<PAGE> 1
LONG-TERM INVESTING IN A SHORT-TERM WORLD(TM)
December 1, 1998
PROSPECTUS
KEMPER GLOBAL AND
INTERNATIONAL FUNDS
Growth Fund Of Spain
PROSPECTUS ENCLOSED
Investment Manager
Scudder Kemper Investments, Inc.
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza , Chicago, IL 60606-5808
www . kemper . com E-mail [email protected]
Tel (800) 621-1048
[KEMPER FUNDS LOGO]
Long-term investing in a short-term world
<PAGE> 2
TABLE OF CONTENTS
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<TABLE>
<S> <C>
SUMMARY 1
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SUMMARY OF EXPENSES 5
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FINANCIAL HIGHLIGHTS 9
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INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS 11
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INVESTMENT MANAGER AND UNDERWRITER 21
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DIVIDENDS, DISTRIBUTIONS AND TAXES 26
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NET ASSET VALUE 32
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PURCHASE OF SHARES 32
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REDEMPTION OR REPURCHASE OF SHARES 40
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SPECIAL FEATURES 49
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PERFORMANCE 54
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FUND ORGANIZATION AND CAPITAL STRUCTURE 57
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</TABLE>
<PAGE> 3
Growth Fund Of Spain
Prospectus
December 1, 1998
KEMPER GLOBAL/INTERNATIONAL SERIES, INC.
222 South Riverside Plaza
Chicago, Illinois 60606
1-800-621-1048
This prospectus of the Growth Fund Of Spain (the "Fund"), a series of Kemper
Global/ International Series, Inc. (the "Corporation"), an open-end management
investment company, contains concisely the information about the Fund that a
prospective investor should know before investing and should be retained for
future reference. A Statement of Additional Information, which contains
additional information about the Fund and the Corporation, dated December 1,
1998, has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated herein by reference. It is available upon request without charge
from the Fund at the address or telephone number on this cover or the firm from
which this prospectus was received. It is also available along with other
related materials on the SEC's Internet Web Site (http://www.sec.gov).
THE FUND IS THE SUCCESSOR ENTITY TO THE GROWTH FUND OF SPAIN, INC., A CLOSED-END
FUND LISTED ON THE NEW YORK STOCK EXCHANGE, INC. WHOSE SHAREHOLDERS APPROVED A
PROPOSAL TO OPEN-END THE FUND AND REORGANIZE IT AS A SERIES OF THE CORPORATION.
THE FUND WILL NOT COMMENCE THE PUBLIC OFFERING OF ITS SHARES UNTIL AFTER THE
CLOSING OF THE REORGANIZATION TRANSACTION. THIS REORGANIZATION IS EXPECTED TO
OCCUR ON DECEMBER 11, 1998 OR AS SOON AS PRACTICABLE THEREAFTER. ACCORDINGLY,
THE FUND IS NOT OFFERING ITS SHARES FOR PURCHASE, AND WILL NOT ACCEPT
SUBSCRIPTIONS FOR SUCH SHARES, UNTIL AFTER THE REORGANIZATION TAKES PLACE.
This prospectus describes the Growth Fund Of Spain, a mutual fund managed by
Scudder Kemper Investments, Inc. (the "Adviser"), whose investment objective is
to seek long-term capital appreciation by investing primarily in equity
securities of Spanish companies. The Fund may also invest up to 35% of its total
assets in the securities of non-Spanish companies, which investments may be
concentrated in whole or in part in the equity securities of Portuguese
companies.
THE FUND'S 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 THE
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
INVESTMENT BY THE FUND IN SECURITIES OF SPANISH AND PORTUGUESE COMPANIES
INVOLVES CERTAIN RISKS NOT TYPICALLY ASSOCIATED WITH INVESTING IN SECURITIES OF
U.S. COMPANIES INCLUDING: CURRENCY FLUCTUATIONS, POTENTIAL PRICE VOLATILITY,
LESS LIQUIDITY AND CONCENTRATION IN THE SPANISH AND PORTUGUESE EQUITIES MARKETS.
<PAGE> 4
KEMPER GLOBAL/INTERNATIONAL SERIES, INC.
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606,
TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVE. GROWTH FUND OF SPAIN (the "Fund") seeks long-term capital
appreciation by investing primarily in equity securities of Spanish companies.
The Fund is a non-diversified series of Kemper Global/International Series, Inc.
(the "Corporation"), an open-end management investment company. As part of its
overall investment strategy, the Fund may also invest up to 35% of its total
assets in the securities of non-Spanish companies, which investments may be
concentrated in whole or in part in the equity securities of Portuguese
companies. The Fund may purchase and sell put and call options, engage in
financial futures transactions ("Strategic Transactions"), invest in foreign
securities and engage in related foreign currency transactions.
RISK FACTORS. The Fund's risks are determined by the nature of the securities
held and the portfolio management strategies used by the Adviser. The following
are descriptions of certain risks related to the investments and techniques that
the Fund may use from time to time. For a more complete discussion of risks
involved in an investment in the Fund, see "Special Risk Factors."
The Fund involves above-average investment risk. It is designed as a long-term
investment and not for short-term trading purposes, and should not be considered
a complete investment program.
There is no assurance that the investment objective of the Fund will be
achieved. The return and net asset value of the Fund will fluctuate. The Fund's
non-diversified status involves greater risk than typical diversified mutual
funds, since the Fund may invest a greater proportion of its assets in the
securities of a smaller number of issuers and therefore may be subject to
greater market and credit risk than a more broadly diversified portfolio.
Investment by the Fund in securities of Spanish and other non-United States
companies involves certain considerations not typically associated with
investing in securities of U.S. companies including: currency fluctuations,
potential price volatility, heightened political and economic risk, less
liquidity and concentration in foreign equities markets. Foreign investments by
the Fund 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 the 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. The Fund's
1
<PAGE> 5
possible concentration of investments in a single issuer (i.e.,
non-diversification) creates greater risk than if its investments were spread
across a more diversified portfolio. There are special risks associated with
options, financial futures and foreign currency transactions and other
derivatives and there is no assurance that use of those investment techniques
will be successful. See "Investment Objective, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. The 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 5.75% of the offering
price. Reduced sales charges apply to
purchases of $50,000 or more. Subject to a
2% redemption fee on shares redeemed or
exchanged within one year after purchase,
with limited exceptions. Class A shares
purchased at net asset value under the
"Large Order NAV Purchase Privilege" may
also be subject to a 1% contingent
deferred sales charge if redeemed within
one year of purchase and a 0.50%
contingent deferred sales charge if
redeemed within the second year of
purchase.
Class B Shares................. Offered at net asset value, subject to a
Rule 12b-1 distribution fee of 0.75% per
annum, a 2% redemption fee on shares
redeemed or exchanged within one year
after purchase, with limited exceptions,
and a contingent deferred sales charge
applied to the value of shares redeemed
within six years of purchase. Class B
shares convert to Class A shares six years
after issuance. The contingent deferred
sales charge is computed at the following
rates:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
--------------------------------- ------------
<S> <C>
First......................... 4%
Second........................ 3%
Third......................... 3%
Fourth........................ 2%
Fifth......................... 2%
Sixth......................... 1%
</TABLE>
2
<PAGE> 6
Class C Shares................. Offered at net asset value without an
initial sales charge, but subject to a
Rule 12b-1 distribution fee of 0.75% per
annum, a 2% redemption fee on shares
redeemed or exchanged within one year
after purchase, with limited exceptions,
and a 1% contingent deferred sales charge
on redemptions made within one year of
purchase. Class C shares do not convert
into any other class.
Each class of shares represents interests in the same portfolio of investments
of the Fund. The minimum initial investment for each class is $1,000 and
investments thereafter must be for at least $100. Shares are redeemable at net
asset value, which may be more or less than original cost, subject to any
applicable redemption fee and/or contingent deferred sales charge. Certain large
redemption requests are subject to being fulfilled through an in-kind
distribution of portfolio securities. See "Purchase of Shares" and "Redemption
or Repurchase of Shares."
As an open-end fund, the Fund is required to redeem its securities if so
requested by shareholders. To the extent the Fund is required to sell
appreciated portfolio securities to pay redemptions, the Fund will realize
capital gains which must be distributed along with all of the Fund's other
income and gains to its shareholders each year and will be taxable to
shareholders. A significant portion of the value of the Fund's portfolio is
represented by unrealized capital gains. To minimize realization of capital
gains on disposition of portfolio securities in connection with redemptions, the
Fund has instituted a policy requiring that certain large-scale redemptions be
paid in-kind in an attempt to avoid the imposition of adverse tax consequences
on remaining shareholders. See "Redemption or Repurchase of Shares--Redemption
in-Kind". This policy will not, however, lessen the tax effect of other
redemptions. The Fund anticipates that there may be significant redemptions as a
result of its conversion to an open-end fund. If so, the Fund may realize
significant capital gains.
INVESTMENT MANAGER AND UNDERWRITER. Scudder Kemper Investments, Inc. (the
"Adviser") serves as investment manager for the Fund. The Adviser is paid an
investment management fee by the Fund based upon the Fund's average daily net
assets. Kemper Distributors, Inc. ("KDI"), a subsidiary of the Adviser, is
principal underwriter and administrator for the Fund. For Class B shares and
Class C shares of the Fund, KDI receives an annual Rule 12b-1 distribution fee
of 0.75% of average daily net assets of each such class. KDI also receives the
amount of any contingent deferred sales charges paid on the redemption of
shares. The expenses of the Fund and of other investment companies investing in
foreign securities can be expected to be higher than for investment companies
investing primarily in domestic securities since the costs of operation are
higher, including custody and transaction costs for foreign securities and
investment management fees, but not necessarily higher than the fees charged to
funds with investment objectives similar to that of the Fund.
3
<PAGE> 7
Certain administrative services are provided to shareholders under an
administrative services agreement with KDI. The Fund pays an administrative
services fee at an annual rate of up to 0.25% of average daily net assets of
each of Class A, B and C shares of the Fund, which KDI pays to financial
services firms. See "Investment Manager and Underwriter."
DIVIDENDS. The Fund normally distributes annual dividends of net investment
income. Any net realized short-term and long-term capital gains for the Fund are
distributed at least annually. Income and capital gain dividends of the Fund are
automatically reinvested in additional shares of the Fund, without a sales
charge, unless the investor makes an election otherwise. See "Dividends,
Distributions and Taxes."
4
<PAGE> 8
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES(1) ------- ------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases (as a percentage of
offering price)............................................. 5.75%(2) None None
Maximum Sales Charge on Reinvested Dividends................ None None None
Redemption Fees(+).......................................... 2.00% 2.00% 2.00%
Exchange Fee................................................ None None None
Maximum Contingent Deferred Sales Charge (as a percentage of
redemption proceeds)........................................ None(3) 4% (4) 1%(5)
</TABLE>
- ---------------
(+) A 2% fee, which is retained by the Fund, is imposed upon redemptions or
exchanges during the first year after purchase, with limited exceptions.
See "Redemption or Repurchase of Shares--Redemption Fee."
(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 $50,000 or more. See "Purchase
of Shares--Initial Sales Charge Alternative--Class A Shares."
(3) The redemption of Class A shares purchased at net asset value under the
"Large Order NAV Purchase Privilege" may be subject to a contingent deferred
sales charge of 1% during the first year and 0.50% during the second year.
See "Purchase of Shares--Initial Sales Charge Alternative--Class A Shares."
(4) The maximum Contingent Deferred Sales Charge on Class B shares applies to
redemptions during the first year. The charge is 4% during the first year,
3% during the second and third years, 2% during the fourth and fifth years
and 1% in the sixth year.
(5) The Contingent Deferred Sales Charge of 1% on Class C shares applies to
redemptions during the first year after purchase.
5
<PAGE> 9
ANNUAL FUND OPERATING EXPENSES
(estimated as a percentage of average net assets)
<TABLE>
<S> <C>
CLASS A SHARES
Management Fees............................................. 0.75%
12b-1 Fees.................................................. None
Other Expenses.............................................. 1.10%
----
Total Fund Operating Expenses............................... 1.85%
====
CLASS B SHARES(6)
Management Fees............................................. 0.75%
12b-1 Fees.................................................. 0.75%
Other Expenses.............................................. 1.35%
----
Total Fund Operating Expenses............................... 2.85%
====
CLASS C SHARES(7)
Management Fees............................................. 0.75%
12b-1 Fees.................................................. 0.75%
Other Expenses.............................................. 1.30%
----
Total Fund Operating Expenses............................... 2.80%
====
</TABLE>
- ---------------
(6) Long-term Class B shareholders of the Fund may, as a result of the Fund's
Rule 12b-1 fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although KDI believes that this is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
(7) As a result of the accrual of Rule 12b-1 fees, long-term Class C
shareholders of the Fund may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, Inc.
6
<PAGE> 10
EXAMPLE
The following example assumes reinvestment of all dividends and distributions
and that the percentage amounts under "Total Fund Operating Expenses" remain the
same each year.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CLASS A SHARES(8) ------ ------- ------- --------
<S> <C> <C> <C> <C>
Based on the estimated level of total operating expenses $96* $112 $152 $262
listed above, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return and
redemption at the end of each time period:
You would pay the following expenses on the same investment, $75 $112 $152 $262
assuming no redemption:
CLASS B SHARES(9)
Based on the estimated level of total operating expenses $89* $118 $170 N/A(11)
listed above, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return and
redemption at the end of each time period:..................
You would pay the following expenses on the same investment, $29 $ 88 $150 N/A(11)
assuming no redemption:.....................................
CLASS C SHARES(10)
Based on the estimated level of total operating expenses $59* $ 87 $148 $313
listed above, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return and
redemption at the end of each time period:
You would pay the following expenses on the same investment, $28 $ 87 $148 $313
assuming no redemption:
</TABLE>
- ---------------
* Assumes that shareholder purchased shares on the first day of the first year
and the 2% redemption fee was applied.
(8) Assumes deduction of the maximum 5.75% initial sales charge at the time of
purchase and no deduction of a Contingent Deferred Sales Charge at the time
of redemption.
(9) Assumes 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 (4%), 3 years (3%), and 5 years (2%).
(10) Assumes that the shareholder purchased shares on the first day of the first
year and a contingent deferred sales charge was applied as follows: 1 year
(1%) and 3 years through 10 years (0%).
(11) Class B shares convert to Class A shares six years after issuance.
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information.
The expense ratios shown above are estimates for the Fund's current fiscal year
ending on October 31, 1999 based on the Fund's current fee schedule and expenses
incurred by the Fund during its most recent fiscal year, prior to the
reorganization transaction scheduled to be consummated on December 11, 1998. The
fees and expenses of the Fund subsequent to its conversion to open-end status
will differ from the fees and expenses of the Fund when it operated as a
closed-end fund, as described more fully below. The fees and expenses of
closed-end funds are, in many cases, lower than those of open-end funds. The
actual expenses for each class of shares in future years may be
7
<PAGE> 11
more or less than the numbers in the tables above, depending on a number of
factors, including changes in actual value of the Fund's assets represented by
each class of shares.
Each Example assumes a 5% annual rate of return pursuant to requirements of the
SEC and assumes reinvestment of all dividends and distributions. This
hypothetical rate of return is not intended to be representative of past or
future performance of the Fund. THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
Prior to reorganization of the Fund as an open-end investment company, the Fund
was organized as a closed-end investment company. Operation of the Fund as an
open-end investment company will result in an immediate increase in the Fund's
expenses as a percentage of average net assets (the "expense ratio"). Increases
in expense ratios will adversely effect the Fund's investment performance. While
the annual investment management fee of the Fund was decreased from 1.00% to a
graduated fee starting at 0.75% of net assets in connection with the conversion
to open-end status, the Fund now bears certain expenses that it previously did
not, including an administrative services fee at an annual rate of up to 0.25%
of average daily net assets, and certain other expenses related to its
operations as an open-end fund, such as a fund accounting fee, higher transfer
agency expenses, increased portfolio transaction expenses, additional
shareholder communications expenses, and distribution expenses (with respect to
Class B and C shares). For the Fund's fiscal year ended November 30, 1997, the
Fund had an annual expense ratio of 1.22%. The expense ratios of the Fund as an
open-end investment company for the current fiscal year are estimated to be
1.85%, 2.85% and 2.80% for Class A, B and C shares, respectively, assuming no
reduction in net assets.
In addition, conversion to an open-end investment company could result in the
immediate redemption of Fund shares, which could be substantial. As a result of
any decrease in size resulting from redemptions, the Fund could experience
further increases in its expense ratio. Further, decreased asset size could
result in less diversification or in smaller portfolio positions in investments,
which could adversely affect the Fund's investment performance. Other closed-end
funds that have converted to open-end format have experienced redemptions that
exceed sales after conversion, and, in some instances, net redemptions have been
substantial. The Fund and its shareholders bear this risk.
8
<PAGE> 12
FINANCIAL HIGHLIGHTS
The Fund is the successor entity to The Growth Fund of Spain, Inc. ("GSP"), a
closed-end management investment company. It is presently contemplated that on
December 11, 1998, GSP will be reorganized as an open-end series of the
Corporation consisting of Class A, Class B, and Class C shares. As of the date
of this prospectus, GSP consisted of only one class of shares; the shares of GSP
outstanding as of December 11, 1998 are to be exchanged for Class A shares of
the Fund. Accordingly, the following table shows financial information for the
Fund's Class A shares expressed in terms of one share outstanding throughout the
relevant period, and reflects the operations of GSP as a closed-end investment
company that was not required to redeem its shares. As of the date of this
prospectus, the Fund has not issued any Class B or Class C shares. The financial
highlights are part of the Fund's financial statements, which are included in
its Annual Report to Shareholders for the fiscal year ended November 30, 1997,
and Semiannual Report to Shareholders for the period ended May 31, 1998 and are
incorporated by reference into the Fund's Statement of Additional Information
and this Prospectus. The financial statements and accompanying notes for the
Fund's fiscal year ended November 30, 1997 have been audited by Ernst & Young
LLP, independent auditors, which together with Ernst & Young LLP's report
thereon are included in the Fund's Annual Report to Shareholders for such fiscal
year. Further information about the Fund's performance is contained in the
Fund's Statement of Additional Information and its Annual Report to Shareholders
for the fiscal year ended November 30, 1997, and Semiannual Report to
Shareholders for the period ended May 31, 1998, which may each be obtained
without charge by calling 1-800-621-1048. Effective as of the Fund's 1998 fiscal
year, the Fund's fiscal year end has been changed to October 31.
9
<PAGE> 13
<TABLE>
<CAPTION>
SIX
MONTHS FEBRUARY 14,
ENDED YEAR ENDED NOVEMBER 30, 1990 TO
MAY 31, ------------------------------------------------------------------- NOVEMBER 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
------- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period $ 19.06 15.67 13.33 12.40 10.67 8.99 11.08 10.71 11.12
- ---------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .06 .24 .36 .37 .32 .40 .54 .37 .32
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain 6.07 4.15 2.69 1.01 1.41 1.28 (2.48) .36 (.73)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 6.13 4.39 3.05 1.38 1.73 1.68 (1.94) .73 (.41)
- ---------------------------------------------------------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .11 .17 .42 .45 -- -- .15 .36 --
- ---------------------------------------------------------------------------------------------------------------------------------
Distribution from net realized
gain 1.36 .83 .29 -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends 1.47 1.00 .71 .45 -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 23.72 19.06 15.67 13.33 12.40 10.67 8.99 11.08 10.71
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 34.60% 29.86 24.12 11.62 16.21 18.69 (17.73) 7.06 (3.69)
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)
Expenses 1.21% 1.22 1.25 1.22 1.23 1.22 1.22 1.23 1.26
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .56% 1.29 2.46 2.89 2.57 3.97 4.98 3.32 3.46
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $392,061 315,059 263,935 227,997 213,972 184,884 156,179 192,986 186,638
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 5% 29 45 69 85 50 72 104 19
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Each figure includes reinvestment of dividends. Data for the period ended
May 31, 1998 is unaudited.
10
<PAGE> 14
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The following information sets forth the Fund's investment objective and
policies. The Fund's returns and net asset value will fluctuate, and there is no
assurance that the Fund will meet its objective.
The Fund is designed for long-term investors who can accept international
investment risk in pursuit of additional opportunities that foreign securities
may provide. Since the Fund normally will be invested primarily in foreign
securities markets, changes in the Fund's share price may have a low correlation
with movements in the U.S. markets. The Fund's share price will reflect the
movements of both the stock and bond markets in which it is invested and the
currency in which the investments are denominated; the strength or weakness of
the U.S. dollar against the Spanish Peseta, the Portuguese Escudos and other
foreign currencies may account for part of the Fund's investment performance. As
with any long-term investment, the value of shares when sold may be higher or
lower than when purchased. In the opinion of the Adviser, Spanish and Portuguese
capital markets provide investors with opportunities to participate in the
economic growth taking place outside the U.S., which should translate into
positive securities market performance over the long term. In addition, the
Adviser believes that international investing offers the benefits of
diversification, which can lower the overall price volatility of an investor's
portfolio. Foreign investing does involve significant risks, as discussed in
this prospectus, and the Fund should not be considered a complete investment
program. The Fund is designed primarily for long-term investment and investors
should not consider it a trading vehicle.
The Fund seeks long-term capital appreciation by investing primarily in equity
securities of companies organized under the laws of Spain or traded in the
Spanish securities markets and doing business in Spain ("Spanish companies").
Under normal market conditions, at least 65% of the Fund's total assets will be
invested in equity securities of Spanish companies. The Fund is permitted to
invest up to 25% of its total assets in unlisted equity and debt securities,
including convertible debt securities, and in other securities that are not
readily marketable, a significant portion of which may be considered illiquid
(see "Unlisted and Illiquid Securities" below). Investment in Spanish equity
securities that are unlisted or are not readily marketable will be treated as
investments in Spanish equity securities for purposes of the Fund's fundamental
policy of investing at least 65% of its total assets in Spanish equity
securities. The Fund may invest up to 35% of total assets in investment-grade
fixed income instruments denominated in Pesetas or U.S. dollars as described
below. The Fund's investment objective and the foregoing policies are
fundamental and cannot be changed without the approval of a majority of the
Fund's outstanding voting securities. As an operating policy, the Adviser
intends to evaluate investment opportunities present throughout the Iberian
Peninsula (i.e., Spain and Portugal). Accordingly, the Fund may, as a matter of
nonfundamental policy, invest up to 35% of total assets in equity securities of
companies other than Spanish companies, and may concentrate such investments in
whole or in part in equity securities of companies organized under
11
<PAGE> 15
the laws of Portugal or traded in the Portuguese securities markets and doing
business in Portugal ("Portuguese companies"). Unless otherwise noted, the
Fund's other investment policies described below are not fundamental and may be
changed by the Fund without shareholder approval.
Investment-grade fixed-income instruments are defined to include securities
rated in the four highest rating categories by Standard & Poor's Ratings Group
("S&P") or by Moody's Investors Service, Inc. ("Moody's"), or, if such
securities are not so rated, securities of equivalent investment quality as
determined by the Adviser, and short-term indebtedness or cash equivalents
denominated in either Pesetas or U.S. dollars. For temporary defensive purposes,
e.g., during periods in which changes in the Spanish securities markets, other
economic conditions or political conditions in Spain warrant, the Fund may vary
from its investment objective and may invest, without limit, in high quality
debt instruments, such as U.S. and Spanish government securities. The Fund may
also at any time invest funds in U.S. dollar-denominated money market
instruments as reserves for expenses and dividend and other distributions to
shareholders.
SPECIAL RISK FACTORS. The Fund's risks are determined by the nature of the
securities held and the portfolio management strategies used by the Adviser. The
following are descriptions of certain risks related to the investments and
techniques that the Fund may use from time to time.
NON-DIVERSIFIED INVESTMENT COMPANY. The Fund is classified as non-diversified
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
means that the Fund is not limited by the 1940 Act in the percentage of its
assets that it may invest in the obligations of a single issuer. As a
"non-diversified" investment company, the Fund may be subject to greater market
and credit risk than a more broadly diversified portfolio. The investment of a
large percentage of the Fund's assets in the securities of a small number of
issuers may cause the Fund's share price to fluctuate more than that of a
diversified investment company. The Fund will, however, be subject to the
diversification requirements imposed by Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code").
FOREIGN SECURITIES, IN GENERAL. Investments in foreign securities involve
special considerations, due to more limited information, higher brokerage costs,
different accounting standards, thinner trading markets and the likely impact of
foreign taxes on the yield from debt securities. They may also entail certain
other risks, such as the possibility of one or more of the following: imposition
of dividend or interest withholding or confiscatory taxes; currency blockages or
transfer restrictions; expropriation, nationalization, military coups or other
adverse political or economic developments; less government supervision and
regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Further, it may be more
difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., increasing the risk of delayed settlements of portfolio transactions or
loss
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<PAGE> 16
of certificates for portfolio securities. Certain markets may require payment
for securities before delivery. The Fund's ability and decision to purchase and
sell portfolio securities may be affected by laws or regulations relating to the
convertibility of currencies and repatriation of assets. Some countries restrict
the extent to which foreigners may invest in their securities markets.
Some foreign countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, there is risk that certain
foreign countries may restrict the free conversion of their currencies into
other currencies. Further, it generally will not be possible to eliminate the
Fund's foreign currency risk through hedging. Any devaluations in the currencies
in which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
SPANISH AND PORTUGUESE MARKET CHARACTERISTICS. The securities markets of Spain
and Portugal have substantially less volume than the securities markets of the
United States and securities of some companies in Spain and Portugal are less
liquid and more volatile than securities of comparable U.S. companies.
Accordingly, these markets may be subject to greater influence by adverse events
generally affecting the market, and by large investors trading significant
blocks of securities, than is usual in the United States. Brokerage commissions
and other transaction costs on securities exchanges in Spain and Portugal are
generally higher than in the United States.
Though foreign investment in the securities markets of Spain and Portugal is
permitted, certain controls and restrictions may apply in certain circumstances.
These controls may at times limit or preclude investment in certain Spanish or
Portuguese companies and may increase the cost and expenses of the Fund. The
right of foreign investors to repatriate both investment income and capital from
Spain and Portugal is recognized. Notwithstanding, such repatriation is
regulated in Spain, including in some cases certain notification requirements.
Although restrictions on foreign investment in Spain and Portugal may in the
future make it undesirable to invest in Spain and Portugal, the Adviser does not
believe that any current repatriation controls would affect its decision to
invest in Spain and Portugal.
Companies in Spain and Portugal are subject to accounting, auditing and
financial standards and requirements which are not equivalent to those
applicable to U.S. companies. There is less government supervision and
regulation of Spanish and Portuguese securities exchanges, brokers and listed
companies than exists in the United States. In addition, there may be the
possibility of increased taxation, and political, economic or diplomatic
developments which could adversely affect assets held in Spain and Portugal.
There is also less publicly available information about Spanish and Portuguese
companies and governments compared to reports and ratings published about U.S.
companies and the U.S. Government.
See Appendix B in the Fund's Statement of Additional Information for a more
detailed discussion of Spanish and Portuguese market and economic
characteristics.
