) any service fees attributable to such class; (c) any shareholder servicing fees 3 attributable to such class; and (d) any Class Expenses determined by the Trustees to be attributable to such class. 3. After a shareholder's Class B shares have been outstanding for six years, they will automatically convert to Class A shares of the same Fund (or series) at the relative net asset values of the two classes and will thereafter not be subject to a Rule 12b-1 Plan; provided, however, that any Class B Shares issued in exchange for shares originally classified as Initial Shares of Kemper Portfolios, formerly known as Kemper Investment Portfolios (KP), whether in connection with a reorganization with a series of KP or otherwise, shall convert to Class A shares seven years after issuance of such Initial Shares if such Initial Shares were issued prior to February 1, 1991. Class B shares issued upon reinvestment of income and capital gain dividends and other distributions will be converted to Class A shares on a pro rata basis with the Class B shares. 4. Any conversion of shares of one class to shares of another class is subject to the continuing availability of a ruling of the Internal Revenue Service or an opinion of counsel to the effect that the conversion of shares does not constitute a taxable event under federal income tax law. Any such conversion may be suspended if such a ruling or opinion is no longer available. 5. To the extent exchanges are permitted, shares of any class of a Fund will be exchangeable with shares of the same class of another Fund, or with money market fund shares as described in the applicable prospectus. Exchanges will comply with all applicable provisions of Rule 11a-3 under the 1940 Act. For purposes of calculating the time period remaining on the conversion of Class B shares to Class A shares, Class B shares received on exchange retain their original purchase date. 6. Dividends paid by a Fund (or series) as to each class of its shares, to the extent any dividends are paid, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except that any distribution fees, service fees, shareholder servicing fees and Class Expenses allocated to a class will be borne exclusively by that class. 7. Any distribution arrangement of a Fund, including distribution fees and front-end and deferred sales loads, will comply with Article III, Section 26, of the Rules of Fair Practice of the National Association of Securities Dealers, Inc. 8. All material amendments to this Plan for a Fund must be approved by a majority of the members of the Fund's governing board, including a majority of the board members who are not interested persons of the Fund. 4 Any open-end investment company may establish a Multi-Distribution System and adopt this Multi-Distribution System Plan by approval of a majority of the members of any such company's governing board, including a majority of the board members who are not interested persons of such company. EX-99.B24 22 POWER OF ATTORNEY 1 EXHIBIT 99.B24 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ Stephen B. Timbers Trustee October 12, 1995 --------------------------- 2 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ David W. Belin Trustee October 12, 1995 -------------------------- 3 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ Lewis A. Burnham Trustee October 12, 1995 -------------------------- 4 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ Donald L. Dunaway Trustee October 12, 1995 -------------------------- 5 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ Robert B. Hoffman Trustee October 12, 1995 -------------------------- 6 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ Donald R. Jones Trustee October 12, 1995 -------------------------- 7 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ David B. Mathis Trustee October 12, 1995 -------------------------- 8 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as such person's attorney-in-fact to sign and file on such person's behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ Shirley D. Peterson Trustee October 12, 1995 -------------------------- 9 POWER OF ATTORNEY The person whose signature appears below hereby appoints Charles F. Custer, Stephen B. Timbers and Philip J. Collora and each of them, any of whom may act without the joinder of the others, as his attorney-in-fact to sign and file on his behalf individually and in the capacity stated below such registration statements, amendments, post-effective amendments, exhibits, applications and other documents with the Securities and Exchange Commission or any other regulatory authority as may be desirable or necessary in connection with the public offering of shares of Kemper Adjustable Rate U.S. Government Fund. Signature Title Date --------- ----- ---- /s/ William P. Sommers Trustee October 12, 1995 -------------------------- EX-99.B485(B) 23 REPRESENTATION OF COUNSEL 1 EXHIBIT 485(b) VEDDER, PRICE, KAUFMAN & KAMMHOLZ November 28, 1995 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Kemper Adjustable Rate U.S. Government Fund To The Commission: We are counsel to the above-referenced investment company (the "Fund") and as such have participated in the preparation and review of Post-Effective Amendment No. 13 to the Fund's registration statement being filed pursuant to Rule 485(b) under the Securities Act of 1933. In accordance with paragraph (b)(4) of Rule 485, we hereby represent that such amendment does not contain disclosures which would render it ineligible to become effective pursuant to paragraph (b) thereof. Very truly yours, /s/ Vedder, Price, Kaufman & Kammholz VEDDER, PRICE, KAUFMAN & KAMMHOLZ COK/dd EX-27.ALL 24 EX-27 COMBINED FOR ALL CLASSES
6 PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000814955 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND 00 COMBINED FOR ALL CLASSES 1000 12-MOS AUG-31-1995 AUG-31-1995 141,704 142,538 2,678 93 0 145,309 15,050 0 502 15,552 0 139,617 0 0 904 0 (11,598) 0 834 129,757 0 11,056 0 (1,811) 9,245 (3,301) 2,153 8,097 (591) (9,118) 0 0 0 0 0 (73,058) 0 0 0 0 (887) 0 (1,811) 162,386 0 0 0 0 0 0 0 0 0 0
EX-27.A 25 CLASS A FDS
6 PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000814955 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND 01 CLASS A 1000 12-MOS AUG-31-1995 AUG-31-1995 0 0 0 0 0 0 0 0 0 0 0 0 14,911 23,791 0 0 0 0 0 123,808 0 0 0 0 0 0 0 0 0 0 0 0 4,929 (14,546) 737 0 0 0 0 0 0 0 0 0 8.33 .48 (.04) (.47) 0 0 8.30 .011 0 0
EX-27.B 26 CLASS B FDS
6 PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000814955 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND 02 CLASS B 1000 12-MOS AUG-31-1995 AUG-31-1995 0 0 0 0 0 0 0 0 0 0 0 0 582 462 0 0 0 0 0 4,836 0 0 0 0 0 0 0 0 0 0 0 0 605 (509) 24 0 0 0 0 0 0 0 0 0 8.32 .43 (.04) (.40) 0 0 8.31 .019 0 0
EX-27.C 27 CLASS C FDS
6 PER SHARE AND RATIO INFORMATION IS SHOWN AT THE CLASS LEVEL. ALL OTHER INFORMATION IS COMBINED FOR ALL CLASSES. THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1995 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000814955 KEMPER ADJUSTABLE RATE U.S. GOVERNMENT FUND 03 CLASS C 1000 12-MOS AUG-31-1995 AUG-31-1995 0 0 0 0 0 0 0 0 0 0 0 0 134 101 0 0 0 0 0 1,113 0 0 0 0 0 0 0 0 0 0 0 0 169 (142) 6 0 0 0 0 0 0 0 0 0 8.33 .43 (.04) (.40) 0 0 8.32 .018 0 0
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