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<PAGE> 17
EXCHANGE RATE FLUCTUATIONS. Although the Fund's assets will be invested in
Spanish and Portuguese securities and substantial revenues will be received in
Pesetas or Escudos, the Fund will value its net assets and will make
distributions to its shareholders in U.S. dollars. Accordingly, the U.S. dollar
equivalent of the Fund's net assets, including accrued income and realized
capital gains, will be adversely affected by reductions in the value of such
currency relative to the U.S. dollar. In addition, significant uncertainty
surrounds the proposed introduction of the euro (a common currency for the
European Union) in January 1999 and its effect on the value of securities
denominated in Spanish Pesetas or Portuguese Escudos. See "Investment Manager
and Underwriter--Euro Conversion" below. The Fund may enter into transactions to
seek to hedge foreign currency exchange rate risks. See "Strategic Transactions
and Derivatives" below.
CORPORATE DISCLOSURE STANDARDS. Issuers of securities in Spain and Portugal are
not subject to the same degree of regulation as are U.S. issuers with respect to
such matters as insider trading rules, tender offer regulation, shareholder
proxy requirements and the timely disclosure of information. Furthermore,
Spanish and Portuguese accounting, auditing and financial reporting standards
are not comparable to U.S. standards and less information is available to
investors in Spanish and Portuguese securities than to investors in U.S.
securities.
INVESTMENT AND REPATRIATION RESTRICTIONS. Regulation of foreign investment in
Spanish companies is relatively limited. In general, only foreign investor
participation which exceeds a 50% interest in a company is subject to a review
procedure by the Ministry of Economy and Finance. Foreign investment in certain
sectors, such as national defense, television, radio, gambling, communications
and air transportation, requires prior governmental approval pursuant to
applicable legislation.
Existing exchange control regulations in Spain permit non-residents to convert
Pesetas to foreign currencies only by means of "foreign currency convertible
Peseta accounts." Non-residents typically acquire Pesetas through their receipt
of proceeds from the sale of investments in Spain. All such exchange operations
are authorized in accordance with the regulations of the Bank of Spain and some
require specific government authorization.
OTHER RISKS OF FOREIGN INVESTMENTS. As in the case of all foreign investments,
the Fund's investments in Spanish and Portuguese securities could in the future
be adversely affected by any increase in taxes or by political, economic or
diplomatic developments.
COMMON STOCKS. The Fund may invest in common stocks. Common stock is issued by
companies to raise cash for business purposes and represents a proportionate
interest in the issuing companies. Therefore, the Fund participates in the
success or failure of any company in which it holds stock. The market values of
common stock can fluctuate significantly, reflecting the business performance of
the issuing company, investor perception and general economic or financial
market movements. Smaller companies are especially
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<PAGE> 18
sensitive to these factors. An investment in common stock entails greater risk
of becoming valueless than does an investment in fixed-income securities.
Despite the risk of price volatility, however, common stock also offers the
greatest potential for long-term gain on investment, compared to other classes
of financial assets such as bonds or cash equivalents.
INVESTMENT COMPANY SECURITIES. Securities of other investment companies may be
acquired by the Fund to the extent permitted under the 1940 Act. Investment
companies incur certain expenses such as management, custodian, and transfer
agency fees, and, therefore, any investment by the Fund in shares of other
investment companies may be subject to such duplicate expenses.
DEBT SECURITIES, IN GENERAL. The Fund may invest in investment-grade fixed-
income instruments rated in the four highest rating categories by S&P or
Moody's, or, if unrated, are determined to be of equivalent quality. High
quality bonds (rated AAA or AA by S&P or Aaa or Aa by Moody's)
characteristically have a strong capacity to pay interest and repay principal.
Medium investment-grade bonds (rated A or BBB by S&P or A or Baa by Moody's) are
defined as having adequate capacity to pay interest and repay principal. In
addition, certain medium investment-grade bonds are considered to have
speculative characteristics. Investment in debt securities involves both
interest rate and credit risk. Generally, the value of debt instruments rises
and falls inversely with fluctuations in interest rates. As interest rates
decline, the value of debt securities generally increases. Conversely, rising
interest rates tend to cause the value of debt securities to decrease. Bonds
with longer maturities generally are more volatile than bonds with shorter
maturities. The market value of debt securities also varies according to the
relative financial condition of the issuer.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities which may
offer higher income than the common stocks into which they are convertible. The
convertible securities in which the Fund may invest are bonds, notes, debentures
and preferred stocks, including fixed-income or zero coupon debt securities,
which may be converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. Prior to their conversion, convertible
securities may have characteristics similar to both nonconvertible debt
securities and equity securities. While convertible securities generally offer
lower yields than nonconvertible debt securities of similar quality, their
prices may reflect changes in the value of the underlying common stock.
Convertible securities generally entail less credit risk than the issuer's
common stock. The Fund may be required to permit the issuer of a convertible
security to redeem the security, convert it into the underlying common stock or
sell it to a third party. Thus, the Fund may not be able to control whether the
issuer of a convertible security chooses to convert that security. If the issuer
chooses to do so, this action could have an adverse effect on the Fund's ability
to achieve its investment objective.
In selecting convertible securities for the Fund, the following factors, among
others, will be considered by the Adviser: (1) the Adviser's evaluations of
creditworthiness of the issuers of the securities; (2) the interest or dividend
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<PAGE> 19
income generated by the securities; (3) the potential for capital appreciation
of the securities and the underlying common stock; (4) the prices of the
securities relative to the underlying common stocks; (5) the prices of the
securities relative to other comparable securities; (6) whether the securities
are entitled to the benefits of sinking funds or other protective conditions;
(7) diversification of the Fund's portfolio as to issuers and industries; and
(8) whether the securities are rated by Moody's and/or S&P and, if so, the
ratings assigned.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities, which pay
no cash income and are sold at substantial discounts from their maturity value.
When held to maturity, their entire income, which consists of accretion of
discount, comes from the difference between the issue price and their maturity
value. Zero coupon securities are subject to greater market value fluctuations
from changing interest rates than debt obligations of comparable maturities that
make current cash distributions of interest.
WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
forward delivery basis, for payment and delivery at a later date. The price and
yield are generally fixed on the date of commitment to purchase. During the
period between purchase and settlement, no interest accrues to the Fund. At the
time of settlement, the market value of the security may be more or less than
the purchase price.
REPURCHASE AGREEMENTS. As a means of earning income for periods as short as
overnight, the Fund may enter into repurchase agreements with selected banks and
broker/dealers with respect to its U.S. dollar-denominated debt securities.
Under a repurchase agreement, the Fund acquires securities, subject to the
seller's agreement to repurchase them at a specified time and price. If the
seller under a repurchase agreement becomes insolvent, the Fund's right to
dispose of the securities may be restricted, or the value of the securities may
decline before the Fund is able to dispose of them. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the securities before repurchase of the securities under a repurchase
agreement, the Fund may encounter delays and incur costs, including a decline in
the value of the securities, before being able to sell the securities. The total
amount of all repurchase agreements having a maturity greater than seven days,
plus the total value of all securities held by the Fund which are not readily
marketable, will be limited to 15% of the Fund's net assets. See "Unlisted and
Illiquid Securities" below.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which a Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
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<PAGE> 20
UNLISTED AND ILLIQUID SECURITIES. The Fund is permitted to invest up to 25% of
its total assets in unlisted securities and in securities that are not readily
marketable, a significant portion of which may be considered illiquid. Under
current interpretations of the SEC's staff, the Fund is limited to investing 15%
of its net assets in such securities to the extent they are deemed to be
illiquid. Such unlisted securities may consist of both equity securities and
debt securities, including convertible debt securities. There is no requirement
to register the sale of securities with a government agency in Spain and there
are no legal restrictions on resales of such securities, either as to length of
time such securities must be held or manner of resale. However, there may be
contractual restrictions on resale of such securities. The sale price of
unlisted securities may be lower or higher than the Adviser's most recent
estimate of their fair value. Generally, less public information is available
with respect to the issuers of such securities than with respect to companies
whose securities are traded on an exchange. Unlisted securities are more likely
to be issued by emerging, small or family businesses and therefore subject to
greater economic, business and market risks than the listed securities of more
well-established companies.
Illiquid securities may have been acquired through private placements
(transactions in which the securities acquired have not been registered with the
SEC). These securities generally offer a higher return than more readily
marketable securities, but carry the risk that the Fund may not be able to
dispose of them at an advantageous time or price. Some restricted securities
purchased by the Fund, however, may be considered liquid despite resale
restrictions since they can be sold to other qualified institutional buyers
under a rule of the SEC (Rule 144A). The absence of a trading market can make it
difficult to ascertain a market value for illiquid securities. Disposing of
illiquid securities may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them promptly at an
acceptable price. Upon approval from the Fund's Board of Directors, the Adviser
may determine which Rule 144A securities will be considered liquid.
INVESTING IN SMALL COMPANIES. There is typically less publicly available
information concerning foreign and smaller companies than for domestic and
larger, more established companies. Some small companies have limited product
lines, distribution channels and financial and managerial resources. Also,
because smaller companies normally have fewer shares outstanding than larger
companies and trade less frequently, it may be more difficult for the Fund to
buy and sell significant amounts of such shares without an unfavorable impact on
prevailing market prices. Some of the companies in which the Fund may invest may
distribute, sell or produce products which have recently been brought to market
and may be dependent on key personnel with varying degrees of experience.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
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<PAGE> 21
short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to maintain portfolio flexibility.
Currently, under applicable Spanish law short sales of listed Spanish securities
are prohibited. To the extent that such law changes to permit short sales, the
Fund may engage in such transactions. In addition, to the extent that companies
that have their shares listed on a Spanish exchange also have depository
receipts for such shares listed on a non-Spanish exchange, such as the New York
Stock Exchange, which permits short sales of such depository receipts, the Fund
may engage in short sales of such depository receipts.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. Government
securities or other liquid securities, equivalent in value to the borrowed
securities. The Fund will also be required to deposit similar collateral with
its custodian to the extent necessary so that the value of both collateral
deposits in the aggregate is at all times equal to at least 100% of the current
market value of the security sold short (see "Use of Segregated and Other
Special Accounts" in the Fund's SAI). Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding any payments
received by the Fund on such security, the Fund may not receive any payments
(including interest and dividends) on its collateral deposited with such broker-
dealer.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its total
assets. The Fund may also make short sales "against the box" without respect to
such limitation. In this type of short sale, at the time of the sale, the Fund
owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
SYNTHETIC INVESTMENTS. Under certain circumstances, the Fund may wish to obtain
the price performance of a security without actually purchasing the security in
circumstances where, for example, the security is illiquid, or is unavailable
for direct investment or available only on less attractive terms. In such
circumstances, the Fund may invest in synthetic or derivative alternative
investments ("Synthetic Investments") that are based upon or otherwise relate
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<PAGE> 22
to the economic performance of the underlying securities. Synthetic Investments
may include swap transactions, notes or units with variable redemption amounts,
and other similar instruments and contracts. Synthetic Investments typically do
not represent beneficial ownership of the underlying security, usually are not
collateralized or otherwise secured by the counterparty and may or may not have
any credit enhancements attached to them. Accordingly, Synthetic Investments
involve exposure not only to the creditworthiness of the issuer of the
underlying security, changes in exchange rates and future governmental actions
taken by the jurisdiction in which the underlying security is issued, but also
to the creditworthiness and legal standing of the counterparties involved. In
addition, Synthetic Investments typically are illiquid. As such, investments in
these securities will be limited by the Fund's policy of investing in illiquid
securities.
STRATEGIC TRANSACTIONS AND DERIVATIVES. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in the Fund's portfolio or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all of the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Some Strategic Transactions may also be used to enhance potential gain although
no more than 5% of the Fund's assets will be committed to Strategic Transactions
entered into for non-hedging purposes. Any or all of these investment techniques
may be used at any time and in any combination, and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous
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<PAGE> 23
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not for leveraging purposes. Strategic
Transactions, including derivative contracts, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent the Adviser's view as to certain market movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. Use of put and call options may
result in losses to the Fund, force the sale or purchase of portfolio securities
at inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the amount
of appreciation the Fund can realize on its investments or cause the Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in the Fund's incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements or the
inability to deliver or receive a specified currency. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Fund creates the possibility
that losses on the hedging instrument may be greater than gains in the value of
the Fund's position. In addition, futures and options markets may not be liquid
in all circumstances and certain over-the-counter options may have no markets.
As a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
ADDITIONAL INVESTMENT INFORMATION. The portfolio turnover rates for the Fund are
listed under "Financial Highlights." The portfolio turnover rate for the Fund
may be higher than the portfolio turnover rate for the predecessor of the Fund.
It is anticipated that, under normal circumstances the portfolio turnover rate
for the Fund will not exceed 100%. The Fund may periodically experience a high
turnover rate (over 100%). Higher portfolio turnover involves correspondingly
greater brokerage commissions or other transaction
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<PAGE> 24
costs. Higher portfolio turnover may also result in the realization of greater
net short-term or long-term capital gains. See "Dividends and Taxes" in the
Statement of Additional Information.
The Fund has adopted certain fundamental investment restrictions which are
described in the Statement of Additional Information and cannot be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk. Policies of the Fund that are not incorporated into any of the
fundamental investment restrictions referred to above or that are not
specifically identified as fundamental may be changed by the Board of Directors
of the Fund without shareholder approval.
As a matter of fundamental policy, the Fund may not borrow money except as
permitted under Federal law; however, as a matter of nonfundamental policy, the
Fund will not borrow in an amount exceeding 5% of total assets except for
temporary or emergency purposes and by engaging in reverse repurchase agreements
or other investments or transactions which may be deemed to be borrowings.
As a matter of fundamental policy, the Fund may not make loans except through
the purchase of debt securities or through repurchase agreements.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund's Statement of Additional
Information.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. The Fund retains the investment management firm of Scudder
Kemper Investments, Inc., a Delaware corporation, to manage the Fund's daily
investment and business affairs subject to the policies established by the
Corporation's Board of Directors. The Directors have overall responsibility for
the management of the Fund under Maryland law.
Under the Investment Management Agreement with the Adviser, dated November 25,
1998, the Fund is responsible for all of its expenses, including fees and
expenses incurred in connection with membership in investment company
organizations; fees and expenses of the Fund's accounting agent; brokers'
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the expenses of and the fees
for registering and qualifying securities for sale; the fees and expenses of
Directors, officers and employees of the Corporation who are not affiliated with
the Adviser; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians.
For its investment management services, the Fund pays the Adviser an investment
management fee, payable monthly, at the annual rate of no more than 0.75% of the
Fund's average daily net assets. The fee is graduated so that increases in the
Fund's net assets may result in a lower fee. In addition, the fee is payable
monthly, provided that the Fund will make such interim payments as may be
requested by the Adviser not to exceed 75% of the amount of the
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<PAGE> 25
fee then accrued on the books of the Fund and unpaid. For the year ended
November 30, 1997, the fee paid to the Adviser by the Fund under the previous
investment management agreement was 1.00% of the Fund's average weekly net
assets. This fee was payable monthly at a rate of 1/12 of 1.00% of the value of
the Fund's average weekly net assets. During the same period, the Adviser paid
BSN Gestion de Patrimonios, S.A., S.G.C. ("BSN Gestion") a monthly fee of 0.35%
of the Fund's average weekly net assets for investment management services
pursuant to a now terminated sub-advisory agreement between the Adviser and BSN
Gestion. The sub-advisory arrangements with BSN Gestion were discontinued in
connection with the Fund's reorganization transaction.
The Adviser is headquartered at 345 Park Avenue, New York, New York.
Scudder Kemper Investments, Inc., an investment counsel firm, acts as investment
adviser to the Fund. This organization, the predecessor of which is Scudder,
Stevens & Clark, Inc. ("Scudder"), is one of the most experienced investment
counsel firms in the U.S. It was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. The predecessor firm reorganized from a partnership to a
corporation on June 28, 1985. On June 26, 1997, the Adviser's predecessor
entered into an agreement with Zurich Insurance Company ("Zurich") pursuant to
which the predecessor and Zurich agreed to form an alliance. On December 31,
1997, Zurich acquired a majority interest in Scudder, and Zurich made its
subsidiary Zurich Kemper Investments, Inc., a part of the predecessor
organization. The predecessor's name has been changed to Scudder Kemper
Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group").
On September 7, 1998, the financial services businesses of Zurich (including
Zurich's 70% interest in the Adviser) and the financial services businesses of
B.A.T Industries p.l.c. ("B.A.T") formed a new global insurance and financial
services group known as Zurich Financial Services. By way of a dual holding
company structure, current Zurich shareholders own approximately 57% of the new
organization, with the balance owned by B.A.T's shareholders.
The expenses of the Fund, and of other investment companies investing in foreign
securities, can be expected to be higher than for investment companies investing
primarily in domestic securities since the costs of operation are higher,
including custody and transaction costs for foreign securities and investment
management fees.
A TEAM APPROACH TO INVESTING. The Fund is managed by a team of investment
professionals who each play an important role in the Fund's management process.
Team members work together to develop investment strategies and
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select securities for the Fund's portfolio. They are supported by the Adviser's
large staff of economists, research analysts, traders, and other investment
specialists who work in the Adviser's offices across the United States and
abroad. The Adviser believes its team approach benefits Fund investors by
bringing together many disciplines and leveraging its extensive resources.
Joan R. Gregory, Lead Portfolio Manager since 1998, focuses on stock selection.
She joined the Adviser in 1992 and has been involved with investment in global
and international stocks since 1989. Nicholas Bratt, Portfolio Manager, directs
the Fund's general investment strategies. Mr. Bratt has over 20 years of
experience in worldwide investing and has been with the Adviser since 1976.
YEAR 2000 READINESS. Like other mutual funds and financial and business
organizations worldwide, the Fund could be adversely affected if computer
systems on which the Fund relies, which primarily include those used by the
Adviser, its affiliates or other service providers, are unable to process
correctly date-related information on and after January 1, 2000. This risk is
commonly called the Year 2000 Issue. Failure to address successfully the Year
2000 Issue could result in interruptions to and other material adverse effects
on the Fund's business and operations. The Adviser has commenced a review of the
Year 2000 Issue as it may affect the Fund and is taking steps it believes are
reasonably designed to address the Year 2000 Issue, although there can be no
assurances that these steps will be sufficient. In addition, there can be no
assurances that the Year 2000 Issue will not have an adverse effect on the
companies whose securities are held by the Fund or on global markets or
economies generally.
EURO CONVERSION. The planned introduction of a new European currency, the Euro,
may result in uncertainties for European securities in the markets in which they
trade and with respect to the operation of the Fund's portfolio. Currently, the
Euro is expected to be introduced on January 1, 1999 by eleven European
countries that are members of the European Economic and Monetary Union (EMU),
including Spain and Portugal. The introduction of the Euro will require the
redenomination of European debt and equity securities over a period of time,
which may result in various accounting differences and/or tax treatments that
otherwise would not likely occur. Additional questions are raised by the fact
that certain European Union (EU) members, including the United Kingdom, will not
officially be implementing the Euro on January 1, 1999. If the introduction of
the Euro does not take place as planned, there could be negative effects, such
as severe currency fluctuations and market disruptions.
The Adviser is actively working to address Euro-related issues and understands
that other key service providers are taking similar steps. At this time,
however, no one knows precisely what the degree of impact will be. To the extent
that the market impact or effect on a portfolio holding is negative, it could
hurt the portfolio's performance.
23
<PAGE> 27
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement (the "distribution agreement") with the Corporation, Kemper
Distributors, Inc. ("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606,
a subsidiary of the Adviser, is the principal underwriter and distributor of the
Fund's shares and acts as agent of the Fund in the sale of its shares. KDI bears
all of 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 the Fund bears the expense of
registering its shares with the SEC. KDI may enter into related selling group
agreements with various broker-dealers, including affiliates of KDI, that
provide distribution services to investors. KDI also may provide some of the
distribution services.
CLASS A SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreement 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 out a
portion of this sales charge or allows concessions or discounts to firms for the
sale of the Fund's Class A shares.
RULE 12B-1 PLANS. Separate distribution plans have been adopted for the Fund's
Class B and Class C shares pursuant to Rule 12b-1 under the 1940 Act (each a
"Plan"). Each Plan provides for fees payable as an expense of the Class B shares
or the Class C shares, as applicable, that are used by KDI to pay for
distribution services for that class. The Plans are approved and reviewed
separately for the Class B shares and the Class C shares in accordance with Rule
12b-1 under the 1940 Act, which regulates the manner in which an investment
company may, directly or indirectly, bear the expenses of distributing its
shares.
If a Plan for a class is terminated in accordance with its terms, the obligation
of the Fund to make payments to KDI pursuant to such 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 a Plan may or may not be sufficient
to reimburse KDI for its expenses incurred. (See "Principal Underwriter" for
more information.)
CLASS B SHARES. For its services under the Class B Plan, KDI receives a fee from
the Fund, payable monthly, at the annual rate of 0.75% of average daily net
assets of the Fund attributable to its 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%.
24
<PAGE> 28
CLASS C SHARES. For its services under the Class C Plan, KDI receives a fee from
the Fund, payable monthly, at the annual rate of 0.75% of average daily net
assets of the Fund attributable to its Class C shares. This fee is accrued daily
as an expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of 0.75% of the purchase price of Class C shares. For
periods after the first year, KDI currently pays firms for sales of Class C
shares a distribution fee, payable quarterly, at an annual rate of 0.75% of net
assets attributable to Class C shares maintained and serviced by the firm and
the fee continues until terminated by KDI or the Fund. KDI also receives any
contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charges--Class C Shares" below.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of the Fund pursuant to an administrative services
agreement with the Corporation (the "administrative agreement"). KDI may enter
into related arrangements with broker-dealer firms or other service or
administrative firms ("firms"), that provide services and facilities for their
customers or clients who are investors in the Fund. 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 the 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 of its
expenses of providing services pursuant to the administrative agreement,
including the payment of any service fees. For services under the administrative
agreements, the Fund pays KDI a fee, payable monthly, at the annual rate of up
to 0.25% of average daily net assets of each of Class A, B and C shares of the
Fund. KDI then pays each firm a service fee at an annual rate of up to 0.25% of
net assets of each of Class A, B and C shares maintained and serviced by the
firm. Firms to which service fees are paid may include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based upon assets in the Fund accounts maintained and serviced by the firm
commencing in the month following the month of purchase and the fee continues
until terminated by KDI or the Fund. The fees are calculated monthly and paid
quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first-year
service fee at a rate of up to 0.25% of the purchase price of Class B and Class
C shares of the Fund. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and paid
quarterly) of average daily net assets attributable to each of Class B and Class
C shares maintained and serviced by the firm during such period. After the first
year, a firm becomes eligible for the quarterly service fee and the fee
continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
25
<PAGE> 29
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 of the administrative services fee that it
receives from the Fund to firms in the form of service fees. The effective
administrative services fee rate to be charged against all assets of the 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. In addition, KDI may,
from time to time, from its own resources pay certain firms additional amounts
for ongoing administrative services and assistance provided to their customers
and clients who are shareholders of the Fund.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. The Chase Manhattan
Bank, Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has
custody of all securities and cash of the Fund held outside the United States.
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas
City, Missouri 64105, as custodian, and State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as sub-custodian, have custody of
all securities and cash held in the United States. Kemper Service Company, 811
Main Street, Kansas City, Missouri 64105, a subsidiary of the Adviser, is the
Fund's transfer agent and dividend-paying agent and, as such, generally serves
as "Shareholder Service Agent" of the Fund. For a description of transfer agent
and shareholder service agent fees, see "Investment Manager and Underwriter" in
the Statement of Additional Information.
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes
net asset value for the Fund. The Fund pays Scudder Fund Accounting Corporation
an annual fee.
PORTFOLIO TRANSACTIONS. The Adviser places all orders for purchases and sales of
the Fund's securities. Subject to seeking best execution of orders, it may
consider sales of shares of the Fund and other funds managed by the Adviser or
its affiliates as a factor in selecting broker-dealers. See "Portfolio
Transactions" in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund normally distributes annual
dividends of net investment income and any net realized short-term and long-
term capital gains at least annually. The Fund intends to distribute net
realized capital gains after utilization of capital loss carryforwards, if any,
on or prior to December 31. Additional distributions may be made at a later
date, if necessary.
According to preference, shareholders may receive distributions in cash or have
them reinvested in additional shares of the Fund. If an investment is in the
form of a retirement plan, all dividends and capital gains distributions must be
reinvested in the shareholder's account.
26
<PAGE> 30
Dividends paid by the Fund with respect 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 proportion for
each class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the Fund
at net asset value on the reinvestment date, except that, upon written request
to the Shareholder Service Agent, a shareholder may select one of the following
options:
(1) To receive dividends from income and short-term capital gain in cash and net
capital gain dividends in shares of the same class at net asset value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of the Fund that are reinvested normally will be reinvested in
shares of the same class of the Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of the 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 the Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund will reinvest dividend checks (and future
dividends) in shares of the same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of the Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the Fund unless
the shareholder requests that such policy not be applied to the shareholder's
account.
U.S. FEDERAL INCOME TAXES. The Fund intends to continue to qualify as a
regulated investment company under Subchapter M of the Code and, if so
qualified, generally will not be liable for federal income taxes to the extent
its earnings are distributed. To so qualify, the Fund must satisfy certain
income, asset diversification and distribution requirements annually. Dividends
derived from net investment income and net short-term capital gains are taxable
to shareholders as ordinary income and properly designated net capital gain
dividends are taxable to shareholders as long-term capital gains, regardless of
how long the shares have been held and whether received in cash or shares.
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 Fund may qualify for the dividends received deduction
available to corporate shareholders.
27
<PAGE> 31
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. Thus, investors should
consider the tax implications of buying shares just prior to a dividend. The
price of shares purchased at that time includes the amount of the forthcoming
dividend, which nevertheless will be taxable to them.
A sale or exchange of shares is a taxable event that may result in gain or loss
that will be a capital gain or loss if held by the shareholder as a capital
asset, and will be long-term or short-term, depending upon the shareholder's
holding period for the shares (including an in-kind redemption).
As an open-end fund, the Fund is required to redeem its securities if so
requested by shareholders. To the extent the Fund is required to sell
appreciated portfolio securities to pay redemptions, the Fund will realize
capital gains which must be distributed along with all of the Fund's other
income and gains to its shareholders each year and will be taxable to
shareholders. A significant portion of the value of the Fund's portfolio is
represented by unrealized capital gains. To minimize realization of capital
gains on disposition of portfolio securities in connection with redemptions, the
Fund has instituted a policy requiring that certain large-scale redemptions be
paid in-kind in an attempt to avoid the imposition of adverse tax consequences
on remaining shareholders. See "Redemption or Repurchase of Shares--Redemption
in-Kind". This policy will not, however, lessen the tax effect of other
redemptions. The Fund anticipates that there may be significant redemptions as a
result of its conversion to an open-end fund. If so, the Fund may realize
significant capital gains.
The 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. Any amounts so withheld are not an additional
tax, and may be applied against the affected shareholder's U.S. federal income
tax liability.
The Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of the 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. The Fund may
make the election permitted under Section 853 of the Code. If this election is
made, shareholders may be able to claim a credit or deduction on their income
tax returns for their pro rata portion of qualified taxes paid by the Fund to
foreign countries.
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 reinvestment of dividends and periodic
investment and redemption programs. Information for income tax purposes,
including, when appropriate, 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
28
<PAGE> 32
year-end statements for tax reporting purposes. However, those who have
incomplete records may obtain historical account transaction information at a
reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
Further information relating to tax consequences is contained in the Statement
of Additional Information. Shareholders of the Fund may be subject to state,
local and foreign taxes on Fund distributions and dispositions of fund shares.
Shareholders should consult their own tax advisors regarding the particular tax
consequences of an investment in the Fund.
SPANISH TAXES. The following description of certain Spanish tax matters
represents the opinion of the Fund's Spanish counsel based upon current law and
interpretations thereof. No advance rulings have been obtained from the Spanish
tax authorities and an opinion of counsel is not binding on the Spanish tax
authorities. No assurance can be given that applicable tax laws and
interpretations thereof will not change in the future.
Neither the Fund nor the Fund's shareholders, solely by reason of being
shareholders of the Fund, will be treated as residents of Spain or as carrying
on a business in Spain. No Spanish tax, other than tax on dividends, interest,
and capital gains as discussed below, will be applicable to the Fund or the
Fund's shareholders, other than shareholders who are residents of Spain or who
are subject to tax in Spain for reasons other than their status as shareholders
of the Fund.
Under Spanish law, dividends and interest income paid by Spanish resident
entities to holders of shares or securities who are non-residents of Spain are
subject to income tax withheld at source at a rate of 25% of the gross amount of
the income. However, under the Convention for the Avoidance of Double Taxation
signed by Spain and the United States on February 22, 1990 (the "Convention"), a
holder of shares that is resident of the United States for purposes of the
Convention (and who does not have a fixed base in Spain from which such holder
performs or has performed independent personal services and whose holding is not
effectively connected with a permanent establishment in Spain through which such
holder carries on or has carried on a business) (a "United States resident") who
obtains dividends from a Spanish resident entity generally is subject to the
Convention's reduced rate of 15% of the gross amount of income. If the United
States resident is a corporation and owns at least 25% of the voting stock of
the Spanish resident entity, tax will be levied at a 10% rate. Also under the
Convention, a United States resident that receives interest from a Spanish
resident entity is subject to the Convention reduced rate of 10% of the gross
amount of income.
29
<PAGE> 33
If the normal 25% rate is initially applied to a United States resident, a
refund for the amount withheld in excess of the Convention-reduced rates can
generally be obtained, subject to applicable procedures.
Under Spanish law, capital gains derived from the disposal of shares or
securities issued by Spanish resident entities are considered to be Spanish
sourced income subject to income tax at a 35% rate. However, by virtue of the
Convention, no Spanish tax would be levied on capital gains upon the disposal of
shares or securities issued by Spanish resident entities by a United States
resident, provided that such United States resident has not maintained a direct
or indirect holding of 25% or more of the share capital of the Spanish resident
entity during the twelve months preceding the disposition of the securities.
Capital borrowed by the State of Spain or its autonomous entities is deemed
Public Debt under Spanish Law. Interest paid on Public Debt to non-residents of
Spain who are not acting through a permanent establishment in Spain is generally
exempt from taxation in Spain. In addition, capital gains realized by
non-residents not acting through a permanent establishment in Spain on the sale
or disposition of Public Debt is generally exempt from taxation in Spain.
Under Spanish law, transfers of shares are exempt from the stamp duty, value
added tax, and transfer tax. However, the transfer tax exemption will not apply
and the transfer of shares will be subject to transfer tax when (i) at least 50%
of the total assets of the company whose shares are transferred consist of real
estate located in Spain, and (ii) as a result of the transfer, the acquiror
obtains a control position over the company.
Generally, the Spanish taxes described above will be imposed on, and paid by,
the Fund (and not its shareholders). Under U.S. tax law, the Fund may be able to
pass through to its shareholders a credit for such taxes.
PORTUGUESE TAXES. The following description of certain Portuguese tax matters
represents the opinion of the Fund's Portuguese tax counsel based upon current
law and interpretations thereof. No advance ruling has been obtained from the
Portuguese tax authorities and an opinion of counsel is not binding on the
Portuguese tax authorities. No assurance can be given that applicable tax laws
and interpretation thereof will not change in the future.
Neither the Fund nor the Fund's shareholders, solely by reason of being
shareholders of the Fund, will be treated as residents of Portugal or as
carrying on a business in Portugal. No Portuguese tax other than those described
below, will apply to the Fund or its shareholders, other than shareholders who
are residents of Portugal or who are subject to tax in Portugal for reasons
other than their status as shareholders of the Fund.
The tax regime applicable to Portuguese income obtained by the Fund is provided
by (i) the Portuguese Corporate Income Tax Code; (ii) the Portuguese Gift and
Inheritance Tax Code; and (iii) the Treaty for the avoidance of Double Taxation
and Prevention of Fiscal Evasion signed by Portugal and the
30
<PAGE> 34
United States on September 6, 1994 and in force since January 1996 (the
"Treaty").
Under Portuguese law, dividends paid by Portuguese entities to holders of shares
who are non-residents of Portugal are subject to income tax withheld at the
source at the general rate of 25% on the gross amount of income. In addition a
further withholding of substitute gift and inheritance tax at the rate of 5% is
levied. However, according to the provisions of the Portuguese Statute of Fiscal
Incentives, 50% of the gross income or dividends paid on shares listed on the
Lisbon Stock Exchange is exempt from withholding tax, resulting in an effective
tax rate of 12.5%. Further, under the Treaty, the rate of withholding tax on
dividends will not exceed 15%, and the rate of withholding with respect to the
substitute gift and inheritance tax on dividends distributed to a United States
resident will not exceed 5%.
However, if a United States resident company for purposes of the Treaty owns 25%
or more of the share capital of a Portuguese resident company for an
uninterrupted period of 2 years prior to the payment of the dividend, the rate
applicable under the Treaty is:
(a) for dividends paid until December 31, 1999, a rate of 10%;
(b) after December 31, 1999, the same rate applicable to the dividends of a
similar nature paid to residents of European Union member States, provided
that in no event shall the applicable rate be lower than 5%.
Interest payments to non-residents of Portugal are subject to a general 20%
withholding tax rate. However, the Treaty provides a reduction to a 10% rate for
United States residents or an exemption if it is a long term loan granted by a
bank or another financial entity that is resident in the United States.
The limitation of Portuguese tax provided by the Treaty can be obtained either
through the refund system or through the reduction at the source, subject to
applicable procedures.
Capital gains derived by a corporate non-resident holder, such as the Fund, from
the disposal of shares or securities issued by Portuguese resident entities are
not subject to Portuguese capital gains tax unless such gains are effectively
connected with a permanent establishment in Portugal. As noted above, neither
the Fund nor the Fund's shareholders, solely by reason of being shareholders of
the Fund, will be treated either as residents of Portugal or as carrying on a
business in Portugal.
Interest paid on treasury securities issued by the Portuguese government and
designated as Public Debt Securities by the Ministry of Finance and held by
entities that do not have a residence, place of administration or permanent
establishment in Portugal is generally exempt from taxation in Portugal. In
addition, capital gains realized on the sale or disposition of such Public Debt
Securities by the Fund (as an entity that does not have a residence, place of
administration or permanent establishment in Portugal) are generally exempt from
Portuguese taxation.
31
<PAGE> 35
Generally, the Portuguese taxes described above will be imposed upon, and paid
by the Fund (and not its shareholders). Under U.S. tax law, the Fund may be able
to pass through to its shareholders a credit for such taxes.
No Portuguese transfer or stamp tax shall be due upon the transfer of portfolio
securities, except for a 4% stamp duty on brokerage fees, bank settlement fees
and commissions, if any, paid on the transfer of securities.
QUALIFICATION FOR SPANISH AND PORTUGUESE TREATY BENEFITS. The Fund has qualified
for treatment as a "United States resident" under the Convention and the Treaty.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and 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
the 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. The net
asset value of shares of the Fund is computed as of the close of regular trading
on the New York Stock Exchange (the "Exchange") on each day the Exchange is open
for trading. The Exchange is scheduled to be closed on the following holidays:
New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Portfolio
securities for which market quotations are readily available are generally
valued at market value. All other securities may be valued at fair value as
determined in good faith by or under the direction of the Board of Directors.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. Upon the redemption
or exchange of any class of shares held for less than one year, a fee of 2% of
the current net asset value of the shares will be assessed and retained by the
Fund for the benefit of the remaining shareholders, with limited exceptions (see
"Redemption or Repurchase of Shares--Redemption Fee" below). When placing
purchase orders, investors must specify whether the order is for Class A, Class
B or Class C shares.
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<PAGE> 36
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL
12B-1 FEES
(AS A % OF
AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales None Initial sales charge
charge of 5.75% of the waived or reduced for
public offering price certain purchases
Class B Maximum contingent 0.75% Shares convert to Class
deferred sales charge A shares six years
of 4% of redemption after issuance
proceeds; declines to
zero after six years
Class C Contingent deferred 0.75% No conversion feature
sales charge of 1% of
redemption proceeds for
redemptions made during
first year after
purchase
</TABLE>
The minimum initial investment for each class of the 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.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond value of 2% or more of the certificate value is normally required).
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<PAGE> 37
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
AS A SALES CHARGE AS ALLOWED TO DEALERS
PERCENTAGE OF A PERCENTAGE OF AS A PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET ASSET VALUE* OFFERING PRICE
- ------------------ -------------- ---------------- ------------------
<S> <C> <C> <C>
Less than $50,000.......... 5.75% 6.10% 5.20%
$50,000 but 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........ 0.00** 0.00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund's 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 re-allow up to the full applicable sales charge, as shown in
the above table, during periods and for transactions specified in such notice
and such reallowances may be based upon attainment of minimum sales levels.
During periods when 90% or more of the sales charge is reallowed, such dealers
may be deemed to be underwriters as that term is defined in the Securities Act
of 1933, as amended.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in the Fund or other Kemper 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), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares
34
<PAGE> 38
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 at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount record keeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale, KDI will consider the
cumulative amount invested by the purchaser in the Fund and other Kemper 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 the 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.
As of February 1, 1996, Class A shares of the Fund or any other Kemper Fund
listed under "Special Features--Class A Shares--Combined Purchases" may be
purchased at net asset value in any amount by members of the plaintiff class in
the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may in its discretion pay
investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
the Fund at net asset value under this privilege is not available if another net
asset value purchase privilege also applies.
35
<PAGE> 39
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
the 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 Fund, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on September
8, 1995, and have continuously owned shares of KVS (or a Kemper Fund acquired by
exchange of KVS shares) since that date, for themselves or members of their
families; (d) any trust, pension, profit-sharing or other benefit plan for only
such persons; (e) persons who purchase such shares through bank trust
departments that process such trades through an automated, integrated mutual
fund clearing program provided by a third party clearing firm; and (f) persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups. 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 Fund for their clients pursuant to an agreement
with KDI or one of its affiliates. Only those employees of such banks and other
firms who as part of their usual duties provide services related to transactions
in Fund shares may purchase Fund Class A shares at net asset value hereunder.
Class A shares may be sold at net asset value in any amount to unit investment
trusts sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase the 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 the Fund may be sold at net asset value by certain investment
advisers registered under the 1940 Act and other financial services firms,
acting solely as agents for their clients, that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program or
agency commission program under which such clients pay a fee to the investment
adviser or other firm for portfolio management or agency brokerage services.
Such shares are sold for investment purposes and on the condition that they will
not be resold except through redemption or repurchase by the Fund. The Fund 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
36
<PAGE> 40
investment company, or to shareholders in connection with the investment or
reinvestment of income and capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share of the Class B shares. The purpose of the conversion feature is to relieve
holders of Class B shares from the distribution services fee when the shares
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
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of 0.75% of the purchase price of such shares. For
37
<PAGE> 41
periods after the first year, KDI currently intends to pay firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of 0.75%
of net assets attributable to Class C shares maintained and serviced by the
firm. KDI is compensated by the Fund for services as distributor and principal
underwriter for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BEST FOR YOU? The decision as to which class of shares
provides the most suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in the Fund or other Kemper 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 the 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
the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in
38
<PAGE> 42
acknowledgment of their dedication to the employee benefit plan area; and (iv)
the purchase is not otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash compensation, to firms that sell shares of the
Fund. In some instances, such discounts, commissions or other incentives will be
offered only to certain firms that sell or are expected to sell during specified
time periods certain minimum amounts of shares of the Fund, or other funds
underwritten by KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
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 in good order 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 Fund reserves 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 Fund's 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 Fund's shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's 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 Fund 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 Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
materials regarding their fees and services.
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<PAGE> 43
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the 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.
TAX IDENTIFICATION NUMBER. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the Fund with a tax identification
number during the 30-day notice period. 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 request that the Fund to redeem his or her shares.
When shares are held for the account of a shareholder by the Fund's transfer
agent, the shareholder may redeem such shares by sending a written request with
signatures guaranteed to Kemper 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.
Any shareholder requesting that the Fund redeem shares with an aggregate value
in excess of the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90 day period will be required to provide the Fund with details of
valid custodial arrangements in Spain, Portugal and the U.S., in addition to
other important information, in order for the redemption request
40
<PAGE> 44
to be deemed in good order. Failure to provide the required information will
result in the rejection of the redemption request as being invalid. See
"Redemption in-Kind" below.
The redemption price for shares of a class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Except with respect to redemptions effected
in-kind pursuant to the Fund's redemption policy set forth below under
"Redemption in-Kind," 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 the Fund is asked to redeem shares for which it
may not have yet received good payment (i.e., purchases by check,
EXPRESS-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. Upon the redemption or exchange of any class of shares held
less than one year, with limited exceptions, a fee of 2% of the current net
asset value of the shares will be assessed and retained by the Fund for the
benefit of the remaining shareholders (see "Redemption Fee" below). The
redemption within two years of Class A shares purchased at net asset value under
the Large Order NAV Purchase Privilege may also be subject to a contingent
deferred sales charge (see "Purchase of Shares-Initial Sales Charge
Alternative-Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred sales charge (see "Contingent Deferred
Sales Charge-Class B Shares" below), and the redemption of Class C shares within
the first year following purchase may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge-Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record-keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The 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
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<PAGE> 45
the telephonic instructions are genuine. The shareholder will bear the risk of
loss, including loss resulting from fraudulent or unauthorized transactions, so
long as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian and custodian account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 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 Fund reserves the right to terminate or modify
this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the 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 the Fund can be redeemed and proceeds sent by
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<PAGE> 46
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 a class of the Fund effective on that day and normally the proceeds will be
sent to the designated account the following business day, subject to the Fund's
redemption policy set forth below under "Redemption in-Kind." 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 Fund is not responsible for the efficiency of the
federal wire system or the account holder's financial services firm or bank. The
Fund currently does not charge the account holder for wire transfers. The
account holder is responsible for any charges imposed by the account holder's
firm or bank. There is a $1,000 wire redemption minimum (including any
contingent deferred sales charge). To change the designated account to receive
wire redemption proceeds, send a written request to the Shareholder Service
Agent with signatures guaranteed as described above or contact the firm through
which shares of the Fund were purchased. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed by wire transfer
until such shares have been owned for at least 10 days. Account holders may not
use this privilege to redeem shares held in certificated form. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the expedited wire transfer redemption privilege. The
Fund reserves the right to terminate or modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after 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), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a participant-
directed qualified retirement plan described in Code Section 403(b)(7) which is
not sponsored by a K-12 school district; (b) redemptions by employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent; (c) redemption of shares of a shareholder
(including a registered joint owner) who has died; (d) redemption of shares of a
shareholder (including a registered joint owner) who after purchase of the
shares being redeemed becomes totally disabled (as evidenced by a determination
by the federal Social Security Administration); (e) redemptions under the Fund's
Systematic Withdrawal Plan at a maximum of 10% per year of the net asset value
of the account; and (f) redemptions of shares whose dealer of record at the time
of the investment notifies KDI that
43
<PAGE> 47
the dealer waives the discretionary commission applicable to such Large Order
NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed, excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
--------------------------------- -------------------
<S> <C>
First.............................................. 4%
Second............................................. 3%
Third.............................................. 3%
Fourth............................................. 2%
Fifth.............................................. 2%
Sixth.............................................. 1%
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features-Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in 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 the Fund), (c) redemptions in connection with distributions qualifying
under the hardship provisions of the Code and (d) redemptions representing
returns of excess contributions to such plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal
44
<PAGE> 48
Social Security Administration) of the shareholder (including a registered joint
owner) occurring after the purchase of the shares being redeemed, (b) in the
event of the death of the shareholder (including a registered joint owner), (c)
for redemptions made pursuant to a systematic withdrawal plan (limited to 10% of
the net asset value of the account during the first year, see "Special
Features-Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Code
Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to satisfy
required minimum distributions after age 70 1/2 from an IRA account (with the
maximum amount subject to this waiver being based only upon the shareholder's
Kemper IRA accounts), (f) for any participant-directed redemption of shares held
by employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by the Shareholder Service Agent, and (g) for
redemption of shares by an employer sponsored employee benefit plan that (i)
offers funds in addition to Kemper Funds (i.e., "multi-manager"), and (ii) whose
dealer of record has waived the advance of the first year administrative service
and distribution fees applicable to such shares and agrees to receive such fees
quarterly.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of the 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 of share appreciation to a total of
$12,000. If the investor were then to redeem the entire $12,000 in share value,
the contingent deferred sales charge would be payable only with respect to
$10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of
share appreciation is subject to the charge. The charge would be at the rate of
3% ($300) because it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. In the event no specific order is requested when
redeeming shares subject to a contingent deferred sales charge, the redemption
will be made first from shares representing reinvested dividends and then from
the earliest purchase of shares. KDI receives any contingent deferred sales
charge directly.
REDEMPTION FEE. Upon the redemption or exchange of any class of shares held for
less than one year, a fee of 2% of the current net asset value of the shares
will be assessed and retained by the Fund for the benefit of the remaining
shareholders. The fee is waived for all shares purchased through certain
retirement plans, including 401(k) plans, 403(b) plans, 457 plans, Keogh
accounts, and other pension, profit-sharing and employee benefit plans. However,
if such shares are purchased through a broker, financial institution or
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recordkeeper maintaining an omnibus account for the shares, such waiver may not
apply. (Before purchasing shares, please check with your account representative
concerning the availability of the fee waiver.) In addition, this waiver does
not apply to any IRA or SEP-IRA accounts. This fee is intended to encourage
long-term investment in the Fund, to avoid transaction and other expenses caused
by early redemptions, and to facilitate portfolio management. The fee is not a
deferred sales charge, is not a commission paid to the Adviser or its
subsidiaries, and does not benefit the Adviser in any way. The Fund reserves the
right to modify the terms of or terminate this fee at any time.
The fee applies to redemptions from the Fund and exchanges to other Kemper
Funds, but not to dividend or capital gains distributions which have been
automatically reinvested in the Fund. The fee is applied to the shares being
redeemed or exchanged in the order in which they were purchased. In the event
that a shareholder has acquired shares of the Fund in connection with the Fund's
acquisition of the assets of or merger or consolidation with another investment
company (an "acquired fund"), the shareholder will generally be permitted to add
the period he or she held shares of the acquired fund to the time he or she has
held Class A shares of the Fund in determining the applicability of the
redemption fee. In such a case, the shareholder bears the burden of
demonstrating to the Fund the period of ownership of the acquired fund. Proof of
ownership for the required period may be demonstrated by providing copies of
brokerage account statements or other appropriate share records in connection
with a redemption under cover of the redemption and certification form attached
to this prospectus. See "Purchase and Redemption of Shares-Special Redemption
and Exchange Information" in the Fund's Statement of Additional Information for
a more detailed description of the redemption fee.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Fund listed under "Special Features-Class A
Shares-Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Funds. A shareholder of the Fund or other
Kemper Fund who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares-Initial Sales Charge
Alternative-Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment, in the same class of shares as
the case may be, of the Fund or of other Kemper Funds. The amount of any
contingent deferred sales charge also will be reinvested, but the amount of any
redemption fee will not be reinvested. These reinvested shares will retain their
original cost and purchase date for purposes of the contingent deferred sales
charge schedule. 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 the Fund or of the other Kemper Funds
listed under "Special Features-Class A Shares-Combined
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<PAGE> 50
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 shares of the Fund, the reinvestment in shares of
the 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. In addition, upon a reinvestment, the shareholder
may not be permitted to take into account sales charges incurred on the original
purchase of shares in computing their taxable gain or loss. The reinvestment
privilege may be terminated or modified at any time.
REDEMPTION IN-KIND. The Fund has adopted the following redemption policy in an
attempt to avoid the imposition of adverse tax consequences on remaining
shareholders that may be caused by certain large-scale redemptions. In
conformity with Rule 18f-1 under the 1940 Act, it is the Fund's policy to redeem
its shares, with respect to any one shareholder during any 90 day period, solely
in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund at
the beginning of the period. As an operating policy, the Fund will satisfy
redemption requests in excess of such amount by distributing portfolio
securities in lieu of cash. This policy may be modified or terminated at any
time by the Board of Directors. Any securities distributed in-kind would be
valued in accordance with the Fund's policies used to determine net asset value,
and would be selected pursuant to procedures adopted by the Board of Directors
to help ensure that such redemptions are effected in a manner that is fair and
equitable to all shareholders. The redeeming shareholder will bear the risk of
fluctuation in value of the in-kind redemption proceeds after the trade date for
the redemption. Shareholders who receive portfolio securities in redemption of
Fund shares will be required to make arrangements for the transfer of custody of
such securities to the shareholder's account and must communicate relevant
custody information to the Fund prior to the effectiveness of a redemption
request. Redemption requests subject to the Fund's redemption in-kind policy
will not be considered in good order unless such information is provided. As
discussed below, a redeeming shareholder will bear all costs associated with the
in-kind distribution of portfolio securities. Shareholders receiving securities
in-kind may, when selling them, receive less than the redemption value of such
securities and would also incur certain transaction costs. Such a redemption
would not be as liquid as a redemption entirely in cash.
Redeeming shareholders will bear any costs of delivery and transfer of the
portfolio securities received in an in-kind redemption (generally, certain
transfer taxes and custodial expenses), and such costs will be deducted from
their redemption proceeds. Redeeming shareholders will also bear the costs of
re-registering the securities, as the securities delivered will be registered in
the Fund's name or the nominee names of the Fund's custodians. The actual per
share expenses for redeeming shareholders of effecting an in-kind redemption
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<PAGE> 51
and of any subsequent liquidation by the shareholder of the portfolio securities
received will depend on a number of factors, including the number of shares
redeemed, the Fund's portfolio composition at the time and market conditions
prevailing during the liquidation process. The Fund gives no assurances of such
expenses, and shareholders whose redemptions are effected in-kind may bear
expenses in excess of 1% of the net asset value of the shares of the Fund
redeemed. These expenses are in addition to any applicable redemption fee or
contingent deferred sales charge, as described above.
As noted under "Redemption or Repurchase of Shares--General" above, shareholders
redeeming in excess of the lesser of $250,000 or 1% of the net asset value of
the Fund during any 90 day period must provide details of their valid custodial
arrangements in Spain, Portugal and the U.S. in order to facilitate the transfer
and settlement of securities to be distributed to them in-kind. Unless a
shareholder establishes such custodial arrangements and properly notifies the
Fund of those arrangements, that shareholder will effectively be limited to
redeeming the lesser of $250,000 or 1% of the net asset value of the Fund during
any 90 day period. In the event that the shareholder wishes to redeem additional
amounts in cash, that shareholder will have to re-submit such a redemption
request after the expiration of each 90 day period (i.e., redemption requests
for amounts in excess of the permitted amount will not be automatically carried
forward to the next 90 day period).
The Fund has applied for an exemptive order from the SEC to permit in-kind
redemption transactions to be effected by shareholders who may be deemed to be
affiliated with the Fund because they own 5% or more of the Fund's outstanding
voting securities ("5% shareholders"). A 5% shareholder receiving an in-kind
redemption prior to receipt of such relief (receipt of which cannot be
guaranteed) could be deemed to be in violation of Section 17(a) of the 1940 Act.
The SEC issued notice of the application on November 17, 1998, which indicates
that an order granting the application would be issued unless the SEC calls for
a hearing; however, until such an order has been issued, the Fund can provide no
assurance to shareholders that with respect to such redemptions in-kind they
will be in compliance with the 1940 Act. Shares of the Fund received by
shareholders in exchange for shares of GSP originally purchased in GSP's initial
public offering are not subject to being redeemed in-kind, contingent upon proof
of such purchase by the shareholder.
For redemptions in excess of the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90 day period, a redemption request will be considered
valid only if accompanied by a properly completed redemption and certification
form (attached to this prospectus), which details, among other things, the
shareholder's valid custodial arrangements in Spain, Portugal and the U.S. No
redemption requests subject to in-kind redemption may be made other than by a
written request accompanied by a properly completed redemption and certification
form.
For more information about redemptions in-kind, see "Purchase and Redemption of
Shares--Redemption in-Kind" in the Statement of Additional Information. See also
"Dividends, Distributions and Taxes--U.S. Federal Income Taxes" in this
prospectus.
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SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Series, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper Value Plus
Growth Fund, Kemper Value Series, Inc., Kemper Quantitative Equity Fund, Kemper
Horizon Fund, Kemper Europe Fund, Kemper Asian Growth Fund, Kemper Aggressive
Growth Fund, Kemper Global/International Series, Inc., Kemper U.S. Growth and
Income Fund, Kemper Small Cap Relative Value Fund, Kemper-Dreman Financial
Services Fund, Kemper Value Fund, Kemper Global Discovery Fund, Kemper Classic
Growth Fund and Kemper High Yield Fund II ("Kemper Funds"). Except as noted
below, there is no combined purchase credit for direct purchases of shares of
Zurich Money Funds, Zurich YieldWise Funds, Cash Equivalent Fund, Tax-Exempt
California Money Market Fund, Cash Account Trust, Investors Municipal Cash Fund
or Investors Cash Trust ("Money Market Funds"), which are not considered "Kemper
Funds" for purposes hereof. For purposes of the Combined Purchases feature
described above as well as for the Letter of Intent and Cumulative Discount
features described below, employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder Service
Agent may include: (a) Money Market Funds as "Kemper Funds", (b) all classes of
shares of any Kemper Fund and (c) the value of any other plan investment, 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 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
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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 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 are included in this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.
CLASS A SHARES--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
Funds in accordance with the provisions below. Upon the exchange of any class of
shares held for less than one year, a fee of 2% of the current net asset value
of the shares will be assessed and retained by the Fund for the benefit of the
remaining shareholders (see "Redemption or Repurchase of Shares-Redemption Fee"
above). Redemptions with respect to any one shareholder during any 90-day period
in excess of the lesser of $250,000 or 1% of the net asset value at the
beginning of the period are not eligible for the exchange privilege, and will be
effected pursuant to the Fund's redemption policies described above under
"Redemption in-Kind."
CLASS A SHARES. Class A shares of the Kemper 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,
subject to the redemption fee, if applicable. Shares of Money Market Funds and
the Kemper Cash Reserves Fund that were acquired by purchase (not including
shares acquired by dividend reinvestment) are subject to the applicable sales
charge on exchange. Series of Kemper Target Equity Fund are available on
exchange only during the Offering Period for such series as described in the
applicable prospectus. Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Investor's Municipal Cash Fund and Investors Cash
Trust are available on exchange but only through a financial services firm
having a services agreement with KDI.
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Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper 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 calculating the contingent deferred sales charge.
CLASS B SHARES. Class B shares of the Fund and Class B shares of any other
Kemper Fund listed under "Special Features-Class A Shares-Combined Purchases"
may be exchanged for each other at their relative net asset values, subject to
the redemption fee, if applicable. Class B shares may be exchanged without a
contingent deferred sales charge being imposed at the time of exchange. For
purposes of calculating the contingent deferred sales charge that may be imposed
upon the redemption of the Class B shares received on exchange, amounts
exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of the Fund and Class C shares of any other
Kemper Fund listed under "Special Features-Class A Shares-Combined Purchases"
may be exchanged for each other at their relative net asset values, subject to
the redemption fee, if applicable. Class C shares may be exchanged without a
contingent deferred sales charge being imposed at the time of exchange. For
determining whether there is a contingent deferred sales charge that may be
imposed upon the redemption of the Class C shares received by exchange, they
retain the cost and purchase date of the shares that were originally purchased
and exchanged.
GENERAL. Shares of a Kemper Fund with a value in excess of $1,000,000 (except
Kemper Cash Reserves Fund) acquired by exchange through another Kemper Fund, or
from a Money Market Fund, may not be exchanged thereafter until they have been
owned for 15 days (the "15-Day Hold Policy"). For purposes of determining
whether the 15-Day Hold Policy applies to a particular exchange, the value of
the shares to be exchanged shall be computed by aggregating the value of shares
being exchanged for all accounts under common control, discretion or advice,
including without limitation accounts administered by a financial services firm
offering market timing, asset allocation or similar services. The total value of
shares being exchanged must at least equal the minimum investment requirement of
the Kemper Fund into which they are being exchanged. Exchanges are made based on
relative dollar values of the shares involved in the exchange. There is no
service fee for an exchange; however, dealers or other firms may charge for
their services in effecting exchange transactions. Exchanges of the Fund for
shares of another Kemper Fund are subject to a 2% redemption fee if the
shareholder has held the Fund shares for less than one year (see "Redemption or
Repurchase of Shares-Redemption Fee"). 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
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be realized, depending upon whether the value of the shares being exchanged is
more or less than the shareholder's adjusted cost basis of such shares.
Shareholders interested in exercising the exchange privilege may obtain
prospectuses of the other funds from dealers, other firms or KDI. Exchanges may
be accomplished by a written request to Kemper Service Company, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the shareholder has given authorization. Once the authorization is
on file, the Shareholder Service Agent will honor requests by telephone at
1-800-621-1048, subject to the limitations on liability under "Redemption or
Repurchase of Shares--General." Any share certificates must be deposited prior
to any exchange of such shares. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
telephone exchange privilege. The exchange privilege is not a right and may be
suspended, terminated or modified at any time. 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 Investors Municipal Cash Fund is available for sale only in
certain states. 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 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, subject to the redemption fee, if
applicable. 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,"
except that the $1,000 minimum investment requirement for the Kemper Fund
acquired on exchange is not applicable. This privilege may not be used for the
exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending
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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 amount of time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri 64141-6415. Termination by a shareholder will become effective
within thirty days after the Shareholder Service Agent has received the request.
The Fund may immediately terminate a shareholder's Plan in the event that any
item is unpaid by the shareholder's financial institution. The Fund may
terminate or modify this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in the 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 the 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.) The 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 the 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 IRAs. The minimum periodic payment is $100. The
maximum annual rate at which Class B shares may be redeemed (and Class A shares
purchased under the Large Order NAV Purchase Privilege and Class C shares in
their first year following the purchase) under a systematic withdrawal plan is
10% of the net asset value of the account. Shares are redeemed so that the payee
will receive payment approximately the first of the month. Any income and
capital gain dividends will be automatically reinvested at net asset value. A
sufficient number of full and fractional shares will be redeemed to make the
designated payment. Depending upon the size of the payments requested and
fluctuations in the net asset value of the shares
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<PAGE> 57
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, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
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:
- - Traditional, Roth and Education Individual Retirement Accounts ("IRAs"). This
includes Simplified Employee Pension Plan ("SEP") IRA accounts and prototype
documents.
- - 403(b)(7) Custodial Accounts. 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. Investors
should consult with their own tax advisers before establishing a retirement
plan.
PERFORMANCE
The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares.
Each of these figures is based upon historical results and is not representative
of the future performance of any class of the 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 particular
class of the 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 the Fund during a specified period. Average annual
total return
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will be quoted for at least the one, five and ten year periods ending on a
recent calendar quarter (or if any such period has 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.
The Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's Composite Stock Price 500 Index, the
Russell 1000(R) Index, the Russell 1000(R) Growth Index, the Wilshire Large
Company Growth Index, the Wilshire 750 Mid Cap Company Growth Index, the
Standard & Poor's/Barra Value Index, Standard & Poor's/ Barra Growth Index, the
Russell 1000(R) Value Index, the Europe/Australia/Far East Index, the BVL (Bolsa
de Valores de Lisboa) Index, Madrid Stock Exchange (MSE) General Index, the
Morgan Stanley Capital International World Index, the J.P. Morgan Global Traded
Bond Index, and the Salomon Brothers World Government Bond Index. The
performance of the Fund may also be compared to the performance of other mutual
funds or mutual fund indices 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, 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.
The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The 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 relative performance of
growth stocks versus value stocks may also be discussed.
55
<PAGE> 59
Because some or all of the Fund's investments are denominated in foreign
currencies, the strength or weakness of the U.S. dollar against these currencies
may account for part of the Fund's investment performance. Historical
information on the value of the dollar versus foreign currencies may be used
from time to time in advertisements concerning the Fund. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests, including, but not limited to, the
following: population growth, gross domestic product, inflation rate, average
stock market price-earnings ratios and the total value of stock markets. Sources
for such statistics may include official publications of various foreign
governments and exchanges.
The Fund's Class A shares are sold at net asset value plus a maximum sales
charge of 5.75% of the offering price. While the maximum sales charge is
normally reflected in the Fund's Class A performance figures, certain total
return calculations may not include such charge and those results would be
reduced if it were included. Class B shares and Class C shares are sold at net
asset value. Redemptions of Class B shares within the first six years after
purchase may be subject to a contingent deferred sales charge that ranges from
4% during the first year to 0% after six years. Redemption of Class C shares
within the first year after purchase may be subject to a 1% contingent deferred
sales charge. Average annual total return figures do, and total return figures
may, include the effect of the contingent deferred sales charge for the Class B
shares and Class C shares that may be imposed at the end of the period in
question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included. Performance figures for each class of the Fund's
shares do not reflect the effect of the 2% redemption fee on shares held for
less than one year.
The Fund's returns and net asset value will fluctuate. Shares of a class of the
Fund are redeemable by an investor at the class' then current net asset value,
which may be more or less than original cost, subject to a 2% redemption fee for
redemption of shares held for less than one year. Redemption of Class A shares,
Class B shares and Class C shares may be subject to a contingent deferred sales
charge as described above. Additional information concerning the Fund's
performance appears in the Statement of Additional Information. Additional
information about the Fund's performance also appears in its Annual Report to
Shareholders and Semiannual Report to Shareholders, each of which is available
without charge from the Fund.
56
<PAGE> 60
FUND ORGANIZATION AND CAPITAL STRUCTURE
The Fund is a series of the Corporation, an open-end management investment
company registered under the 1940 Act. The Corporation was organized as a
corporation under the laws of Maryland on October 2, 1997.
The Corporation may issue an indefinite amount of shares of capital stock, all
having $.001 par value, which may be divided by the Board of Directors into
classes of shares. 100,000,000 shares have been classified for each of the
Corporation's six series. Currently, each series offers three classes of shares.
These are Class A, Class B and Class C shares. The Board of Directors may
authorize the issuance of additional classes and additional series if deemed
desirable, each with its own investment objectives, policies and restrictions.
Since the Corporation may offer multiple funds, each is known as a "series
company." Shares of a fund have equal noncumulative voting rights except that
Class B and Class C shares have separate and exclusive voting rights with
respect to each such class' 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 the fund.
Shares of each fund are fully paid and nonassessable when issued, are
transferable without restriction and have no preemptive or conversion rights.
Each fund's activities are supervised by the Corporation's Board of Directors.
The Corporation is not required to hold and has no current intention of holding
annual shareholder meetings, although special meetings may be called for
purposes such as electing or removing Directors, changing fundamental investment
policies or approving an investment management contract. Shareholders will be
assisted in communicating with other shareholders in connection with removing a
Director as if Section 16(c) of the 1940 Act were applicable.
The Growth Fund of Spain, Inc. ("GSP"), the predecessor of the Fund, commenced
investment operations in 1990 as a closed-end management investment company
organized as a Maryland corporation. At a meeting of the shareholders of GSP
held October 28, 1998, the shareholders voted to approve the conversion of the
Fund to an open-end investment company and the reorganization of GSP as a new
series of the Corporation. Pursuant to the reorganization agreement between GSP
and the Corporation, it is intended that GSP will transfer all of its assets to
the Fund in exchange for Class A shares of the Fund and the assumption by the
Fund of the liabilities of GSP on or about December 11, 1998. GSP will then
distribute the Class A shares of the Fund received in the reorganization to its
shareholders.
57
<PAGE> 61
Growth Fund Of Spain
Redemption and [KEMPER FUNDS LOGO]
Certification
Form
Please mail this form or
a reproduction thereof to:
Kemper Service Company
811 Main Street
Kansas City, MO 64105-2005
For further information call:
(800) 621-1048
CERTIFICATES
Any shares held in certificate form
cannot be redeemed until the certifi-
cates are returned. Please return your
certificates with this form by
certified mail to Kemper Service
Company at the address above.
NAME AND ADDRESS
L Please check here if the address listed below is a
new address
(a signature guarantee will be required to
complete this redemption request.)
----------------------------------------------------
Name Date
----------------------------------------------------
Name
----------------------------------------------------
Address
----------------------------------------------------
City State Zip
----------------------------------------------------
Daytime Phone Number Social Security/Tax I.D. Number
<TABLE>
<CAPTION>
<S> <C>
GROWTH FUND OF SPAIN
----------------------------------------------------------------------------
Fund Currently Invested In Account Number
</TABLE>
PLEASE REDEEM (CHECK ONE):
<TABLE>
<S> <C> <C> <C>
KEMPER CLASS A SHARES or KEMPER CLASS B AND C SHARES
L $ L $
----------------------------------- -----------------------------------
Amount in Dollars Net Amount (see "Provisions" below)
L L $
----------------------------------- -----------------------------------
Number of Shares Gross Amount (see "Provisions"
below)
L All shares to close my account L
-----------------------------------
Number of Shares
L All shares to close my account
</TABLE>
ALTERNATE PAYEE/ADDRESS (SIGNATURE GUARANTEE
REQUIRED)
This is your authorization to have the redemption
check sent to a special payee and/or address
different from the account registration as
designated below.
----------------------------------------------------
Name
----------------------------------------------------
Address
----------------------------------------------------
City State Zip
SIGNATURE OF OWNERS (REQUIRED)
All account owners must sign this request. If acting
in a special capacity (executor, administrator,
custodian, trustee, corporate officer, etc.) the
capacity (title) must be indicated.
<TABLE>
<S> <C>
-----------------------------------------------------------
Signature Signature
-----------------------------------------------------------
Title Title
</TABLE>
SIGNATURE GUARANTEE (SEE SIGNATURE GUARANTEE
PROVISIONS BELOW)
<TABLE>
<S> <C>
Signature Guaranteed By Affix Signature Guarantee Stamp
--------------------------------------------------------------------------------
Name of Bank or Firm
--------------------------------------------------------------------------------
Signature of Officer Title
</TABLE>
<PAGE> 62
A SIGNATURE GUARANTEE IS REQUIRED:
<TABLE>
<S> <C> <C>
- - if the redemption check is to be made - if the redemption proceeds for an - if the address of record was changed
payable to a special payee and/or individual or joint account exceed within last 30 days.
sent to an address different from the $50,000;
address of record;
- if you are signing on behalf of a
corporation, or as a custodian,
executor, administrator, trustee or
guardian;
</TABLE>
A signature guarantee must be supplied by a commercial bank, trust company,
savings and loan association, federal savings bank, member of a national
securities exchange, or other eligible financial institution.
PROVISIONS
FOR KEMPER CLASS B AND C SHARES
<TABLE>
<S> <C> <C>
"Net" dollar amount: applicable contingent deferred sales "Gross" dollar amounts:
(This option is not available if you charge and/or redemption fee will be The check sent will be for the dollar
are closing your account.) The check assessed over and above the amount amount of shares requested minus any
sent will be for the exact dollar received and will be paid by applicable contingent deferred sales
amount or net asset value of shares redemption of sufficient shares from charge and/or redemption fee.
requested. Any your account.
</TABLE>
DOCUMENTATION REQUIRED--For business/fiduciary accounts, i.e., corporations,
trusts, custodians, associations, partnerships, fiduciaries, guardians,
representatives, executors and administrators, further documentation may be
required. Please contact Shareholder Services at (800) 621-1048 for additional
information.
IRA ACCOUNTS WITH IFTC AS CUSTODIAN should contact Shareholder Services for the
IRA distribution form.
PLEASE COMPLETE PART A OF THE "CERTIFICATIONS" SECTION BELOW AND PART B OR PART
C, AS APPLICABLE.
CERTIFICATIONS
PART A: APPLICABILITY OF REDEMPTION FEE
PLEASE COMPLETE THIS SECTION AND INCLUDE PROOF OF OWNERSHIP OF FUND SHARES FOR A
PERIOD OF ONE YEAR OR MORE (E.G., BROKERAGE STATEMENTS) IN ORDER TO AVOID BEING
ASSESSED THE 2% REDEMPTION FEE AS DESCRIBED UNDER "REDEMPTION OR REPURCHASE OF
SHARES--REDEMPTION FEE" IN THE FUND'S PROSPECTUS.
Certification: The undersigned certifies that the shares being presented for
redemption have been held by the same beneficial owner for a period of one year
or more. The undersigned further certifies the authenticity of the documents
provided under cover of this form as proof of historical ownership.
- --------------------------------------------------------------------------------
Signature
PART B: CERTIFICATION OF INAPPLICABILITY OF IN-KIND REDEMPTION POLICY
Please certify under the appropriate section that this transaction is not
subject to the Fund's in-kind redemption policy. For information concerning this
policy, please refer to "Redemption or Repurchase of Shares--Redemption in-Kind"
in the Fund's Prospectus.
(1) FOR INDIVIDUALS: The undersigned certifies that the aggregate value of this
redemption request and all prior redemption requests made within the past 90
days, including the date of this request, amount to no more than the lesser
of $250,000 or 1% of the Fund's net asset value.
- --------------------------------------------------------------------------------
Signature
(2) FOR BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER
NOMINEES: The undersigned certifies that the shares being presented for
redemption do not exceed the lesser of $250,000 or 1% of the Fund's net
asset value when aggregated with all other redemption requests made on
behalf of the same beneficial owner within the past 90 days, including the
date of this request. The undersigned further certifies the authenticity of
all documents provided under cover of this form as proof of the foregoing
statement (e.g., brokerage statements).
- --------------------------------------------------------------------------------
Signature
IF YOU ARE UNABLE TO MAKE THE APPLICABLE CERTIFICATION REQUIRED BY PART B ABOVE,
PLEASE COMPLETE PART C.
<PAGE> 63
PART C: TRANSACTIONS SUBJECT TO IN-KIND REDEMPTION
IF YOU ARE REDEEMING SHARES FOR AN INDIVIDUAL BENEFICIAL OWNER, WHICH WHEN
AGGREGATED WITH SHARES REDEEMED FOR THE SAME BENEFICIAL OWNER OVER THE PAST 90
DAYS, INCLUDING THE DATE OF THIS REQUEST, ARE VALUED IN EXCESS OF THE LESSER OF
$250,000 OR 1% OF THE FUND'S NET ASSET VALUE, THAT PORTION OF THE REDEMPTION
REQUEST IN EXCESS OF SUCH AMOUNT WILL BE SATISFIED THROUGH THE DISTRIBUTION OF
PORTFOLIO SECURITIES IN LIEU OF CASH. PART C OF THIS FORM MUST BE COMPLETED AND
SUBMITTED WITH ANY SUCH REDEMPTION REQUEST BEFORE THE REQUEST WILL BE CONSIDERED
IN GOOD ORDER.
In order to facilitate settlement, please provide details on the individual or
individuals at your firm who will be responsible for settlement of foreign
securities transactions. The contact(s) listed here will receive instructions
regarding the securities that will be delivered.
- --------------------------------------------------------------------------------
Contact(s) Name and Firm
- --------------------------------------------------------------------------------
Phone Number(s) at Brokerage Firm
- --------------------------------------------------------------------------------
Facsimile Number
PLEASE PROVIDE DETAILS OF VALID CUSTODIAL ARRANGEMENTS ESTABLISHED IN SPAIN,
PORTUGAL AND THE UNITED STATES.
SPAIN: Please provide the details of valid custodial arrangements in Spain.
The institution listed below must have an account in the central
securities depository.
- --------------------------------------------------------------------------------
Name of Account
- --------------------------------------------------------------------------------
Bank Name
- --------------------------------------------------------------------------------
Bank Address
- --------------------------------------------------------------------------------
Securities Account Number at Bank
PORTUGAL: Please provide the following details of valid custodial arrangements
in Portugal. The institution listed below must have an account in the
central securities depository.
- --------------------------------------------------------------------------------
Name of Account (if different)
- --------------------------------------------------------------------------------
Bank Name
- --------------------------------------------------------------------------------
Bank Address
- --------------------------------------------------------------------------------
Securities Account Number at Bank
UNITED STATES--DEPOSITORY TRUST CO. (DTC)
- --------------------------------------------------------------------------------
Participant Name
- --------------------------------------------------------------------------------
DTC Participant Number
PORTFOLIO SECURITIES RECEIVED IN SATISFACTION OF THIS REDEMPTION REQUEST WILL BE
REGISTERED IN EITHER THE NAME OF THE FUND OR IN THE NOMINEE NAMES OF THE FUND'S
CUSTODIANS. THE REDEEMING SHAREHOLDER, IN CONJUNCTION WITH THE LOCAL
BANK/BROKER, WILL BE RESPONSIBLE FOR RE-REGISTERING THE PORTFOLIO SECURITIES AND
FOR ALL COSTS ASSOCIATED WITH RE-REGISTRATION.
<TABLE>
<S> <C> <C>
[KEMPER FUNDS LOGO] Principal Underwriter Investment Manager
Kemper Distributors, Inc. Scudder Kemper Investments, Inc.
120 South LaSalle Street http://www.kemper.com
Chicago, IL 60603
Tel (800) 621-1048
E-mail [email protected]
</TABLE>
<PAGE> 64
GROWTH FUND OF SPAIN
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1998
KEMPER GLOBAL/INTERNATIONAL SERIES, INC.
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for the Growth Fund Of Spain (the "Fund"), a
series of Kemper Global/International Series, Inc. (the "Corporation"), an
open-end management investment company. It should be read in conjunction with
the prospectus of the Fund dated December 1, 1998. A prospectus may be obtained
without charge from the Fund. The Fund is the successor entity to The Growth
Fund of Spain, Inc., a closed-end fund listed on the New York Stock Exchange,
Inc., whose shareholders approved a proposal to open-end the fund and reorganize
it as a series of the Corporation.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions.................... B-1
Investment Policies and Techniques......... B-2
Portfolio Transactions..................... B-22
Investment Manager and Underwriter......... B-24
Purchase and Redemption of Shares.......... B-31
Net Asset Value............................ B-33
Dividends, Distributions and Taxes......... B-34
Performance................................ B-43
Officers and Directors..................... B-47
Shareholder Rights......................... B-50
Financial Statements....................... B-51
Additional Information..................... B-51
Appendix A--Ratings of Fixed Income
Investments.............................. B-52
Appendix B--Information About Spain and
Portugal................................. B-54
</TABLE>
Scudder Kemper Investments, Inc. (the "Adviser") serves as the Fund's investment
manager.
(LOGO)printed on recycled paper
<PAGE> 65
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which cannot be
changed without approval of a majority of its outstanding voting shares, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"). This
means the lesser of the vote of (a) 67% of the shares of the Fund present at a
meeting where more than 50% of the outstanding shares are present in person or
by proxy or (b) more than 50% of the outstanding shares of the Fund.
AS A MATTER OF FUNDAMENTAL POLICY, THE FUND WILL NOT:
(a) make loans except to the extent that the purchase of portfolio securities
consistent with the Fund's investment objective and policies or the acquisition
of securities subject to repurchase agreements may be deemed to be loans;
(b) borrow money or issue senior securities, except as permitted under the 1940
Act and as interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(c) pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings or in connection with hedging and risk management
strategies as described under "Investment Objective, Policies and Risk Factors"
in the prospectus;
(d) invest in companies for the purpose of exercising control or participation
in management;
(e) make short sales of securities or maintain a short position in any security
except as described under "Investment Objective, Policies and Risk Factors" in
the prospectus;
(f) (i) purchase or sell real estate, except that it may purchase and sell
securities of companies which deal in real estate or interests therein, (ii)
purchase or sell commodities or commodity contracts except that the Fund may
enter into foreign currency and stock index futures contracts and options
thereon and may buy or sell forward currency contracts and options on foreign
currencies, (iii) invest in interests in oil, gas, or other mineral exploration
or development programs, except that it may purchase and sell securities of
companies which deal in oil, gas or other mineral exploration or development
programs, (iv) purchase securities on margin, except for such short-term credits
as may be necessary for the clearance of transactions as described under the
heading "Investment Objective, Policies and Risk Factors" in the prospectus, and
(v) act as an underwriter of securities, except that the Fund may acquire
securities in private placements in circumstances in which, if such securities
were sold, the Fund might be deemed to be an underwriter within the meaning of
the Securities Act of 1933, as amended; and
(g) invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition, if more than 3% of the outstanding
voting stock of any such investment company would be held by the Fund,
B-1
<PAGE> 66
if more than 5% of the total assets of the Fund would be invested in any such
investment company, or if the Fund would own, in the aggregate, securities of
investment companies representing more than 10% of its total assets.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond that specified limit resulting from a
change in values or net assets will not be considered a violation.
AS A MATTER OF NONFUNDAMENTAL POLICY, THE FUND WILL NOT:
(1) borrow money in an amount greater than 5% of its total assets, except (i)
for temporary or emergency purposes and (ii) by engaging in reverse repurchase
agreements or other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) enter into either of reverse repurchase agreements or dollar rolls in an
amount greater than 5% of its total assets;
(3) purchase securities on margin, except (i) for margin deposits in connection
with futures contracts, options or other permitted investments, and (ii) that
the Fund may obtain such short-term credits as may be necessary for the
clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell put
options, if as a result, the aggregate value of the obligations underlying such
put options would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect to
such futures contracts entered into on behalf of the Fund and the premiums paid
for such options on futures contracts does not exceed 5% of the fair market
value of the Fund's total assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
computing the 5% limit; and
(6) purchase warrants if as a result, such securities, taken at the lower of
cost or market value, would represent more than 5% of the value of the Fund's
total assets (for this purpose, warrants acquired in units or attached to
securities will be deemed to have no value).
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. The Growth Fund Of Spain seeks long-term capital appreciation by
investing primarily in equity securities of Spanish companies. The Fund may also
invest up to 35% of its total assets in the securities of non-Spanish companies,
which investments may be concentrated in whole or in part in the equity
securities of Portuguese companies.
The Fund may engage in futures, options and other derivative transactions
("Strategic Transactions and Derivatives") in accordance with its investment
B-2
<PAGE> 67
objective and policies. The Fund intends to engage in such transactions if it
appears to the Adviser to be advantageous for the Fund to do so in order to
pursue its investment objective, to hedge against the effects of fluctuation in
interest rates, and also to hedge against the effects of market risks, but not
for leveraging purposes. The use of futures and options, and possible benefits
and attendant risks, are discussed below, along with information concerning
other investment policies and techniques.
FOREIGN SECURITIES, IN GENERAL. The Fund is designed for investors who can
accept currency and other forms of international investment risk. The Adviser
believes that diversification of assets on an international basis decreases the
degree to which events in any one country, including the U.S., will affect an
investor's entire investment holdings. In certain periods since World War II,
many leading foreign economies and foreign stock market indices have grown more
rapidly than the U.S. economy and leading U.S. stock market indices, although
there can be no assurance that this will be true in the future.
Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and 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. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems either could result in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Payment for securities without delivery may be
required in certain foreign markets. Fixed commissions on some foreign
securities exchanges and bid-to-asked spreads in foreign bond markets are
generally higher than commissions or bid-to-asked spreads on U.S. markets,
although the Fund will endeavor to achieve the most favorable net results on its
portfolio transactions. Further, the Fund may encounter difficulties or be
unable to pursue legal remedies and obtain judgments in foreign courts. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S. It may be more difficult for the
B-3
<PAGE> 68
Fund's agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the U.S. and
foreign countries may be less reliable than within the U.S., thus increasing the
risk of delayed settlements of portfolio transactions or loss of certificates
for portfolio securities. In addition, with respect to certain foreign
countries, there is the possibility of nationalization, expropriation, the
imposition of withholding or confiscatory taxes, political, social, or economic
instability, or diplomatic developments which could affect United States
investments in those countries. Investments in foreign securities may also
entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
Trading in securities on European securities exchanges is normally completed
before the close of regular trading on the New York Stock Exchange (the
"Exchange"). Trading on these foreign exchanges may not take place on a day on
which there is regular trading on the Exchange, or may take place on days on
which there is no regular trading on the Exchange. Events materially affecting
the value of the Fund's portfolio securities may occur between the time when
these foreign exchanges close and the time when the Fund's net asset value is
calculated.
See Appendix B for a detailed discussion of Spanish and Portuguese market and
economic characteristics.
DEPOSITARY RECEIPTS. The Fund may invest directly in securities of foreign
issuers through sponsored or unsponsored American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"), International Depositary Receipts ("IDRs")
and other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs
are hereinafter referred to as "Depositary Receipts"). Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted. In addition, the issuers of the stock of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of the Depositary Receipts. ADRs
are Depositary Receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
GDRs, IDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the United States securities
markets and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. For purposes of the Fund's
investment policies, the Fund's investments in ADRs, GDRs and other types of
Depositary Receipts will be deemed to be investments in the underlying
securities. Depositary Receipts
B-4
<PAGE> 69
may be subject to foreign currency exchange rate risk. Certain Depositary
Receipts may not be listed on an exchange and therefore may be illiquid
securities.
FOREIGN CURRENCIES. The Fund has foreign currency exposure. Because investments
in foreign securities usually will involve currencies of foreign countries, and
because the Fund may hold funds in bank deposits in foreign currencies during
the completion of investment programs and may purchase foreign currency, foreign
currency futures contracts, and options on foreign currencies and foreign
currency futures contracts, the value of the assets of the Fund as measured in
U.S. dollars may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Fund may incur
costs in connection with conversions between various currencies. Although the
Fund values its assets daily in terms of U.S. dollars, it does not intend to
convert its holdings of foreign currencies into U.S. dollars on a daily basis.
It will do so from time to time, and investors should be aware of the costs of
currency conversion. 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.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The 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 entering into options or
forward or futures contracts to purchase or sell foreign currencies.
Because the Fund normally will be invested in foreign securities markets,
changes in the Fund's share price may have a low correlation with movements in
the U.S. markets. The Fund's share price will reflect the movements of both the
different stock and bond markets in which it is invested and of the currencies
in which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies may account for part of the Fund's investment
performance. U.S. and foreign securities markets do not always move in step with
each other, and the total returns from different markets may vary significantly.
DEBT SECURITIES. The Fund may purchase "investment-grade" bonds, which are those
rated Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's") or AAA,
AA, A or BBB by Standard & Poor's Ratings Group ("S&P") or, if unrated, judged
to be of equivalent quality as determined by the Adviser. Bonds rated Baa or BBB
may have speculative elements as well as investment-grade characteristics. (See
"Appendix A.")
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities, including
fixed-income and zero coupon debt securities, which are convertible into common
stock. Investments in convertible securities can provide an opportunity for
capital appreciation and/or income through interest and dividend payments by
virtue of their conversion or exchange features.
B-5
<PAGE> 70
The convertible securities in which the Fund may invest include fixed income or
zero coupon debt securities which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time
due to stock splits, dividends, spin-offs, other corporate distributions or
scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs(TM)"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
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underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon securities which are convertible into common stock offer the opportunity
for capital appreciation as increases (or decreases) in market value of such
securities closely follow the movements in the market value of the underlying
common stock. Zero coupon convertible securities generally are expected to be
less volatile than the underlying common stocks, as they usually are issued with
maturities of 15 years or less and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" ("TIGRS(TM)") and Certificate of Accrual on Treasuries
("CATS(TM)"). The underlying U.S. Treasury bonds and notes themselves are held
in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are owned ostensibly by the
bearer or holder thereof), in trust on behalf of the owners thereof. Counsel to
the underwriters of these certificates or other evidences of ownership of the
U.S. Treasury securities have stated that, for federal tax and securities
purposes, in their opinion purchasers of such certificates, such as the Fund,
most likely will be deemed the beneficial holder of the underlying U.S.
Government securities.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of
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having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES").
SOVEREIGN DEBT. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
WHEN-ISSUED SECURITIES. The Fund may, from time to time, purchase securities on
a "when-issued" or "forward delivery" basis for payment and delivery at a later
date. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued or forward delivery securities takes place at a later date.
During the period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund. To the extent that
assets of the Fund are held in cash pending the settlement of a
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purchase of securities, the Fund would earn no income; however, it is the Fund's
intention to be fully invested to the extent practicable and subject to the
policies stated above. While when-issued or forward delivery securities may be
sold prior to the settlement date, the Fund intends to purchase such securities
with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. At the time of settlement, the market value of the when-issued or forward
delivery securities may be more or less than the purchase price. The Fund does
not believe that its net asset value or income will be adversely affected by its
purchase of securities on a when-issued or forward delivery basis.
WARRANTS. Subject to nonfundamental investment policy (6), the Fund may invest
in warrants, which are securities permitting, but not obligating, their holders
to subscribe for other securities or commodities. The Fund may invest in
warrants for debt securities or warrants for equity securities that are acquired
as units with debt instruments. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase and they do not represent any rights in the assets of
the issuer. As a result, an investment in warrants may be considered to be more
speculative than certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the underlying securities
or commodities and a warrant ceases to have value if it is not exercised prior
to its expiration date. Consistent with the Fund's investment policies as
described above, the Fund may retain in its portfolio any securities received
upon the exercise of a warrant and may also retain in its portfolio any warrant
acquired as a unit with a debt instrument if the warrant begins to trade
separately from the related debt instrument.
BORROWING. The Fund may borrow to the maximum extent permitted under the 1940
Act; however, as a matter of nonfundamental policy, the Fund will not borrow in
an amount exceeding 5% of the value of the total assets of the Fund except for
temporary or emergency purposes and by engaging in reverse repurchase agreements
or other investments or transactions which may be deemed to be borrowings. Such
borrowings are not subject to the asset coverage restrictions set forth below.
The 1940 Act requires the Fund to maintain "asset coverage" of not less than
300% of its "senior securities representing indebtedness" as those terms are
defined and used in the 1940 Act. In addition, the Fund may not pay any cash
dividends or make any cash distributions to shareholders if, after the
distribution, there would be less than 300% asset coverage of a senior security
representing indebtedness for borrowing (excluding for this purpose certain
evidences of indebtedness made by a bank or other entity and privately arranged,
and not intended to be publicly distributed). If, as a result of the foregoing
restriction or otherwise, the Fund was unable to distribute at least 90% of its
investment company taxable income in any year, it would lose its status as a
regulated investment company for such year and become liable at the corporate
level for U.S. federal income taxes on its
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income for such year. See "Dividends, Distributions and Taxes" in the Fund's
prospectus.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to its U.S. dollar-denominated debt securities with member banks of the
Federal Reserve System or with any domestic broker/dealer which is recognized as
a reporting government securities dealer, if the creditworthiness of the bank or
broker/dealer has been determined by the Adviser to be at least as high as that
of other obligations the Fund may purchase.
A repurchase agreement provides a means for the Fund to earn income on funds for
periods as short as overnight. It is an arrangement under which the purchaser
(i.e., the Fund) acquires a debt security ("Obligation") and the seller agrees,
at the time of sale, to repurchase the Obligation at a specified time and price.
Securities subject to a repurchase agreement are held in a segregated account
and the value of such securities is kept at least equal to the repurchase price
on a daily basis. The repurchase price may be higher than the purchase price,
the difference being income to the Fund, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the Fund, together with
the repurchase price on repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation itself. Obligations will be
physically held by the Fund's custodian or in the Federal Reserve Book Entry
system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the Obligation, subject to the repurchase agreement
and is therefore subject to the Fund's investment restrictions applicable to
loans. It is not clear whether a court would consider the Obligation purchased
by the Fund subject to a repurchase agreement as being owned by the Fund or as
being collateral for the loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation, in which case the Fund may incur a loss if the proceeds to the Fund
of the sale to a third party are less than the repurchase price. Apart from the
risk of bankruptcy or insolvency proceedings, there is also the risk that the
seller may fail to repurchase the security. However, if the market value of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Fund will direct the seller of the Obligation to
deliver additional securities so that the market value
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of all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
ILLIQUID SECURITIES. The Fund may occasionally purchase securities other than in
the open market. While such purchases may often offer attractive opportunities
for investment not otherwise available on the open market, the securities so
purchased are often "restricted securities," "not readily marketable," or
"illiquid" restricted securities, i.e., which cannot be sold to the public
without registration under the Securities Act of 1933, as amended (the "1933
Act"), or the availability of an exemption from registration (such as Rules 144
or 144A) or because they are subject to other legal or contractual delays in or
restrictions on resale.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid securities. Disposing of illiquid securities may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price. The Fund
may have to bear the extra expense of registering such securities for resale and
the risk of substantial delay in effecting such registration. Also market
quotations are less readily available. The judgment of the Adviser may at times
play a greater role in valuing these securities than in the case of illiquid
securities.
Generally speaking, restricted securities may be sold in the U.S. only to
qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration, or in a public offering for which a registration
statement is in effect under the 1933 Act. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public, and in such event the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer, or the
prospectus forming a part of it, is materially inaccurate or misleading.
INDEXED SECURITIES. The Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which the Fund
may invest in several respects. First, the interest rate or, unlike other debt
securities, the principal amount payable at maturity of an indexed security may
vary based on changes in one or more specified reference instruments, such as an
interest rate compared with a fixed interest rate or the currency exchange rates
between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a U.S.
dollar-denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively indexed;
that is, its value may increase or decrease if the value of
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the reference instrument increases. Further, the change in the principal amount
payable or the interest rate of an indexed security may be a multiple of the
percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to the
credit risk of the security's issuer and the normal risks of price changes in
response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
SYNTHETIC INVESTMENTS. In certain circumstances, the Fund may wish to obtain the
price performance of a security without actually purchasing the security in
circumstances where, for example, the security is illiquid, or is unavailable
for direct investment or available only on less attractive terms. In such
circumstances, the Fund may invest in synthetic or derivative alternative
investments ("Synthetic Investments") that are based upon or otherwise relate to
the economic performance of the underlying securities. Synthetic Investments may
include swap transactions, notes or units with variable redemption amounts, and
other similar instruments and contracts. Synthetic Investments typically do not
represent beneficial ownership of the underlying security, usually are not
collateralized or otherwise secured by the counterparty and may or may not have
any credit enhancements attached to them. Accordingly, Synthetic Investments
involve exposure not only to the creditworthiness of the issuer of the
underlying security, changes in exchange rates and future governmental actions
taken by the jurisdiction in which the underlying security is issued, but also
to the creditworthiness and legal standing of the counterparties involved. In
addition, Synthetic Investments typically are illiquid.
STRATEGIC TRANSACTIONS AND DERIVATIVES. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of the fixed-income securities in the Fund's portfolio, or
to enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into
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various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used without limit to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for leveraging purposes.
Strategic Transactions, including derivative contracts have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to
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minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
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offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of
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A-1 from S&P or P-1 from Moody's or an equivalent rating from any nationally
recognized statistical rating organization ("NRSRO") or, in the case of OTC
currency transactions, are determined to be of equivalent credit quality by the
Adviser. The staff of the SEC currently takes the position that OTC options
purchased by the Fund, and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. The
Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and
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Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that 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 and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
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this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) 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. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency.
RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement
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of a currency futures contract for the purchase of most currencies must occur at
a bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
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specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from a NRSRO or is determined to be of equivalent credit quality by the Adviser.
If there is a default by the Counterparty, the Fund may 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 utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions and
certain short sale transactions, in addition to other requirements, require that
the Fund segregate cash or liquid assets with its custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required
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to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid assets at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Fund will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid assets sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by the Fund
on an index will require the Fund to own portfolio securities which correlate
with the index or to segregate cash or liquid assets equal to the excess of the
index value over the exercise price on a current basis. A put option written by
the Fund requires the Fund to segregate cash or liquid assets equal to the
exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
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daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
PORTFOLIO TRANSACTIONS
BROKERAGE
Allocation of brokerage may be placed by the Adviser.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for the Fund's portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. national securities exchange transactions) where applicable, size
of order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through its familiarity
with commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Adviser
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally placed
by the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by the Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes or who supply research, market and
statistical information to the Fund. The term "research, market and statistical
information" includes advice as to the value of securities; the advisability of
investing in, purchasing or selling securities; the availability of securities
or
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purchasers or sellers of securities; and analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. The Adviser is authorized when placing
portfolio transactions for the Fund to pay a brokerage commission in excess of
that which another broker might charge for executing the same transaction solely
on account of the receipt of research, market or statistical information. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market makers for the security being traded unless, after
exercising care, it appears that more favorable results are available elsewhere.
In selecting among firms believed to meet the criteria for handling a particular
transaction, the Adviser may give consideration to those firms that have sold or
are selling shares of the Fund managed by the Adviser.
Although certain research, market and statistical information from
broker/dealers may be useful to the Fund and to the Adviser, it is the opinion
of the Adviser that such information only supplements its own research effort
since the information must still be analyzed, weighed and reviewed by the
Adviser's staff. Such information may be useful to the Adviser in providing
services to clients other than the Fund and not all such information is used by
the Adviser in connection with the Fund. Conversely, such information provided
to the Adviser by broker/dealers through whom other clients of the Adviser
effect securities transactions may be useful to the Adviser in providing
services to the Fund.
The Directors for the Fund review from time to time whether the recapture for
the benefit of the Fund of some portion of the brokerage commissions or similar
fees paid by the Fund on portfolio transactions is legally permissible and
advisable.
For the fiscal years ended November 30, 1997, 1996 and 1995, the Fund paid BSN
Sociedad de Valores y Bolsa, an affiliate of the Fund's former sub-adviser,
brokerage commissions of $94,000, $251,000 and 324,000, respectively.
Transactions in which the Fund used BSN Sociedad de Valores y Bolsa as broker
comprised 21.56% of the aggregate dollar amount involving payment of
commissions, and 24.1% of the aggregate brokerage commissions paid by it during
the fiscal year ended November 30, 1997.
The Fund's average portfolio turnover rate is the ratio of the lesser of sales
or purchases to the monthly average value of the portfolio securities owned
during the year, excluding all securities with maturities or expiration dates at
the time of acquisition of one year or less. A higher rate involves greater
brokerage transaction expenses to the Fund and may result in the realization of
net capital gains, which would be taxable to shareholders when distributed.
Purchases and sales are made for the Fund's portfolio whenever necessary, in
management's opinion, to meet the Fund's objective. Under normal investment
conditions, it is anticipated that the Fund's portfolio turnover rate will not
exceed 100%.
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INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. (the "Adviser"), an
investment counsel firm, 345 Park Avenue, New York, New York, is the Fund's
investment manager. This organization is one of the most experienced investment
management firms in the United States. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. The predecessor firm reorganized from a partnership to a
corporation on June 28, 1985. On June 26, 1997, Adviser's predecessor entered
into an agreement with Zurich Insurance Company ("Zurich") pursuant to which the
predecessor and Zurich agreed to form an alliance. On December 31, 1997, Zurich
acquired a majority interest in Scudder, and Zurich made its subsidiary Zurich
Kemper Investments, Inc., a part of the predecessor organization. The
predecessor's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group").
On September 7, 1998, the financial services business of Zurich (including
Zurich's 70% interest in the Adviser) and the financial services businesses of
B.A.T Industries p.l.c. ("B.A.T") formed a new global insurance and financial
services group known as Zurich Financial Services. By way of a dual holding
company structure, current Zurich Shareholders own approximately 57% of the new
organization, with the balance owned by B.A.T's shareholders.
Pursuant to the investment management agreement, the Adviser acts as the Fund's
investment adviser, manages its investments, administers its business affairs,
furnishes office facilities and equipment, provides clerical, bookkeeping and
administrative services and permits any of its officers or employees to serve
without compensation as directors or officers of the Fund if elected to such
positions. The investment management agreement provides that the Fund shall pay
the charges and expenses of its operations, including the fees and expenses of
the directors (except those who are affiliates of the Adviser), 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. The Fund bears the expenses of registration of its shares with the SEC
while Kemper Distributors, Inc. ("KDI"), as principal underwriter, pays the cost
of qualifying and maintaining the qualification of the Fund's shares for sale
under the securities laws of the various states.
The Adviser maintains a large research department, which conducts ongoing
studies of the factors that affect the position of various industries, companies
and individual securities. In this work, the Adviser utilizes certain reports
and statistics from a wide variety of sources, including brokers and dealers who
may execute portfolio transactions for the Fund and for clients of the Adviser,
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but conclusions are based primarily on investigations and critical analyses by
its own research specialists.
Certain investments may be appropriate for the Fund and also for other clients
advised by the Adviser. Investment decisions for the Fund and other clients are
made with a view toward achieving their respective investment objectives and
after consideration of such factors as their current holdings, availability of
cash for investment and the size of their investments generally. Frequently, a
particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same date. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The Investment Management Agreement (the "Agreement") between the Corporation,
on behalf of the Fund, and the Adviser continues from year to year only if its
continuance is approved annually by the vote of a majority of those Directors
who are not parties to such Agreement or interested persons of the Adviser or
the Fund, cast in person at a meeting called for the purpose of voting on such
approval, and by a majority vote either of the Fund's Directors or of the
outstanding voting securities of the Fund. The Agreement may be terminated at
any time without payment of penalty by either party on sixty days' written
notice, and automatically terminates in the event of its assignment.
Under the Agreement, the Adviser provides the Fund with continuing investment
management for the Fund's portfolio consistent with the Fund's investment
objective, policies and restrictions and determines what securities shall be
purchased for the portfolio of the Fund, what portfolio securities shall be held
or sold by the Fund and what portion of the Fund's assets shall be held
uninvested, subject always to the provisions of the Fund's Articles of
Incorporation and By-Laws, the 1940 Act and the Internal Revenue Code of 1986,
as amended (the "Code"), and to the Fund's investment objective, policies and
restrictions and subject, further, to such policies and instructions as the
Directors of the Corporation may from time to time establish. The Adviser also
advises and assists the officers of the Corporation in taking such steps as are
necessary or appropriate to carry out the decisions of its Directors and the
appropriate committees of the Directors regarding the conduct of the business of
the Fund.
The Adviser also renders significant administrative services (not otherwise
provided by third parties) necessary for the Fund's operations as an open-end
investment company including, but not limited to, preparing reports and notices
to the Directors and shareholders; supervising, negotiating contractual
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arrangements with, and monitoring various third-party service providers to the
Fund (such as the Fund's transfer agent, pricing agents, custodian, accountants
and others); preparing and making filings with the SEC and other regulatory
agencies; assisting in the preparation and filing of the Fund's federal, state
and local tax returns; preparing and filing the Fund's federal excise tax
returns; assisting with investor and public relations matters; monitoring the
valuation of securities and the calculation of net asset value; monitoring the
registration of shares of the Fund under applicable federal and state securities
laws; maintaining the Fund's books and records to the extent not otherwise
maintained by a third party; assisting in establishing accounting policies of
the Fund; assisting in the resolution of accounting and legal issues;
establishing and monitoring the Fund's operating budget; processing the payment
of the Fund's bills; assisting the Fund in, and otherwise arranging for, the
payment of distributions and dividends; and otherwise assisting the Fund in the
conduct of its business, subject to the direction and control of the Directors.
The Adviser pays the compensation and expenses of all Directors, officers and
executive employees of the Corporation affiliated with the Adviser and makes
available, without expense to the Corporation, the services of such Directors,
officers and employees of the Adviser as may duly be elected officers or
Directors of the Corporation, subject to their individual consent to serve and
to any limitations imposed by law, and provides the Corporation's office space
and facilities.
Under the Agreement the Fund is responsible for all of its other expenses
including organizational costs, fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; the calculation of net asset value; taxes and
governmental fees; the fees and expenses of the transfer agent; the cost of
preparing stock certificates and any other expenses including clerical expenses
of issue, redemption or repurchase of shares; the expenses of and the fees for
registering or qualifying securities for sale; the fees and expenses of
Directors, officers and employees of the Corporation who are not affiliated with
the Adviser; the cost of printing and distributing reports and notices to
shareholders; and the fees and disbursements of custodians. The Fund may arrange
to have third parties assume all or part of the expenses of sale, underwriting
and distribution of shares of the Fund. The Fund is also responsible for its
expenses incurred in connection with litigation, proceedings and claims and the
legal obligation it may have to indemnify its officers and Directors with
respect thereto.
The Agreement expressly provides that the Adviser shall not be required to pay a
pricing agent of the Fund for portfolio pricing services, if any.
In reviewing the terms of the Agreement and in discussions with the Adviser
concerning such Agreement, the Directors of the Corporation who are not
"interested persons" of the Corporation have been represented by Vedder, Price,
Kaufman & Kammholz, as independent counsel at the Fund's expense.
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The Agreement provides that the Adviser shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Adviser's
opinion that the terms and conditions of those transactions which have occurred
were not influenced by existing or potential custodial or other Fund
relationships.
None of the officers or Directors of the Corporation may have dealings with the
Corporation as principals in the purchase or sale of securities, except as
individual subscribers or holders of shares of the Corporation.
Employees of the Adviser and certain of its subsidiaries are permitted to make
personal securities transactions, subject to requirements and restrictions set
forth in the Adviser's Code of Ethics. The Code of Ethics contains provisions
and requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as those of the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
For its services, the Fund pays the Adviser a fee, payable monthly, equal to an
annual rate of 0.75% of the Fund's first $250 million of average daily net
assets, 0.72% of the next $750 million of such net assets, 0.70% of the next
$1.5 billion of such net assets, 0.68% of the next $2.5 billion of such net
assets, 0.65% of the next $2.5 billion of such net assets, 0.64% of the next
$2.5 billion of such net assets, 0.63% of the next $2.5 billion of such net
assets, and 0.62% on such net assets in excess of $12.5 billion. For the fiscal
years ended November 30, 1997, 1996 and 1995, the investment management fee
payable to the Adviser for its services under the previous investment management
agreement with the Fund amounted to $2,846,000, $2,374,000 and $2,139,000,
respectively. During those periods, the Adviser paid BSN Gestion de Patrimonios,
S.A., S.G.C. ("BSN Gestion") a monthly fee of 0.35% of the Fund's average weekly
net assets for investment management services pursuant to a now terminated
sub-advisory agreement between the Adviser and BSN Gestion. The sub-advisory
arrangements with BSN Gestion were discontinued in connection with the Fund's
reorganization transaction.
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Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, computes net asset value
for the Fund. The Fund pays Scudder Fund Accounting Corporation an annual fee of
0.065% on the first $150 million, 0.04% on the next $850 million, and 0.02% over
$1 billion, plus holding charges and transaction fees for this service. The Fund
is subject to a monthly minimum fee of $4,167. In addition, there is a 33%
multiclass surcharge imposed on the annual fee for the Fund.
The Adviser may serve as adviser to other funds with similar investment
objectives and policies to those of the Fund that may have different
distribution arrangements or expenses, which may affect performance.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc., a subsidiary of
the Adviser, is the principal underwriter and distributor for the shares of the
Fund and acts as agent of the Fund in the continuous offering of its shares. KDI
bears all of its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. The Fund pays the cost for
the prospectus and shareholder reports to be set in type and printed for
existing shareholders, and KDI 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.
The 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 Directors of the Fund, including the Directors who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The distribution agreement automatically terminates in the event of
its assignment and may be terminated for a class at any time without penalty by
the Fund or by KDI upon 60 days' notice. Termination by the Fund with respect to
a class may be by vote of a majority of the Board of Directors, and a majority
of the Directors who are not interested persons of the Fund and who have no
direct or indirect financial interest in the distribution agreement, the Fund's
Rule 12b-1 distribution plans, or any other agreement related to the Fund's Rule
12b-1 distribution plans, or a "majority of the outstanding voting securities"
of the class of the Fund, as defined under the 1940 Act.
RULE 12B-1 PLANS. The Corporation has adopted on behalf of the Fund, in
accordance with Rule 12b-1 under the 1940 Act, separate Rule 12b-1 distribution
plans pertaining to the Fund's Class B and Class C shares (each a "Plan"). Under
each Plan, the Fund pays KDI a distribution fee, payable monthly, at the annual
rate of 0.75% of the average daily net assets attributable to its Class B or
Class C shares. Under each Plan, KDI may compensate various financial services
firms ("Firms") for sales of Fund shares and may pay other commissions, fees and
concessions to such Firms. The distribution fee compensates KDI for expenses
incurred in connection with activities primarily intended to result in the sale
of the Fund's Class B or Class C shares, including
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the printing of prospectuses and reports for persons other than existing
shareholders and the preparation, printing and distribution of sales literature
and advertising materials.
Among other things, each Plan provides that KDI will prepare reports for the
Board on a quarterly basis for each class showing amounts paid to the various
Firms and such other information as the Board may reasonably request. Each Plan
will continue in effect indefinitely, provided that such continuance is approved
at least annually by vote of a majority of the Board of Directors, and a
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) of the Fund and who have no direct or indirect financial interest in
the operation of the Plan ("Qualified Board Members"), cast at an in-person
meeting called for such purpose, or by vote of at least a majority of the
outstanding voting securities of the applicable class. Any material amendment to
a Plan must be approved by vote of a majority of the Board of Directors, and of
the Qualified Board Members. An amendment to a Plan to increase materially the
amount to be paid to KDI by the Fund for distribution services with respect to
the applicable class must be approved by a majority of the outstanding voting
securities of that class. While each Plan is in effect, the selection and
nomination of Directors who are not "interested persons" of the Corporation
shall be committed to the discretion of the Directors who are not themselves
"interested persons" of the Corporation. If a Plan is terminated (or not
renewed) with respect to either class, the Plan with respect to the other class
may continue in effect unless it also has been terminated (or not renewed).
As of the date of this SAI, no payments had been made under the Plans with
respect to the Fund.
ADMINISTRATIVE SERVICES. Administrative services are provided to the 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, the Fund pays KDI an
administrative services fee, payable monthly, at an annual rate of up to 0.25%
of average daily net assets of Class A, B and C shares of the Fund.
KDI enters into related arrangements with various broker-dealer firms and other
service or administrative firms ("firms") that provide services and facilities
for their customers or clients who are investors in the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other administrative services as may be agreed upon from time
to time and permitted by applicable statute, rule or regulation. With respect to
Class A shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to 0.25% of the net assets in Fund accounts
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that it maintains and services attributable to Class A shares, commencing with
the month after investment. With respect to Class B and Class C shares, KDI
currently advances to firms the first-year service fee at a rate of up to 0.25%
of the purchase price of such shares. For periods after the first year, KDI
currently intends to pay firms a service fee at a rate of up to 0.25%
(calculated monthly and paid quarterly) of the net assets attributable to Class
B and Class C shares maintained and serviced by the firm. After the first year,
a firm becomes eligible for the quarterly service fee and the fee continues
until terminated by KDI or the Fund. Firms to which service fees may be paid may
include affiliates of KDI.
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 the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services listed on the Fund's
records and it is intended that KDI will pay all the administrative services fee
that it receives from the Fund to firms in the form of service fees. The
effective administrative services fee rate to be charged against all assets of
the 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. The Board
of Directors of the Fund, in its discretion, may approve basing the fee to KDI
on all Fund assets in the future.
Certain directors or officers of the Fund are also directors or officers of the
Adviser or KDI, as indicated under "Officers and Directors."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. The Chase Manhattan
Bank, Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has
custody of all securities and cash of the Fund held outside the United States.
Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas
City, Missouri 64105, as custodian, and State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as sub-custodian, have custody of
all securities and cash held in the United States. Kemper Service Company, a
subsidiary of the Adviser, is the Fund's transfer agent and dividend-paying
agent and, as such, generally serves as "Shareholder Service Agent" of the Fund.
Kemper Service Company receives as transfer agent annual account fees of $6 per
account plus account set up, transaction, maintenance charges, annual fees
associated with the contingent deferred sales charge (Class B only) and
out-of-pocket expense reimbursement. Kemper Service Company's fee is reduced by
certain earnings credits in favor of each Fund. Effective January 1, 1999, the
Fund will pay to KSC annual account fees of $10 per account ($18 for retirement
accounts) plus set up charges and annual fees associated with the contingent
deferred sales charge (Class B only) and an asset-based fee of .08% plus
out-of-pocket expense reimbursement.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Fund's independent
auditors, Ernst & Young LLP, audit and report on the Fund's annual financial
statements, review certain regulatory reports and the Fund's federal income
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tax return, and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the Fund. Shareholders will receive
annual audited financial statements and semi-annual unaudited financial
statements.
PURCHASE AND REDEMPTION OF SHARES
As described in the prospectus, Fund shares are sold at their public offering
price, which is the net asset value next determined after an order is received
in proper form plus, with respect to Class A shares, an initial sales charge.
The minimum initial investment for each class of the Fund 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. The Fund
may waive the minimum for purchases by directors, officers or employees of the
Fund or the Adviser and its affiliates. An order for the purchase of shares that
is accompanied by a check drawn on a foreign bank (other than a check drawn on a
Canadian bank in U.S. Dollars) will not be considered in proper form and will
not be processed unless and until the Fund determines that it has received
payment of the proceeds of the check. The time required for such a determination
will vary and cannot be determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by the Fund at the applicable net asset
value per share of the particular class of the Fund as described in the Fund's
prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares by certain classes of persons or
through certain types of transactions as described in the prospectus are
provided because of anticipated economies of scale in sales and sales-related
efforts.
The 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 the 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 SEC may by order permit for the protection of the Fund's shareholders.
REDEMPTION IN-KIND. Shareholders who receive Fund portfolio securities in lieu
of cash in redemption of Fund shares pursuant to the Fund's policy on in-kind
redemptions as set forth in the prospectus will be required to receive the
portfolio securities in their own account, all at the shareholders' expense and
risk. In order to retain the portfolio securities distributed in-kind, a
redeeming shareholder must establish cash and securities accounts on his or her
behalf
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with a bank or broker in Spain and Portugal so that such bank or broker can
re-register the portfolio securities received, and must provide such information
to the Shareholder Service Agent at the time of the redemption request. Certain
information for a U.S. bank or broker will also need to be provided so that such
bank or broker can receive any American Depository Receipts constituting part of
the portfolio securities to be retained by the shareholders. Redemption requests
subject to the Fund's redemption in-kind policy will not be considered in good
order unless such information is provided.
Redeeming shareholders who receive portfolio securities in-kind will bear the
risks associated with market fluctuations that may affect the price of the
portfolio securities they receive. Accordingly, redeeming shareholders who
receive portfolio securities in-kind may, when they sell such securities,
realize cash equal to a lesser or greater amount than the total value of the
portfolio securities received in redemption of their shares of the Fund. See
"Redemption or Repurchase of Shares--Redemption in-Kind" in the prospectus.
SPECIAL REDEMPTION AND EXCHANGE INFORMATION. Shares of any class of the Fund
held for less than one year are redeemable at a price equal to 98% of the then
current net asset value per share, with limited exceptions. This 2% discount,
referred to in the prospectus and this Statement of Additional Information as a
redemption fee, directly affects the amount a shareholder who is subject to the
fee receives upon exchange or redemption. It is intended to encourage long-term
investment in the Fund, to avoid transaction and other expenses caused by early
redemptions and to facilitate portfolio management. The fee is not a deferred
sales charge, is not a commission paid to the Adviser or its subsidiaries, and
does not benefit the Adviser in any way. The Fund reserves the right to modify
the terms of or terminate this fee at any time.
This redemption fee will not be applied to (a) a redemption of shares held in
certain retirement plans, including 401(k) plans, 403(b) plans, Keogh accounts,
and other pension, profit-sharing and employee benefit plans (however, this fee
waiver does not apply to IRA and SEP-IRA accounts), (b) a redemption of any
shares purchased through the reinvestment of dividends or capital gains
distributions paid by the Fund), or (d) a redemption of shares by the Fund upon
exercise of its right to liquidate accounts (i) falling below the minimum
account size by reason of shareholder redemptions or (ii) when the shareholder
has failed to provide tax identification information. However, if shares are
purchased for a retirement plan account through a broker, financial institution
or recordkeeper maintaining an omnibus account for the shares, such waiver may
not apply.
For this purpose and without regard to the shares actually redeemed, shares will
be redeemed as follows: first, reinvestment shares; second, purchased shares
held one year or more: and third, purchased shares held for less than one year.
Finally, if a shareholder enters into a transaction in Fund shares which,
although it may technically be treated as a redemption and purchase for
recordkeeping purposes, does not involve the termination of economic interest in
the Fund, no redemption fee will apply and applicability of the redemption fee,
if any, on any subsequent redemption or exchange will be
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determined by reference to the date the shares were originally purchased, and
not the date of the transaction.
The conversion of Class B shares of the Fund to Class A shares of the Fund may
be subject to the continuing availability of an opinion of counsel, ruling by
the Internal Revenue Service ("IRS") or other assurance acceptable to the 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 Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the 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.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and 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
the 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. The net
asset value of shares of the Fund is computed as of the close of regular trading
on the Exchange on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Martin Luther
King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market, Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by the Fund's pricing agent(s)
which reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant
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to the above methods, the Adviser may calculate the price of that debt security,
subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Corporation's Board of
Directors, the value of a portfolio asset as determined in accordance with these
procedures does not represent the fair market value of the portfolio asset, the
value of the portfolio asset is taken to be an amount which, in the opinion of
the Valuation Committee, represents fair market value on the basis of all
available information. The value of other portfolio holdings owned by the Fund
is determined in a manner which, in the discretion of the Valuation Committee,
most fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Fund may retain all or part of such gain for reinvestment, after
paying the related federal taxes for which shareholders may then be able to
claim a credit against their federal tax liability. If the Fund does not
distribute the amount of capital gain and/or net investment income required to
be distributed by an excise tax provision of the Code, the Fund may be subject
to that excise tax. In certain circumstances, the Fund may determine that it is
in
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the interest of shareholders to distribute less than the required amount. (See
"TAXES.")
The Fund normally distributes annual dividends of net investment income. Any net
realized short-term and long-term capital gains for the Fund are distributed at
least annually. Income and capital gain dividends of the Fund are automatically
reinvested in additional shares of the Fund, without a sales charge, unless the
investor makes an election otherwise. Distributions of net capital gains
realized during each fiscal year will be made at least annually before the end
of the Fund's fiscal year on October 31. Additional distributions, including
distributions of net short-term capital gains in excess of net long-term capital
losses, may be made, if necessary.
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
proportion for each class.
Dividends will be reinvested in shares of the Fund unless shareholders indicate
in writing that they wish to receive them in cash or in shares of other Kemper
Funds as provided in the prospectus.
TAXES. The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code and, if so qualified, generally will not be
liable for federal income taxes to the extent its earnings are distributed. To
so qualify, the Fund must satisfy certain income and asset diversification
requirements, and must distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain).
The Fund is subject to a 4% nondeductible excise tax on amounts required to be
but not distributed under a prescribed formula. The formula requires payment to
shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for each calendar year, at least 98% of the excess
of its capital gains over capital losses (adjusted for certain ordinary losses)
realized during the one-year period ending October 31 during such year, and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by the Fund for reinvestment, requiring federal
income taxes to be paid thereon by the Fund, The Fund intends to elect to treat
such capital gains as having been distributed to shareholders. As a result, each
shareholder will report such capital gains as long-term capital gains, will be
able to claim a relative share of federal income taxes paid by the Fund on such
gains as a credit against personal federal income tax liability, and will be
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entitled to increase the adjusted tax basis on Fund shares by the difference
between such reported gains and the individual tax credit.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a long-
term capital loss to the extent of any amounts treated as distributions of long-
term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
If shares are held in a tax-deferred account, such as a retirement plan, income
and gain will not be taxable each year. Instead, the taxable portion of amounts
held in a tax-deferred account generally will be subject to tax as ordinary
income only when distributed from that account.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Kemper fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Dividend and interest income received by the Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries
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generally do not impose taxes on capital gains respecting investments by foreign
investors. The Fund may qualify for and make the election permitted under
Section 853 of the Code so that shareholders may (subject to limitations) be
able to claim a credit or deduction on their federal income tax return form, and
may be required to treat as part of the amounts distributed to them, their pro
rata portion of qualified taxes paid by the Fund to foreign countries (which
taxes related primarily to investment income). The Fund may make an election
under Section 853 of the Code, provided that more than 50% of the value of the
total assets of the Fund at the close of the taxable year consists of securities
as foreign corporations. The foreign tax credit available to shareholders is
subject to certain limitations imposed by the Code, except in the case of
certain electing individual taxpayers who have limited creditable foreign taxes
and no foreign source income other than passive investment-type income.
Furthermore, the foreign tax credit is eliminated with respect to foreign taxes
withheld on dividends if the dividend-paying shares or the shares of the Fund
are held by the Fund or the shareholders, as the case may be, for less than 16
days. (46 days in the case of preferred shares) during the 30-day period (90-day
period for preferred shares) beginning 15 days (45 days for preferred shares)
before the shares become ex-dividend. In addition, if the Fund fails to satisfy
these holding period requirements, it cannot elect under Section 853 to pass
through to shareholders the ability to claim a deduction for the related foreign
taxes.
The Fund may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
the Fund receives a so-called "excess distribution" with respect to PFIC stock,
the Fund itself may be subject to a tax on a portion of the excess distribution.
Certain distributions from a PFIC as well as gains from the sale of the PFIC
shares are treated as "excess distributions." In general, under the PFIC rules,
an excess distribution is treated as having been realized ratably over the
period during which the Fund held the PFIC shares. The Fund will be subject to
tax on the portion, if any, of an excess distribution that is allocated to prior
Fund taxable years and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. Excess distributions allocated
to the current taxable year are characterized as ordinary income even though,
absent application of the PFIC rules, certain excess distributions might have
been classified as capital gain.
The Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark to market losses and any loss from an actual disposition of shares would be
deductible as ordinary loss to the extent of any net mark to market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to the Fund level tax when distributed to shareholders as a dividend.
Alternatively, the Fund may elect to include as income and gain its share of
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the ordinary earnings and net capital gain of certain foreign investment
companies in lieu of being taxed in the manner described above.
Equity options (including covered call options on portfolio stock) written or
purchased by the Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by the Fund upon payment of a premium in
connection with the purchase of a put or call option. The character of any gain
or loss recognized (i.e., long-term or short-term) will generally depend, in the
case of a lapse or sale of the option, on the Fund's holding period for the
option and, in the case of an exercise of the option, on the Fund's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or substantially identical security in
the Fund's portfolio. If the Fund writes a call option, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as a short-term capital gain or loss. If a call option is
exercised, any resulting gain or loss is short-term or long-term capital gain or
loss depending on the holding period of the underlying security. The exercise of
a put option written by the Fund is not a taxable transaction for the Fund.
Many futures and forward contracts entered into by the Fund and all listed
nonequity options written or purchased by the Fund (including covered call
options written on debt securities and options purchased or written on futures
contracts) will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position will be treated as 60% long-term and 40% short-term, and on
the last trading day of the Fund's fiscal year (and generally, on October 31 for
purposes of the 4% excise tax), all outstanding Section 1256 positions will be
marked-to-market (i.e., treated as if such positions were closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by the Fund will be treated as ordinary income or loss. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security in the
Fund's portfolio.
Positions of the Fund consisting of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for any "qualified covered
call options" on stock written by the Fund.
Positions of the Fund consisting of at least one position not governed by
Section 1256 and at least one future, forward, or nonequity option contract
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which is governed by Section 1256 which substantially diminishes the Fund's risk
of loss with respect to such other position will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, certain tax elections exist for them which reduce or eliminate
the operation of these rules. The Fund will monitor its transactions in options
and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may require the
Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time the Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain futures, forward or options
contracts, gains or losses attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contracts and the
date of disposition are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of the Fund's investment company taxable income
to be distributed to its shareholders as ordinary income.
If the Fund holds zero coupon securities or other securities which are issued at
a discount a portion of the difference between the issue price and the face
value of such securities ("original issue discount") will be treated as income
to the Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the investment company taxable income of the Fund which
must be distributed to shareholders in order to maintain the qualification of
the Fund as a regulated investment company and to avoid federal income tax at
the Fund level. In addition, if the Fund invest in certain high yield original
issue discount obligations issued by corporations, a portion of
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the original issue discount accruing on the obligation may be eligible for the
deduction for dividends received by corporations. In such an event, properly
designated dividends of investment company taxable income received from the Fund
by its corporate shareholders, to the extent attributable to such portion of the
accrued original issue discount, may be eligible for the deduction received by
corporations.
If the Fund acquires a debt instrument at a market discount, a portion of the
gain recognized (if any) on disposition of such instrument may be treated as
ordinary income.
The Fund will be required to report to the IRS all distributions of taxable
income and capital gains as well as gross proceeds from the redemption or
exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
A shareholder who redeems shares of the Fund (including any in-kind redemption)
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 the Fund or any other Kemper
Mutual Fund listed in the prospectus under "Special Features--Class A
Shares--Combined Purchases" (other than shares of Kemper Cash Reserves Fund not
acquired by exchange from another Kemper Mutual Fund) may reinvest the amount
redeemed at net asset value at the time of the reinvestment in shares of the
Fund or in shares of the other Kemper Mutual Funds within six months of the
redemption as described in the prospectus under "Redemption or Repurchase of
Shares--Reinvestment Privilege." If redeemed shares were held less than 91 days,
then the lesser of (a) the sales charge waived on the reinvested shares, or (b)
the sales charge incurred on the redeemed shares, is included in the basis of
the reinvested shares and is not included in the basis of the redeemed shares.
If a shareholder realizes a loss on the redemption or exchange of the Fund's
shares and reinvests in shares of the 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
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recognition of such loss for federal income tax purposes. An exchange of the
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.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
RETIREMENT PLANS. Shares of the Fund may be purchased as an investment in a
number of kinds of retirement plans, including qualified pension, profit
sharing, money purchase pension, and 401(k) plans, Code Section 403(b) custodial
accounts, and individual retirement accounts.
One of the tax-deferred retirement plan accounts that may hold Fund shares is an
individual retirement account ("IRA"). There are three kinds of IRAs that an
individual may establish: traditional IRAs, Roth IRAs and education IRAs. With a
traditional IRA, an individual may be able to make a deductible contribution of
up to $2,000 or, if less, the amount of the individual's earned income for any
taxable year prior to the year the individual reaches age 70 1/2 if neither the
individual nor his or her spouse is an active participant in an employer's
retirement plan. An individual who is (or who has a spouse who is) an active
participant in an employer retirement plan also may be eligible to make
deductible IRA contributions; the amount, if any, of IRA contributions that are
deductible by such an individual is determined by the individual's (and
spouse's, if applicable) adjusted gross income for the year. Even if an
individual is not permitted to make a deductible contribution to an IRA for a
taxable year, however, the individual nonetheless may make nondeductible
contributions up to $2,000, or 100% of earned income if less, for that year. One
spouse also may contribute up to $2,000 per year to the other spouse's own IRA,
even if the other spouse has earned income of less than $2,000, as long as the
spouses' joint earned income is at least $4,000. There are special rules for
determining how withdrawals are to be taxed if an IRA contains both deductible
and nondeductible amounts. In general, a proportionate amount of each withdrawal
will be deemed to be made from nondeductible contributions; amounts treated as a
return of nondeductible contributions will
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not be taxable. Lump sum distributions from another qualified retirement plan,
may be rolled over into a traditional IRA, also.
With a Roth IRA, an individual may make only nondeductible contributions;
contributions can be made of up to $2,000 or, if less, the amount of the
individual's earned income for any taxable year, but only if the individual's
(and spouse's, if applicable) adjusted gross income for the year is less than
$95,000 for single individuals or $150,000 for married individuals. The maximum
contribution amount phases out and falls to zero between $95,000 and $110,000
for single persons and between $150,000 and $160,000 for married persons.
Contributions to a Roth IRA may be made even after the individual attains age
70 1/2. Distributions from a Roth IRA that satisfy certain requirements will not
be taxable when taken; other distributions of earnings will be taxable. An
individual with adjusted gross income of $100,000 or less generally may elect to
roll over amounts from a traditional IRA to a Roth IRA. The full taxable amount
held in the traditional IRA that is rolled over to a Roth IRA will be taxable in
the year of the rollover, except rollovers made for 1998, which may be included
in taxable income over a four year period.
An education IRA provides a method for saving for the higher education expenses
of a child; it is not designed for retirement savings. Generally, amounts held
in an education IRA may be used to pay for qualified higher education expenses
at an eligible (postsecondary) educational institution. An individual may
contribute to an education IRA for the benefit of a child under 18 years old if
the individual's income does not exceed certain limits. The maximum contribution
for the benefit of any one child is $500 per year. Contributions are not
deductible, but earnings accumulate tax-free until withdrawal, and withdrawals
used to pay qualified higher education expenses of the beneficiary (or
transferred to an education IRA of a qualified family member) will not be
taxable. Other withdrawals will be subject to tax.
In addition, there are special IRA programs available for employers under which
an employer may establish IRA accounts for its employees in lieu of establishing
more complicated retirement plans, such as qualified profit sharing or 401(k)
plans. Known as SEP-IRAs (Simplified Employee Pension-IRA) and SIMPLE IRAs, they
permit employers to maintain a retirement program for their employees without
being subject to a number of the recordkeeping and testing requirements
applicable to qualified plans.
Information regarding the establishment of IRAs or other retirement plans is
available from the Shareholder Service Agent upon request. A retirement plan
custodian may charge fees in connection with establishing and maintaining the
plan. An investor should consult with a competent adviser for specific advice
concerning his or her tax status and the possible benefits of establishing one
or more retirement plan accounts. The description above is only very general;
there are numerous other rules applicable to these plans to be considered before
establishing one.
Shareholders should consult their tax advisers about the application of the
provisions of tax law in light of their particular tax situations.
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PERFORMANCE
As described in the prospectus, the Fund's historical performance or return for
a class of shares may be shown in the form of "average annual total return" and
"total return" figures. These measures of performance are described below.
Performance information will be computed separately for each class.
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. The
Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the SEC. The average annual total
return for each class of the Fund for a specific period is found by first taking
a hypothetical $1,000 investment ("initial investment") in the class' 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. Average annual return quotations will be
determined to the nearest 1/100th of 1%. The redeemable value in the case of
Class B shares or Class C shares include 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. Average
annual return calculated in accordance with this formula does not take into
account any required payments for federal of state income taxes. Average annual
total return does not reflect the effect of the 2% redemption fee on shares held
for less than one year. Such quotations for Class B shares of the Fund for
periods over six years will reflect conversion of such shares to Class A shares
at the end of the sixth year. 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 in a manner not consistent with the standard formula
described above, without deducting the maximum sales charge or contingent
deferred sales charge.
AVERAGE ANNUAL TOTAL RETURN = (ERV/P)(1/N) - 1
Where: P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for the Fund's "Financial Highlights" table in the Fund's
financial statements and prospectus. Total return performance for a specific
period is calculated by first taking a hypothetical investment ("initial
investment") in the Fund's shares on the first day of the period, either
adjusting
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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 the Fund's Class B shares or Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period. Total
return calculations that do not include the effect of the sales charge for the
Fund's Class A shares or the contingent deferred sales charge for Class B and
Class C shares would be reduced if such charges were included. In addition,
total return does not reflect the effect of the 2% redemption fee on shares held
for less than one year.
The Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. The Fund's Class A shares are
sold at net asset value plus a maximum sales charge of 5.75% of the offering
price. Class B and Class C shares are sold at net asset value. Redemption of the
Fund's Class B shares may be subject to a contingent deferred sales charge that
is 4% in the first year following the purchase, declines by a specified
percentage each year thereafter and becomes zero after six years. Redemption of
the Fund's Class C shares may be subject to a 1% contingent deferred sales
charge in the first year following the purchase. A 2% redemption fee is assessed
upon the redemption or exchange of any class of shares held for less than one
year. Returns and net asset value will fluctuate. Factors affecting the 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 returns described in this section. Shares of the Fund are
redeemable at the then current net asset value, which may be more or less than
original cost.
There are differences and similarities between the investments which the Fund
may purchase and the investments measured by the indices which are described
herein. The Consumer Price Index is generally considered to be a measure of
inflation. The Dow Jones Industrial Average and the Standard & Poor's 500 Stock
Index are indices of common stocks which are considered to be generally
representative of the U.S. stock market. The Financial Times/ Standard & Poor's
Actuaries World Index-Europe(TM) is a managed index that is generally
representative of the equity securities of European markets. The foregoing
indices are unmanaged. The net asset value and returns of the Fund will
fluctuate.
Investors may want to compare the performance of the Fund to certificates of
deposit issued by banks and other depository institutions. 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
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subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund to that of U.S.
Treasury bills, notes or bonds. 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. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC/Donoghue's Money Fund Averages(R)
(All Taxable). As reported by IBC/Donoghue's, all investment results represent
total return (annualized results for the period net of management fees and
expenses) and one year investment results are effective annual yields assuming
reinvestment of dividends.
As of the date of this Statement of Additional Information, it is anticipated
that on December 11, 1998, or as soon as practicable thereafter, The Growth Fund
of Spain, Inc. ("GSP") will be reorganized as an open-end series of the
Corporation consisting of Class A, Class B, and Class C shares (the
"Reorganization"). Currently, GSP consists of only one class of shares, which
has no Rule 12b-1 fees or sales charges; the shares of GSP outstanding as of
December 11, 1998 will be exchanged for Class A shares of the Fund, which class
will also have no Rule 12b-1 fees but will be subject to an administrative
services fee. The performance figures shown below reflect the performance of the
Fund prior to the Reorganization, restated to reflect the sales charge of the
Fund's Class A shares. Different fees and expenses applicable to each of the
classes, including Rule 12b-1 fees applicable to the Class B and C shares
(shares of which had not been issued as of the date of this Statement of
Additional Information) and an administrative services fee applicable to each
class, will affect the performance of those classes.
For purposes of the performance computations for the Fund, it is assumed that
all dividends and capital gains distributions made by the Fund are reinvested at
net asset value in additional shares of the same class during the
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designated period. In calculating the ending redeemable value for Class A shares
and assuming complete redemption at the end of the applicable period, the
maximum 5.75% sales charge is deducted from the initial $1,000 payment (for
Class B shares and Class C shares, the applicable CDSC imposed upon redemption
of Class B shares or Class C shares held for the period would be deducted).
Standardized Return quotations for the Fund do not take into account any
applicable redemption fees or required payments for federal or state income
taxes. Standardized Return quotations are determined to the nearest 1/100 of 1%.
The Fund may, from time to time, include in advertisements, promotional
literature or reports to shareholders or prospective investors total return data
that are not calculated according to the formula set forth above ("Non-
Standardized Return"). Initial sales charges, CDSCs and redemption fees are not
taken into account in calculating Non-Standardized Return; a sales charge or
redemption fee, if deducted, would reduce the return.
The following tables summarize the calculation of Standardized and Non-
Standardized Return for the Class A shares of the Fund based on performance
information for the periods indicated. During the periods covered by the tables,
the Fund was subadvised by BSN Gestion. This subadvisory relationship was
discontinued in connection with the reorganization transaction.
<TABLE>
<CAPTION>
STANDARDIZED RETURN*
CLASS A
--------------------
<S> <C>
One year ended May 31, 1998................... 39.05%
Five years ended May 31, 1998................. 23.70%
Inception(#) to May 31, 1998.................. 12.57%
NON-STANDARDIZED RETURN**
CLASS A
-----
One year ended May 31, 1998................... 47.53%
Five years ended May 31, 1998................. 25.18%
Inception(#) to May 31, 1998.................. 13.38%
</TABLE>
- ---------------
* The Standardized Return figures for Class A shares reflect the deduction of
the maximum initial sales charge of 5.75%, but do not reflect any applicable
redemption fees and have not been restated to reflect expected differences in
the Fund's expense structure as an open-end investment company.
** The Non-Standardized Return figures do not reflect the deduction of any
initial sales charge or any applicable redemption fee, and have not been
restated to reflect expected differences in the Fund's expense structure as
an open-end investment company.
# The inception date for The Growth Fund of Spain, Inc. (and, consequently, of
the Fund's Class A shares) was February 14, 1990. As of the date of this
Statement of Additional Information, the Fund had not issued any Class B or
Class C shares.
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OFFICERS AND DIRECTORS
The officers and directors of the Corporation, their birth dates, their
principal occupations and their affiliations, if any, with the Adviser, and KDI,
the principal underwriter, are as follows:
*DANIEL PIERCE (3/18/34) Director and Chairman of the Board, Two International
Place, Boston, Massachusetts; Managing Director, Scudder Kemper Investments,
Inc.
*MARK S. CASADY (9/21/60) President, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper Investments, Inc.
JAMES E. AKINS (10/15/26) Director, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly a
career United States Foreign Service Officer, Energy Adviser for the White House
and United States Ambassador to Saudi Arabia, 1973-76.
ARTHUR R. GOTTSCHALK (2/13/25) Director, 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; Member, Illinois state Senator; Vice
President, The Reuben H. Donnelley Corp.
FREDERICK T. KELSEY (4/25/27) Director, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Benchmark Funds, formerly, Trustee of
The Pilot Funds.
FRED B. RENWICK (2/1/30) Director, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Industrial Program, Inc., Director, the Wartburg Home Foundation; Chairman
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly member of the Investment Committee
of Atlanta University Board of Trustees; formerly Director of Board of Pensions,
Evangelical Lutheran Church of America.
JOHN B. TINGLEFF (5/4/35) Director, 2015 South Lake Shore Drive, Harbor Springs,
Michigan; Retired; formerly, President, Tingleff & Associates (management
consulting firm); formerly, Senior Vice President, Continental Illinois National
Bank & Trust Company.
JOHN G. WEITHERS (8/8/33) Director, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company, President of the
Members of the Corporation and Trustee, DePaul University; Director, Systems
Imagineering, Inc.
*PHILIP J. COLLORA (11/15/45) Vice President and Secretary, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President, Scudder Kemper Investments,
Inc.
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<PAGE> 112
*DIEGO ESPINOSA (6/30/62) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
*JOAN R. GREGORY (8/4/45) Vice President, 345 Park Avenue, New York, New York;
Vice President, Scudder Kemper Investments, Inc.
*JOHN R. HEBBLE (6/27/58) Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
*MAUREEN E. KANE (2/14/62) Assistant Secretary, Two International Place, Boston,
Massachusetts; Vice President, Scudder Kemper Investments, Inc.; formerly,
Assistant Vice President of an unaffiliated investment management firm; prior
thereto, Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
*THOMAS W. LITTAUER (4/26/55) Vice President, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper Investments, Inc.; formerly,
Head of Broker Dealer Division of an unaffiliated investment management firm
during 1997; prior thereto, President of Client Management Services of an
unaffiliated investment management firm from 1991 to 1996.
*BRENDA LYONS (2/21/63), Assistant Treasurer, Treasurer, Two International
Place, Boston, Massachusetts; Senior Vice President, Scudder Kemper Investments,
Inc.
*ANN M. McCREARY (11/6/56) Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper Investments, Inc.
*CAROLINE PEARSON (4/1/62) Assistant Secretary, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.;
formerly, Associate, Dechert Price & Rhoads (law firm) 1989 to 1997.
*KATHRYN L. QUIRK (12/3/52) Director and Vice President, 345 Park Avenue, New
York, New York; Managing Director, Scudder Kemper Investments, Inc.
*SHERIDAN P. REILLY (2/27/52) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
*LINDA J. WONDRACK (9/12/64) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
*ELIZABETH C. WERTH (10/1/47) Assistant Secretary, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Scudder Kemper Investments, Inc.
- ---------------
* Interested persons of the Corporation as defined in the 1940 Act.
COMPENSATION OF OFFICERS AND DIRECTORS
The Directors and Officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts
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<PAGE> 113
estimated to be paid to or accrued for those Directors who are not designated
"interested persons" by the Corporation during the 1999 fiscal year. The
information in the last column is for calendar year 1997.
<TABLE>
<CAPTION>
ESTIMATED
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM KEMPER FROM KEMPER FUND
GLOBAL/INTERNATIONAL COMPLEX PAID
NAME OF BOARD MEMBERS SERIES, INC. TO BOARD MEMBERS(2)
- --------------------- -------------------- -------------------
<S> <C> <C>
James E. Akins................... $9,216 $106,300
Arthur R. Gottschalk(1).......... $9,216 $121,100
Frederick T. Kelsey(1)........... $9,216 $111,300
Fred B. Renwick.................. $9,216 $106,300
John B. Tingleff................. $9,216 $106,300
John G. Weithers................. $9,216 $106,300
</TABLE>
- ---------------
(1) Includes deferred fees and interest thereon pursuant to deferred agreements
with certain Kemper funds. Deferred amounts accrue interest monthly at a
rate equal to the yield of Zurich Money Funds-Zurich Money Market Fund.
(2) Includes compensation for service on the boards of 13 Kemper funds with 39
fund portfolios. Each Board Member currently serves as a board member of 15
Kemper Funds with 50 fund portfolios. Total compensation does not reflect
amounts paid by Scudder Kemper Investments, Inc. to the board members
regarding the combination of Scudder, Stevens & Clark, Inc. and Zurich
Kemper Investment, Inc. Such amounts totaled $42,800, $40,100, $39,000,
$42,900, $42,900 and $42,900 for Messrs. Akins, Gottschalk, Kelsey, Renwick,
Tingleff, and Weithers, respectively.
The Directors and Officers as a group owned less than 1% of the Fund's shares as
of the date of this Statement of Additional Information.
B-49
<PAGE> 114
SHAREHOLDER RIGHTS
The Fund's activities are supervised by the Corporation's Board of Directors.
The Fund is not required to and has no current intention of holding annual
shareholder meetings, although special meetings may be called for purposes such
as electing or removing Directors, changing fundamental investment policies or
approving an investment advisory contract. Shareholders will be assisted in
communicating with other shareholders in connection with removing a Director as
if Section 16(c) of the 1940 Act were applicable.
Each director serves until the next meeting of shareholders, if any, called for
the purpose of electing directors and until the election and qualification of a
successor or until such director 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 directors.
A majority of the Directors shall be present in person at any regular or special
meeting of the Directors in order to constitute a quorum for the transaction of
business at such meeting and, except as otherwise required by law, the act of a
majority of the Directors present at any such meeting, at which a quorum is
present, shall be the act of the Directors.
Any matter shall be deemed to have been effectively acted upon with respect to
the Fund if acted upon as provided in Rule 18f-2 under the 1940 Act, or any
successor rule, and in the Corporation's Articles of Incorporation. As used in
the prospectus and in this Statement of Additional Information, the term
"majority", when referring to the approvals to be obtained from shareholders in
connection with general matters affecting the Fund and all additional portfolios
(e.g., election of directors), means the vote of the lesser of (i) 67% of the
Corporation's shares represented at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy, or (ii) more than 50%
of the Corporation's outstanding shares. The term "majority," when referring to
the approvals to be obtained from shareholders in connection with matters
affecting the Fund or any other single portfolio (e.g., annual approval of
investment management contracts), means the vote of the lesser of (i) 67% of the
shares of the portfolio represented at a meeting if the holders of more than 50%
of the outstanding shares of the portfolio are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of the portfolio.
In the event of the liquidation or dissolution of the Corporation, shares of the
Fund are entitled to receive the assets attributable to that Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Fund, of any general assets not attributable to the
Fund that are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid and non-assessable by the Corporation.
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<PAGE> 115
FINANCIAL STATEMENTS
The financial statements appearing in the Fund's Annual Report to Shareholders
for the fiscal year ended November 30, 1997, and its Semiannual Report to
Shareholders for the period ended May 31, 1998 are incorporated by reference
herein. The financial statements appearing in the Fund's Annual Report to
Shareholders for the fiscal year ended November 30, 1997 have been incorporated
by reference herein in reliance on the report of Ernst & Young LLP, independent
auditors, given on their authority as experts in auditing and accounting. The
principal business address of Ernst & Young LLP is 233 South Wacker Drive,
Chicago, Illinois 60606.
ADDITIONAL INFORMATION
OTHER INFORMATION
The CUSIP number of the Class A shares of the Growth Fund Of Spain is
487916-81-9.
The CUSIP number of the Class B shares of the Growth Fund Of Spain is
487916-79-3.
The CUSIP number of the Class C shares of the Growth Fund Of Spain is
487916-78-5.
Effective as of the Fund's 1998 fiscal year, the Fund's fiscal year end has been
changed to October 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Adviser in light of the Fund's investment objective and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
The Fund's prospectus and this Statement of Additional Information omit certain
information contained in the Registration Statement and its amendments which the
Fund has filed with the SEC under the 1933 Act and reference is hereby made to
the Registration Statement for further information with respect to the Fund and
the securities offered hereby. The Registration Statement and its amendments,
are available for inspection by the public at the SEC in Washington, D.C.
B-51
<PAGE> 116
APPENDIX A--RATINGS OF FIXED INCOME
INVESTMENTS
STANDARD & POOR'S RATINGS GROUP BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
AAA. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other
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<PAGE> 117
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.
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<PAGE> 118
APPENDIX B--INFORMATION ABOUT SPAIN AND PORTUGAL
I. KINGDOM OF SPAIN
Note: Certain numbers in this Appendix B have been rounded for ease of
presentation. Since most calculations have been made on unrounded figures, the
sum of the component figures in many tables presented may not precisely equal
the totals shown.
AREA AND POPULATION
The Kingdom of Spain ("Spain") includes 50 provinces, 47 of which are situated
on the mainland of the Iberian Peninsula, with the remaining three being the
Baleares Islands and the two provinces of the Canary Islands. In addition, the
cities of Ceuta and Melilla on the northern coast of Africa are part of the
Spanish territory. The total land area is 504,782 sq. km. As of mid 1997, the
population was 39.3 million. The major cities are Madrid, Barcelona, Valencia
and Seville.
GOVERNMENT
Spain is a democratic, constitutional monarchy. In 1975, the current monarch,
Juan Carlos de Borbon, was proclaimed King of Spain. On December 6, 1978, a new
Constitution was ratified by national referendum that provides for the existence
of political parties, universal suffrage, parliamentary elections by secret and
direct ballot every four years, and the existence of a Parliament with two
legislative chambers--the Congress of Deputies, with 350 members and the Senate
with 248 members.
The Constitution defines the authority of the executive, legislative and
judicial powers. The King is commander-in-chief of the armed forces. He names
the Prime Minister, who is the head of Government, after consulting the Congress
of Deputies and Senate, and calls referenda to decide on major political issues.
The Prime Minister is empowered to dissolve parliament and call elections and
govern with the assistance of a Cabinet, which is collectively responsible to
the Congress of Deputies.
Members of the Congress of Deputies and the Senate serve four-year terms,
barring dissolution, and elect their own presidents. Although each house can
initiate legislation, the Congress of Deputies has the power of final approval
on all legislation.
The judicial system is headed by a Supreme Tribunal (Tribunal Supremo) which is
responsible for the final determination of all civil and criminal cases brought
on appeal from the lower courts. The lower courts consist of territorial courts,
provincial courts, regional courts, courts of the first instance and municipal
courts. There is also a Constitution Tribunal which has jurisdiction to resolve
matters affecting constitutional issues.
B-54
<PAGE> 119
At the last election in March 1996, the conservative Partido Popular (PP)
narrowly defeated the socialist Partido Socialista Obrero Espanol (PSOE) which
had governed the country since 1982. However, the PP fell 20 seats short of a
parliamentary majority. After some 57 days of negotiations, two conservative
regional parties--the Catalonian Convergencia i Unio (CiU), and the Basque
Nationalist Party (PNV)--agreed to support the PP but not to enter a coalition
government. Jose Maria Aznar of the PP became the Prime Minister.
INTERNATIONAL ORGANIZATIONS
Spain is a member of the United Nations, the International Monetary Fund (IMF),
the World Bank, the Organization for Economic Cooperation and Development
(OECD), the North Atlantic Treaty Organization (NATO), the World Trade
Organization (WTO) and the European Union (EU).
THE ECONOMY
After accession to the EU in 1985, foreign capital, particularly direct
investment, poured into Spain attracted by its low labor costs relative to those
in the core European countries. In the five years through 1990, GDP in Spain
grew at an average annual rate of 5.0%, compared with an average of 3.3% for all
of EU. Domestic demand surged, but since the structural reforms needed to
improve supply conditions were slow to take place, bottlenecks arose and
inflation began to surface. Spain became less competitive and GDP slowed to a
rate of 0.7% in 1991 and a decline of 1.2% in 1992. The peseta came under
speculative attack in the Exchange Rate Mechanism crises of 1992 and 1993. The
peseta was devalued 15.6% against the dollar in 1992 and a further 19.4% in
1993. With the resulting improvement in competitiveness, the economy began to
improve.
Among the structural reforms to the Spanish economy was a reduction in state
ownership of business. During the Socialist term in power, Seat, the car
producer was sold to Volkswagen in 1986 and Enasa (trucks) to Iveco, a division
of Fiat. Between 1989 and 1995, shares were floated in such profitable companies
as Repsol, Endesa, the electrical utility, Argentaria, the banking group, and
Telefonica. The state's share in these companies was reduced to 10%, 67%, 25%
and 20% respectively. Among the plans of the center-right government is one in
which they aim to sell off additional state shareholdings worth more than three
trillion pesetas ($23.4 billion) by the year 2000.
One of the most intractable structural problems in Spain is labor regulation,
which has resulted in an official unemployment rate, currently at 20%, or
roughly double the EU average. To a large extent the high unemployment rate is
the result of rigid labor laws inherited from the Franco regime. Workers with
permanent job contracts are protected by generous dismissal payments while new
entrants have great difficulty in finding a new job because of the reluctance of
employers to take on additional staff because of the very same generous
dismissal payments. In spite of the introduction of fixed-term contracts in 1984
and the reforms of 1996 that have reduced the cost of overtime
B-55
<PAGE> 120
hours and encouraged part-time contracts, there has been no change in the legal
severance provisions which are still among the highest of the OECD. Justified
layoffs, for both collective and individual dismissals, require a minimum
severance payment ranging from 20 days' wages per year of seniority to a maximum
of 12 months. Unjustified dismissals carry with them 45 days' wages per year of
seniority to a maximum of 42 months, in addition to which the firm must pay up
to 60 days' retroactive wages during the appeals process.
GROSS DOMESTIC PRODUCT
Gross Domestic Product (GDP) in Spain was approximately $531 billion dollars in
1997, ranking fifth among the fifteen nations in the European Union. In terms of
per capita income, however, it ranked fourth from the bottom, exceeding only
Portugal, Greece and Turkey.
The following table sets forth selected economic data relating to Spain for the
indicated periods.
SELECTED ECONOMIC DATA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GDP at current market prices
(billion pesetas)......... 59,105 60,953 64,789 69,761 73,572 77,786
% Change.................... 7.6% 3.1% 6.3% 7.7% 5.5% 5.7%
GDP at 1990 prices (billion
pesetas).................. 51,635 51,016 52,098 53,546 54,708 56,672
% Change.................... 0.7% -1.2% 2.1% 2.8% 2.2% 3.6%
CPI (1990=100).............. 112.2 117.3 122.9 128.6 133.2 135.8
% Change.................... 5.9% 4.5% 4.8% 4.6% 3.6% 2.0%
Industrial Production....... 96.5 91.9 98.6 103.2 102.5 109.5%
% Change.................... -2.7% -4.8% 7.3% 4.7% -0.7% 6.8%
Unemployment Rate........... 18.4% 22.7% 24.2% 22.9% 22.2% 20.8%
General Gov. Deficit/GDP.... -3.6% -6.8% -6.3% -6.6% 4.4% -3.0%
General Gov. Debt/GDP....... 48.3% 60.5% 63.0% 65.7% 69.6% 68.1%
Current Account (mil.
US$)...................... -21,537 -6,017 -6,922 513 503 2,486
Current Account/GDP......... -3.7% -1.3% -1.4% 0.1% 0.1% 0.5%
Population (millions)....... 39.0 39.1 39.2 39.2 39.3 39.3
Average Exchange Rate....... 102.38 127.26 133.96 124.69 126.66 146.41
GDP in US$ Billions......... $ 577.3 $ 479.0 $ 483.6 $ 559.5 $ 580.9 $ 531.3
GDP Per Capita.............. $14,770 $12,234 $12,335 $14,247 $14,772 $13,675
</TABLE>
- ---------------
Sources: IMF, International Financial Statistics, August 1998. European
Commission, 1977 Broad Economic Policy Guidelines, No. 64, 1997
Spain produces a wide range of agricultural products, both for domestic and
export markets. Among them are rice, olive oil, wine, feed grains, vegetables
and citrus fruits. In addition, Spain produces an array of forestry products,
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<PAGE> 121
including wood for construction and furniture, cork, firewood and resins. Spain
has significant deposits of metals and minerals, including iron ore, mercury,
potash, uranium, tungsten, lead, zinc and pyrites. The main industries of Spain
include iron and steel, aluminum, motor vehicles, electronic equipment and
machinery, chemicals, metal products, coal mining and electricity generation.
Tourism is one of the largest components of the service sector and a significant
source of foreign exchange.
The following table shows the changes in the distribution of GDP by type of
activity between 1986 and 1996.
GROSS DOMESTIC PRODUCT BY TYPE OF ACTIVITY
<TABLE>
<CAPTION>
PERCENT DISTRIBUTION
---------------------
1986 1997
---- ----
<S> <C> <C>
Agriculture, Hunting, Forestry, and Fishing....... 5.6% 4.3%
Mining, Mfg & Gas................................. 29.2% 28.0%
Construction...................................... 6.5% 7.0%
Services.......................................... 53.2% 55.0%
Adjustments....................................... 5.6% 5.8%
100.0% 100.07%
</TABLE>
- ---------------
OECD Quarterly National Accounts, 1998:2 P226
FOREIGN TRADE AND BALANCE OF PAYMENTS
Since accession to EU in 1986, Spain's trade with other EU members has increased
significantly as can be seen in the following table.
GEOGRAPHIC BREAKDOWN OF TRADE
<TABLE>
<CAPTION>
EXPORTS IMPORTS
--------------------- ---------------------
1986 1987 1986 1987
---- ---- ---- ----
(MILLIONS OF US$)
<S> <C> <C> <C> <C>
Total.................. $27,206 $104,134 $35,056 $122,753
(PERCENT OF TOTAL)
European Union......... 62.5% 69.6% 53.4% 65.0%
France............... 17.9% 18.4% 11.7% 17.5%
Germany.............. 11.7% 13.5% 15.1% 14.8%
Italy................ 8.0% 9.8% 7.3% 9.4%
Portugal............. 3.5% 9.0% 1.3% 2.7%
U.K.................. 8.8% 8.1% 7.7% 8.1%
Other................ 12.6% 10.8% 10.3% 12.6%
U.S.................... 9.3% 4.4% 9.8% 6.3%
Japan.................. 1.1% 1.1% 4.9% 2.8%
All Other.............. 27.1% 24.9% 31.8% 25.9%
100.0% 100.0% 100.0% 100.0%
</TABLE>
- ---------------
Source: IMF, Direction of Trade Yearbook, 1998.
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<PAGE> 122
Spain typically runs a deficit on the balance of trade and the balance on income
(interest and dividend payments). Services and transfers regularly report
surpluses. On the capital account, direct investment has declined from the high
level of 1992. Portfolio investment has tended to be volatile. The overall
balance, however, has improved and the Current Account as a percentage of GDP
has gone from negative 3.7% in 1992 to positive 0.5% in 1997.
BALANCE OF PAYMENTS
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(MILLIONS US$)
<S> <C> <C> <C> <C> <C> <C>
Trade Balance.......... (30,420) (14,946) (14,833) (18,244) (16,027) (13,347)
Balance on Services.... 12,607 11,108 14,712 17,898 19,789 19,227
Balance on Income...... (5,790) (3,573) (8,193) (3,878) (5,799) (6,396)
Transfers Net.......... 2,066 1,393 1,388 4,737 2,540 (3,002)
Current Account........ (21,537) (6,017) (6,927) 513 503 2,486
Direct Investment
Net.................. 11,084 5,492 5,528 2,551 1,246 (4,486)
Portfolio Investment
Net.................. 9,358 49,212 (22,313) 20,879 (1,308) (6,359)
Equity Securities
Net................ 3,503 5,727 107 3,681 (631) (5,388)
Debt Securities
Net................ 5,855 43,485 (22,420) 17,198 (677) (971)
Other Investments
Net.................. (14,483) (54,983) 22,254 (31,045) 20,179 19,534
Capital Acct n.i.e. ... 3,726 3,168 2,722 6,285 6,420 5,965
Errors and Omissions... (5,957) (1,681) (1,213) (5,598) (2,764) (5,385)
Overall Balance........ (17,809) 4,808 50 (6,415) 24,278 11,755
</TABLE>
- ---------------
IFS January 1998:660
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<PAGE> 123
EXCHANGE RATES
The following table shows the exchange rate of the peseta relative to the U.S.
dollar at the end of each year and the average for the year. The percent of
depreciation or appreciation is also shown.
EXCHANGE RATES
<TABLE>
<CAPTION>
CHANGE CHANGE
END OF RELATIVE RELATIVE
PERIOD TO US$ AVERAGE TO US$
------ -------- ------- --------
<S> <C> <C> <C> <C>
1986....................... 132.40 140.05
1987....................... 109.00 21.5% 123.48 13.4%
1988....................... 113.45 -3.9% 116.49 6.0%
1989....................... 109.72 3.4% 118.38 -1.6%
1990....................... 96.91 13.2% 101.93 16.1%
1991....................... 96.69 0.2% 103.91 -1.9%
1992....................... 114.62 -15.6% 102.38 1.5%
1993....................... 142.21 -19.4% 127.26 -19.6%
1994....................... 131.74 8.0% 133.96 -5.0%
1995....................... 121.41 8.5% 124.69 7.4%
1996....................... 131.28 -7.5% 126.66 -1.6%
1998....................... 151.04* -0.4% 153.14 -4.4%
</TABLE>
- ---------------
* July
** January -- July
IMF, International Financial Statistics, September 1998
II. PORTUGUESE REPUBLIC
AREA AND POPULATION
The Portuguese Republic ("Portugal") is situated in Southwest Europe on the
western portion of the Iberian Peninsula, bounded on the north and east by Spain
and on the south and west by the Atlantic Ocean. The country also comprises the
Azores and Madeira Islands in the Atlantic Ocean. The total area including the
islands is 91,985 sq. Km. (35,515 sq. miles).
The population of Portugal, including the Azores and Madeira Islands, was 9.8
million according to the 1991 census. The population is concentrated along the
Atlantic coast. Lisbon, the capital and largest city and seaport, comprises some
1.9 million inhabitants and Porto, the second largest city and seaport comprises
1.l million.
GOVERNMENT
Portugal is a republic governed under a constitution approved in 1976 and
revised in 1982, 1989, 1992 and 1997. The President is elected to a 5-year
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<PAGE> 124
term, as head of state. The current president elected in January 1996 is Jorge
Sampaio. Parliament proposes the Prime Minister to the president who then makes
the appointment. The Prime Minister, who is the country's chief administrative
official, presides over a cabinet of ministers. The current Prime Minister is
Antonio Guterres.
Legislative power is vested in a unicameral parliament, the Assembly of the
Republic. Members of the Assembly are elected under a system of proportional
representation and serve 4-year terms. The Assembly had a total of 230 seats in
the early 1990s.
The judicial system is headed by the Supreme Court, which is made up of a
president and 29 judges. Below the Supreme Court are courts of appeal and
ordinary and special district courts. There is also a Constitutional court.
The leading political parties are the Socialist Party (PS), the Social
Democratic Party (CDS), the Popular Party (PP) and the Communist Party (PCP) The
socialist party won the October 1995 election, ending 10 years of government by
the social democrats. Both of the main parties have similar economic policies,
with participation in European Monetary Union (EMU) and fulfilling Maastricht
criteria as the center piece of fiscal and monetary policies.
INTERNATIONAL ORGANIZATIONS
Portugal is a member of the United Nations, the International Monetary Fund
(IMF), the World Bank, the Organization for Economic Cooperation and Development
(OECD), the North Atlantic Treaty Organization (NATO), the World Trade
Organization (WTO) and the European Union (EU).
THE ECONOMY
When Portugal joined the European Union (EU) in 1986, the economy was in need of
major restructuring. Inflation, unemployment and the public sector deficit were
high. Moreover the industry sector was antiquated and the State was heavily
involved in the economy. Protectionism, underdeveloped financial markets and
rigidity in labor markets characterized the economy. Monetary policy was based
on capital controls and credit ceilings. Financial institutions were sheltered
from foreign competition and the money market was poorly developed. The Central
Bank, which could not be considered independent, controlled liquidity through
credit ceilings imposed on the overwhelmingly public banking system. Exchange
rate policy was based on a crawling peg aimed at alleviating the chronic current
account deficit which, in 1982 peaked at 12% of GDP. Over the period from
1976-1985, the compound real effective exchange rate depreciation of the escudo
amounted to 40% while inflation was running at a rate of 20% annually.
After joining the EU, tax reforms were introduced which lowered effective
marginal rates, broadened the tax base and curtailed opportunities for evasion.
The value added to tax (VAT) was introduced between 1984 and 1986 and the income
tax was subject to a major reform in 1989. Institutional
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<PAGE> 125
changes strengthened Central Bank autonomy by cutting off the government's
automatic access to Banco De Portugal credit and making its statutes broadly
aligned to the requirements of the European Union Treaty. Portugal moved from a
highly regulated financial market to financial liberalization.
A far-reaching privatization program was started in 1989. In 1988, public sector
participation in the market economy accounted for close to 19% of total value
added, around 6.5% of employment and almost 15% of total investment. State-owned
enterprises were dominant in financial service, transport, energy,
communications, steel, cement brewing, shipbuilding, pulp and tobacco.
Initially, the program focused on the financial services sector. The stock
exchange was modernized and privatized.
On April 6, 1992, the escudo joined the Exchange Rate Mechanism (ERM) in the
wide fluctuation band (6%) thereby establishing exchange rate stability as the
cornerstone of its monetary policy. Remaining controls on capital movements were
abolished at the end of that year, ahead of the schedule previously agreed with
the EU.
Turmoil in the ERM in 1992 led to widening of bands to 15% in August 1993. The
Central parity of the escudo had to be devalued twice during that period. In
spite of realignments, the new monetary policy based on exchange rate stability
as an intermediate objective has remained a cornerstone of economic policy in
Portugal. In March 1995 the central parity of the escudo within the ERM was
devalued by 3.5%, half the size of the devaluation of the Spanish peseta. This
realignment was not preceded by market pressure on the escudo, but was aimed at
limiting losses in competitiveness relative to partner countries.
Since joining the EU, Portuguese output increased significantly in the period
from 1986-1990, rising on average at 5% a year compared with an average of 1.6%
in the previous five-year period. The rate of inflation, which had been close to
30% in 1984, was brought down to about 12% in 1990. Output was affected
adversely by the oil shock of 1979-80 and the recession of 1993, but began to
pick up in 1994 and has subsequently continued to grow in each year. Inflation
has continued to abate. The CPI rose 3.2% in 1996 and 2.1% in 1997. At the same
time, the balance of payments has remained strong and the overall general
government deficit fell from above 6% of GDP in 1993 to 3.2% in 1996 and to
2.45% in 1997.
GROSS NATIONAL PRODUCT
In 1997, GDP amounted to approximately $102 billion. The European Commission has
stated that, measured in purchasing power parity, Portuguese GDP per capita rose
from 50% of the European Union (EU) average in 1985 to about 70% in 1996.
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The following table sets forth selected economic data relating to Portugal for
the indicated periods:
SELECTED ECONOMIC DATA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GDP at current market
prices (billion
escudo)............ 12,759.0 13,463.1 14,628.9 15,817.7 16,803.6 17,905.2
% Change............. 12.8% 5.5% 8.7% 8.1% 6.2% 6.6%
GDP at 1995 prices
(billion escudo)... 15,214.3 14,999.8 15,364.9 15,817.8 16,320.6 16,920.3
% Change............. 1.9% -1.4% 2.4% 2.9% 3.2% 3.7%
CPI (1990=100)....... 121.3 129.6 135.9 141.5 146.0 149.1
% Change............. 8.9% 6.8% 4.9% 4.1% 3.2% 2.1%
Industrial
Production......... 99.5 95.9 94.8 99.4 100.8 103.3
% Change............. -1.9% -3.6% -1.1% 4.9% 1.4% 2.5%
Unemployment Rate.... 4.2% 5.6% 6.9% 7.2% 7.3% 6.8%
General Gov.
Deficit/GDP........ -3.6% -6.9% -5.8% -5.1% -4.0% -2.5%
General Gov.
Debt/GDP........... 60.7% 64.3% 66.7% 66.4% 65.6% 62.4%
Current Account (mil.
US$)............... -184 233 -2,196 -144 -1,491 -1,877
Current Account/GDP.. -0.2% 0.3% -2.5% -0.1% -1.4% -1.8%
Population
(millions)......... 9.83 9.84 9.84 9.85 9.87 9.88
Average Exchange
Rate............... 135.00 160.80 165.99 151.11 154.24 175.31
GDP in US$
Billions........... $ 94.5 $ 83.7 $ 88.1 $ 104.7 $ 108.9 102.1
GDP Per Capita....... $ 9,612 $ 8,509 $ 8,956 $ 10,630 $ 11,042 $ 10,342
</TABLE>
- ---------------
Sources: OECD, Quarterly National Account, No. 2, 1998
and IMF, International Financial Statistics, August, 1998; European Commission,
1977
Broad Economic Policy Guidelines, No. 64, 1997.
While the importance of agriculture in the economy has declined since accession
to the EU, approximately 11% of the labor force is still engaged in agriculture,
having declined from over 20% in 1986. Only Greece among EU members has a higher
proportion of the population currently employed in agriculture. Approximately
34% of Portugal's total land area is covered by forest. The country is the
world's largest producer and exporter of cork and cork products and is an
increasingly important supplier of wood pulp. Portugal has substantial reserves
of copper ore, iron ore, pyrites and uranium.
The manufacturing sector accounted for about 24% of GDP and employed about 23%
of the labor force in 1993, the latest year for which data are available. The
principal manufacturing industries include metal products, textiles, chemicals
and allied products, wood pulp and cork and base metallurgy. The construction
sector employs approximately 8% of the labor force.
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Tertiary production includes retail and wholesale trade, utilities, finance,
transportation and communication, and services. Trade and services have been the
fastest growing sectors of the economy. The growth in tourism is reflected in
the trade sector which includes hotels and restaurants.
The following table shows how employment by industry has changed since accession
to the EU in 1986.
CIVILIAN EMPLOYMENT BY SECTOR
<TABLE>
<CAPTION>
1986 % OF 1995 % OF
(THOUS) TOTAL (THOUS) TOTAL
------- ----- ------- -----
<S> <C> <C> <C> <C>
Agriculture...................... 890.3 21.9% 477.5 11.4%
Mining........................... 27.2 0.7% 16.8 0.4%
Manufacturing.................... 995.3 24.5% 971.9 23.2%
Construction..................... 332.1 8.2% 340.3 8.1%
Electricity, gas and water....... 31.9 0.8% 34.6 0.8%
Transport and communication...... 174 4.3% 183.1 4.4%
Trade............................ 598.6 14.7% 819.2 19.5%
Banking, insurance, real
estate......................... 127 3.1% 137.4 3.3%
Personal services................ 887 21.8% 1,213.7 28.9%
Total............................ 4,063.4 4,194.5
</TABLE>
- ---------------
OECD, Economic Survey Portugal 1998:111
EXTERNAL TRADE AND BALANCE OF PAYMENTS
Since accession to EU in 1986, Portugal's trade with other EU members has
increased significantly as illustrated in the following table:
GEOGRAPHIC BREAKDOWN OF TRADE
<TABLE>
<CAPTION>
EXPORTS IMPORTS
1986 1997 1986 1997
---- ---- ---- ----
(MILLIONS US$)
<S> <C> <C> <C> <C>
Total........................... $7,243 $21,195 $9,646 $35,720
PERCENT OF TOTAL
European Union.................. 75.4% 78.3% 62.1% 76.1%
France........................ 15.2% 13.7% 10.1% 11.1%
Germany....................... 14.7% 21.8% 14.3% 15.6%
Italy......................... 4.0% 4.2% 8.0% 8.6%
Spain......................... 6.9% 14.9% 11.0% 25.5%
U.K........................... 14.2% 12.0% 7.5% 7.5%
Other......................... 20.5% 11.6% 11.2% 7.9%
U.S............................. 7.0% 5.4% 7.0% 2.9%
Japan........................... 0.8% 0.7% 3.6% 2.5%
All Other....................... 16.8% 15.6% 27.4% 18.5%
100.0%.. 100.0% 100.0% 100.0%
</TABLE>
- ---------------
Source: IMF, Direction of Trade Yearbook 1998.
(Accessed through Haver Analytics)
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Portugal typically runs a deficit on the balance of trade which is offset, in
part, by tourism receipts and unilateral transfers. Tourism receipts are
expected to increase sharply with Expo 98, which runs from May 22 through
September 30, 1998. Transfers include emigrant remittances and, in recent years,
transfers from EU. The overall balance of payments is shown in the following
table:
BALANCE OF PAYMENTS
(MILLIONS US$)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Trade Balance......... (9,387) (8,050) (8,321) (8,910) (9,340) (9,551)
Balance on Services... 765 1,365 1,269 1,613 1,375 1,206
Balance on Income..... 611 219 (565) (21) (352) (245)
Transfers Net......... 7,826 6,699 5,421 7,132 6,827 6,712
Current Account....... (184) 233 (2,196) (144) (1,491) (1,877)
Direct Investment
Net................. 1,186 1,387 983 (3) (57) 71
Portfolio Investment
Net................. (3,064) 1,827 478 (1,083) 1,746 1,133
Equity Securities
Net.............. 561 411 496 (338) 958 1,776
Debt Securities
Net.............. (3,625) 1,416 (18) (745) (2,704) (643)
Other Investments
Net................. 928 (6,246) (409) 4,110 6,553 2,750
Errors and
Omissions........... 978 (48) (287) (3,181) (2,813) (2,483)
Overall Balance....... (156) (2,848) (1,430) (300) 445 (407)
</TABLE>
- ---------------
IMF, International Financial Statistics, September 1998
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<PAGE> 129
EXCHANGE RATES
The following table shows the exchange rate of the escudo relative to the US
dollar at the end of each year and the average for the year. The percent of
depreciation or appreciation is also shown.
VALUE OF ESCUDO RELATIVE TO US$
<TABLE>
<CAPTION>
CHANGE RELATIVE TO CHANGE RELATIVE TO
END OF PERIOD US$ AVERAGE US$
------------- ------------------ ------- ------------------
<S> <C> <C> <C> <C>
1986 146.12 149.59
1987 129.87 12.5% 140.88 6.2%
1988 146.37 -11.3% 143.95 -2.1%
1989 149.84 -2.3% 157.46 -8.6%
1990 133.60 12.2% 142.56 10.5%
1991 134.18 -0.4% 144.48 -1.3%
1992 146.76 -8.6% 135.00 7.0%
1993 176.81 -17.0% 160.80 -16.0%
1994 159.09 11.1% 165.99 -3.1%
1995 149.41 6.5% 151.11 9.9%
1996 156.39 -4.5% 154.24 -2.0%
1997 183.33 -14.7% 175.31 -12.0%
1998 182.15* 0.6% 184.79** -5.0%
</TABLE>
- ---------------
* End of July
** Average January - July
IMF, International Financial Statistics, September 1998
III. SPANISH AND PORTUGUESE MARKET INFORMATION
THE SPANISH SECURITIES MARKETS
In 1988 the Securities Market Act (known by its Spanish acronym as LVM)
established the framework for the operation of the securities markets in Spain.
The securities markets, and all market participants are supervised by the
National Securities Market Commission ("Comision National de Mercado de Valores"
or "CNMV"), an independent public entity, and the key institution of the Spanish
securities markets. Each of the four Spanish stock exchanges is managed by a
managing company ("Sociedad Rectora"), a private limited liability company
formed and owned by the authorized dealers and broker-dealers ("sociedades de
valores" and "agencias de valores") that are members of the relevant stock
exchange. Each managing company is in turn an equal member of another company,
the "Stock Exchange Company" ("Sociedad de Bolsas"), the main function of which
is to oversee the Automated Quotation System, which is the computerized system
through which trading in equity securities on the Spanish stock exchanges takes
place primarily.
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Shares (equity securities), government securities, bonds, treasury bills and
other financial instruments are traded on the exchanges. All transactions must
be effected through an official dealer or broker-dealer member of the relevant
stock exchange, except in certain exceptional cases. Brokerage commissions are
freely fixed by the dealers and broker-dealers. However, they are overseen by
the CNMV, and have to be publicly published and may not exceed the maximum rates
established by the Spanish Government.
In order for securities to be listed for trading on any exchange, the
authorization of the relevant exchange is required. Additionally, trading on the
Automated Quotation System requires previous listing on at least two Spanish
stock exchanges, and authorization of the CNMV with a favorable report of the
Stock Exchange Company. Spanish legislation establishes rules for the exchanges
with respect to listing and disclosure requirements, including examinations of
financial statements.
Equity Markets. Securities are traded on the four exchanges via the Automated
Quotation System ("AQS"), which presently exists in conjunction with the
traditional oral trading on the floor of the exchange. AQS accounts for almost
90% of all trades. The principal feature of the AQS is the computerized matching
of buy and sell orders at the time of entry of the order. Each order is executed
as soon as a matching order is entered, but can be modified or canceled until
executed.
In a pre-opening session held from 9:00 a.m. to 10:00 a.m. each trading day, an
opening price is established for each security traded on the AQS based on orders
placed at that time. The computerized trading hours are from 10:00 a.m. to 5:00
p.m. (except for some less liquid securities which trade only at 12:00 p.m. and
4:00 p.m.) during which time the trading price of a security is permitted to
vary up to 15% (or 20% with the authorization of the Stock Exchange Company) of
the previous trading day's closing price. If the quoted price exceeds this
limits, trading in the security is suspended until the next trading day.
Between 5:00 p.m. and 8:00 p.m, trades may occur outside the computerized system
without prior authorization of the Stock Exchange Company, at a price within the
range of 5% above the higher of the average price and closing price for the day
and 5% below the lower of the average price and closing price for the day, if
there are no outstanding bids or offers, as the case may be, on the system
matching or bettering the terms of the proposed off-system transaction, and if
the trade involves more than Ptas. 50 million and more than 20% of the average
daily trading volume of the stock during the preceding three months. In certain
cases, at any time before 8:00 p.m., trades may take place (with the prior
authorization of the Stock Exchange Company) at any price.
The Madrid exchange is the fourth most active in turnover terms in the European
Union after London, Frankfurt and Paris. Based on market capitalization, the
Madrid exchange, valued at $235.1 billion at the end of 1997,
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<PAGE> 131
ranked twelfth among the exchanges of the world. Market capitalization and
trading value for the past five years are given below:
MADRID STOCK EXCHANGE
<TABLE>
<CAPTION>
NO. OF COS.
LISTED MKT CAP TRADING MKT CAP TRADING
----------- ------- ------- ------- -------
ECU BILLIONS US $ BILLIONS
<S> <C> <C> <C> <C> <C>
1992..................... 400 80.3 64.6 61.9 49.8
1993..................... 379 125.5 99.9 107.1 85.2
1994..................... 378 122.5 132.1 103.1 111.1
1995..................... 366 137.9 120.9 105.4 92.4
1996..................... 361 190.2 182.5 150.0 143.9
1997..................... 388 266.6 376.3 235.1 331.8
</TABLE>
- ---------------
Bolsa de Madrid, Key Figures, January 1998
The most traded shares are shown below:
MOST TRADED SHARES IN 1997
<TABLE>
<CAPTION>
TRADING VOLUME
------------------- NO. SHARES
COMPANY SECTOR ECU MIL US$ MIL (MILLIONS)
------- ------ ------- ------- ----------
<S> <C> <C> <C> <C>
Telefonica............. Communications 24,205 19,089 3,138
Endesa................. Utilities 13,648 10,763 2,526
Repsol................. Petroleum 11,288 8,902 918
BBV.................... Banking 8,385 6,613 1,140
Iberdrola.............. Utilities 8,186 6,456 2,337
B. Santander........... Banking 7,599 5,993 969
Argentaria............. Banking 4,602 3,629 300
B. Popular............. Banking 4,035 3,182 249
BCH.................... Banking 3,127 2,466 630
Banesto................ Banking 2,300 1,814 834
</TABLE>
- ---------------
Bolsa de Madrid, Key Figures, January 1998
Stock Indexes. The main stock price indexes are the Madrid General Index, the
Total Index and the Ibex-35. The Madrid General Index reflects the increase or
decrease in share prices and is corrected for dividends and capital increases.
It has been published since December 1940 and as of 1986 the base has been
December 31, 1985=100. The Total Index measures the overall profitability of
shares based on the price performance, capital increases and dividends
reinvested. It is an indicator of total return. The index is based on December
31, 1985=100. The Ibex-35 index, made up of the 35 most liquid shares that trade
on the continuous market, acts as the underlying asset for the trading of
futures and options on indexes. The index is not corrected for dividends and the
base is December 31, 1989=3000. It has been called Ibex-35
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<PAGE> 132
since January 1991; prior to that time it was known as Fiex. The following table
shows the three indexes for the period 1987-1997 (except with respect to the
Madrid Total Index, with respect to which 1997 figures are not available).
MADRID STOCK PRICE INDEXES (END OF YEAR)
<TABLE>
<CAPTION>
MADRID MADRID
GENERAL PERCENT TOTAL PERCENT IBEX-35 PERCENT
INDEX(1) CHG. INDEX(1) CHG. INDEX(2) CHG.
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1987................. 227.2 242.8 2,407.1
1988................. 274.4 20.8% 302.8 24.7% 2,727.5 13.3%
1989................. 296.6 8.1% 336.8 11.2% 3,000.0 10.0%
1990................. 223.3 -24.7% 260.9 -22.5% 2,248.8 -25.0%
1991................. 246.2 10.3% 299.9 14.9% 2,603.3 15.8%
1992................. 214.3 -13.0% 277.8 -7.4% 2,344.6 -9.9%
1993................. 332.8 55.3% 433.0 55.9% 3,615.2 54.2%
1994................. 285.0 -14.4% 393.0 -9.2% 3,087.6 -14.6%
1995................. 320.1 12.3% 454.7 15.7% 3,630.8 17.6%
1996................. 444.8 39.0% 649.8 42.9% 5,154.8 42.0%
1997................. 632.5 42.2% 7,255.3 40.7%
1998................. 652.0(*)
</TABLE>
- ---------------
(1) 12/21/85=100
(2) 12/31/89=3,000
* As of September 21, 1998
Bolsa de Madrid, Fact Book 1997 and Financial Times September 22, 1998
As of March 20, 1998, the Madrid General Index was 859.08 up 34.4% from the end
of 1997 and the Ibex 35 was 9,797.1, up 35% over the same time period.
New Listing of Equity Securities. In order to be eligible for listing on any of
the Spanish stock exchanges, companies are required to meet certain
requirements, including the following:
(i) General requirements:
- The company must comply with all the rules and regulations to which it
is subject; including its own memorandum and articles of association.
- The annual company accounts, and if applicable, the consolidated group
accounts, must be audited. However, exceptions to this requirement may
be granted in certain cases.
- The securities must be freely transferable.
- The securities must be registered in book-entry form ("anotaciones en
cuenta").
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<PAGE> 133
(ii) Specific requirements for shares:
- The company must have a minimum share capital of Pesetas 200 million
(without taking into account shareholdings over 25%).
- The company must have enough profits (after tax) to distribute a
dividend of at least 6% of the paid up share capital in the previous
two years or in three non-consecutive years of the previous five
(although no actual distribution is required). However, exceptions to
this requirement may be granted in certain cases.
- There must be at least 100 shareholders owning individual interests in
the company of less than 25% of its share capital.
Debt Market. The debt instruments principally traded in the Spanish markets are
treasury letters of credit ("Letras del Tesoro"), treasury promissory notes
("Pagares del Tesoro"), and state bonds and debt instruments ("Bonos y
obligaciones del Estado"), a mixture of short, medium and long-term instruments.
These public debt securities, and also those issued by Autonomous Communities
(i.e., territorial political sub-divisions of the Spanish State) and local
authorities, are primarily traded in the Public Debt Market ("Mercado de Deuda
Publica en Anotaciones") which operates through a book-entry system run by the
Bank of Spain. The Bank of Spain is empowered to supervise and control the
Public Debt Market, Public debt represented by book entry can also be traded on
the Spanish stock exchanges.
The "AIAF" fixed-yield wholesale securities market is an organized but
unofficial wholesale market of securities. This market is sponsored by a private
entity ("AIAF"), governed by its own supervisory body in accordance with its
rules, and under the supervision of the CNMV. Several fixed-yield securities
which could also trade on the Spanish stock exchanges trade on this market.
The capitalization of fixed-income securities has been gradually declining while
trading has risen sharply. The explanation lies in the fact that as of 1993 the
book-entry debt of the State and regional governments has been traded via the
Bolsa de Madrid's electronic system, however capitalization of this debt is
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<PAGE> 134
not included in that of public sector securities on the Bolsa. Trading and
capitalization of fixed-income securities is shown below.
FIXED-INCOME SECURITIES
<TABLE>
<CAPTION>
MKT CAP TRADING
-------------------------- --------------------------
(BIL. PTAS.) (BIL. US$) (BIL. PTAS.) (BIL. US$)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
1992.......................... 4,332 42.3 922 9.0
1993.......................... 4,371 34.3 1,758 13.8
1994.......................... 3,832 28.6 4,488 33.5
1995.......................... 3,532 28.3 4,274 34.3
1996.......................... 3,334 26.3 9,540 75.3
</TABLE>
- ---------------
Bolsa de Madrid, Fact Book 1997
Futures and Options Market. The futures and options markets are organized by the
holding company Mercado Espanol de Futuros Financieros (MEFF). MEFF's
subsidiary, MEFF Renta Variable, based in Madrid, manages the trading of options
and futures on the Ibex-35 stock index and individual options on certain shares.
MEFF Renta Fija, based in Barcelona, manages the trading of futures and options
on interest rates.
SPANISH FOREIGN EXCHANGE CONTROL
Official buying and selling rates for major trading and certain other specified
currencies are fixed daily by the Bank of Spain in consultation with the banks
authorized to conduct foreign exchange business. Purchases and sales by bank
transfers of foreign currencies are centralized at the Bank of Spain, which
publishes the rates at which it settles transactions.
Foreign investors may freely invest in shares of Spanish companies and need only
obtain prior verification or authorization from the Ministry of Economy in
certain cases. Foreign non-European Union governments, state-owned entities and
state-controlled entities are required to obtain specific consent from the
relevant Spanish authorities to make capital investments in Spain.
Payments and collections derived from foreign investments in Spain are
liberalized, but certain formalities have to be fulfilled and specific
information must be supplied, in certain cases, to the Spanish exchange control
authorities. Generally payments must be channeled through licensed credit
entities.
SPANISH PUBLIC FINANCE, STATE REVENUE AND TAXATION
Each year, the Ministry of Economy and Finance, in collaboration with other
Government Ministries, prepares the State Budget and summary budgets for
autonomous public agencies and the social security system. After submission to
the Council of Ministers, the budget is presented for approval to parliament. If
the budget is not finally approved by January 1 of each year, the budget of the
previous year is automatically extended.
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<PAGE> 135
Spain has a fairy complex tax system with a wide range of direct and indirect
taxes applicable to both individuals and businesses. The majority of Spanish
taxes are imposed by the State, although certain taxes are levied by local
governments. Certain Autonomous Communities, namely the Basque Country and
Navarra, have a particular tax system adopted by their respective local
legislative bodies within the framework of the State tax system.
THE SPANISH MONETARY AND BANKING SYSTEM
Government regulation of the Spanish banking industry is administered by the
Bank of Spain, a public law entity which operates as the Spanish autonomous
central bank. In addition, it has the ability to function as a private bank.
Except in its performance of public functions, the Bank of Spain's relations
with third parties are governed by general private law and its actions and
omissions subject to the civil and commercial codes.
Among other responsibilities, the Bank of Spain is responsible for determining
and executing monetary policy with the primary goal of attaining price stability
(while the Bank of Spain's monetary policy must support the general financial
policy of the government, it is not subject to instructions from the Government
or the Ministry of Economy and Finance), maintaining, administering and managing
foreign exchange and precious metal reserves in order to execute the rate of
exchange policy formulated by the Government, promoting stability, good
performance and operation of the financial payment systems, issuing Spanish
currency, rendering treasury services to the Spanish Treasury and to the
Autonomous Communities, and rendering services related to public debt of the
State and the Autonomous Communities.
In addition, the Bank of Spain exercises general supervisory control over all
Spanish credit institutions and is entrusted with certain supervisory powers
over Spanish banks, subject to rules and regulations issued by the Ministry of
Economy and Finance. The "Fondos de Garantia de Depositos", which operate under
the guidance of the Bank of Spain, guarantee bank and savings bank deposits up
to EURO 15,000 per depositor. The minimum covered amount for all European Union
member banks will be increased to EURO 20,000 after December 31, 1999.
SPANISH CREDIT ENTITIES
The commercial banking sector in Spain is dominated by four Spanish banking
groups, which, based on statistics of the Spanish Banking Association, accounted
for approximately 68.5% of total deposits at commercial banks at December 31,
1996.
Spanish savings banks also represent an important source of competition for
retail deposits, mortgage loans and other retail banking products and services.
Since 1988, Spanish savings banks, which have traditionally been regional
institutions, have been permitted to open branches and offices through Spain.
The savings banks are divided into "Cajas de Ahorro", which are partially
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<PAGE> 136
controlled by local governments, and "Cajas Rurales", which specialize in the
agricultural sector.
Law 3/1994, of April 14, 1994 conforms Spanish law to the European Unions'
Second Banking Coordination Directive (89-646) (the "Second Banking Directive")
by providing that any financial institution incorporated in and authorized to
conduct business in another member state of the European Union will be permitted
to conduct business in Spain either through branches in Spain or on a
cross-border basis following certain procedures.
Likewise, the European Union's Investment Services Directive. No. 93/22/CE took
effect on December 31, 1995. Although Spain has not yet implemented this
Directive, it could affect financial services in Spain by permitting any
brokerage house incorporated and authorized to operate in the European Union to
offer its services in Spain. A bill of law amending the Securities Market Act
and implementing the Investment Services Directive is pending approval by the
Spanish Parliament.
THE PORTUGUESE SECURITIES MARKETS
Background and Development. The Portuguese securities markets officially opened
at the turn of the century with the establishment of the Oporto Stock Exchange
and the Lisbon Stock Exchange (the "Stock Exchanges"). The Stock Exchanges were
closed in 1974 and were reopened in the late 1970s, but it was not until 1987,
when the Portuguese Government passed additional laws designed to stimulate the
capital markets, that activity on the Stock Exchanges increased substantially.
The 1987 legislation consisted mainly of tax incentives, the relaxation of
listing and issuing requirements and a reduction in limitations on foreign
investment.
A series of legislative measures designed to reform the Stock Exchanges was
implemented in July 1991, including the transfer of their ownership from the
Portuguese Government to the brokers and dealers acting on the Stock Exchanges.
In addition, the 1991 legislation (i) established an independent regulatory
authority over the securities market, the Comissao do Mercado de Valores
Mobiliarios (the "CMVM"), to supervise the securities markets, (ii) established
a framework for the regulation of trading practices, tender offers and insider
trading, (iii) required members of the Stock Exchanges to be corporate entities,
(iv) required companies listed on the Stock Exchanges to file annual audited
financial statements and to publish semi-annual financial information, (v)
established a framework for integrating quotations on the Stock Exchanges by
computer, and (vi) provided for the transfer of shares by book-entry.
Equity securities are currently listed only on the Lisbon Stock Exchange. The
Lisbon Stock Exchange is regulated by the Ministry of Finance and the CMVM.
Shares were traded on the Oporto Stock Exchange until May 1994, when it was
closed in preparation for the introduction of the trading of derivative
securities. Trading on the Oporto Stock Exchange is now limited to derivative
instruments.
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<PAGE> 137
The official market index of the Lisbon Stock Exchange, published since February
1991 (the "BVL General Index"), is a weighted average price of shares listed on
the Official Market of the Lisbon Stock Exchange. The exact number of companies
in the index's portfolio may change each day because of new admissions,
exclusions, suspensions and the absence of quotations. Since January 1993, the
Lisbon Stock Exchange has calculated a sub-index of the 30 most frequently
traded shares listed on the Official Market, which includes the Ordinary Shares,
and their market capitalization (the "BVL 30"). Two Portuguese banks, Banco
Totta & Acores, S.A. and Banco Portugues do Atlantico, S.A., also calculate
stock market indices.
Regulation of the Exchanges. Each of the two Portuguese stock exchanges (Lisbon
Stock Exchange and Oporto Stock Exchange) is managed by a managing company
("Associacao de Bolsa"), a private limited liability association formed and
owned by the authorized dealers and brokers ("sociedades financeiras de
corretagem" and "sociedades de corretagem") that are members of the relevant
stock exchange.
The securities markets, and all market participants are supervised by the
Securities Market Commission ("Comissao do Mercado de Valores Mobiliarios"), an
independent public entity.
Shares (equity securities), government securities, bonds, treasury bills, and
other financial instruments are traded on the Lisbon Stock Exchange. Trading in
the Oporto Stock Exchange is now limited to derivative products.
Market Activity. The market capitalization of all securities traded on the LSE
at the end of 1997 was 14,388,729 million escudos or $78,487 million. Of this
total bonds accounted for $38,798 million or 49.4%; stocks, $39,065 million or
49.8% and other securities, such as participation bonds, investment trust units
and rights, $624 million or 0.8%. The LSE is one of the smaller stock markets
among the developed markets. In terms of the Morgan Stanley Capital
International list of developed markets, Portugal ranked 21 out of 23 in market
capitalization at the end of 1997. Only the Austria and New Zealand stock
markets had smaller capitalizations.
B-73
<PAGE> 138
The following table shows the market capitalization of securities on the LSE in
the various markets as of the end of 1997.
<TABLE>
<CAPTION>
MIL ESC. MIL. US$ % DISTRIBUTION
-------- -------- --------------
<S> <C> <C> <C>
Official Market.................. 13,667,609 74,554 95.0%
Bonds.......................... 6,558,200 35,773
Stocks......................... 7,007,975 38,227
Other*......................... 101,434 553
Second Market.................... 597,954 3,262 4.2%
Bonds.......................... 553,528 3,019
Stocks......................... 44,426 242
Market without................... 123,167 672 0.9%
Quotations
Bonds.......................... 996 5
Stocks......................... 109,268 596
Other.......................... 12,903 70
Subtotal......................... 14,388,728 78,487 100.0%
Addendum:
Bonds............................ 7,112,723 38,798 49.4%
Stocks........................... 7,161,669 39,065 49.8%
Other............................ 114,337 624 0.8%
14,388,729 78,487 100.0%
</TABLE>
- ---------------
* Participation bonds, Investment Trust Units and Rights of bonds, warrants and
shares.
Bolsa de Valores de Lisboa: Nota Informativa 1997
Trading in 1997 of all securities amounted to 6,450,409 million escudos or
$36,794 million. Approximately 90% of the trades took place on the Official
Market. Trading in stocks accounted for 63.7% of all trades.
B-74
<PAGE> 139
The following table shows the value of trading on the three main markets in 1997
and for both normal and special sessions.
LISBON STOCK EXCHANGE: VALUE OF TRADING IN 1997
<TABLE>
<CAPTION>
MIL ESC. MIL. US$ % DISTRIBUTION
-------- -------- --------------
<S> <C> <C> <C>
Normal Sessions
Official Market.................. 5,812,687 33,156 90.1%
Bonds............................ 2,175,717 12,411
Stocks........................... 3,598,606 20,527
Other*........................... 38,364 219
Second Market...................... 128,363 732 2.0%
Bonds............................ 102,061 582
Stocks........................... 26,302 150
Market without Quotations.......... 68,410 390 1.1%
Bonds............................ 2,131 12
Stocks........................... 45,727 261
Other............................ 20,552 117
Subtotal........................... 6,009,459 34,279 93.2%
Special Sessions
Stocks........................... 440,949 2,515 6.8%
Grand Total........................ 6,450,408 36,794
Addendum:
Bonds.............................. 2,279,909 13,005 35.3%
Stocks............................. 4,111,584 23,453 63.7%
Other.............................. 58,916 336 0.9%
6,450,409 36,794 100.0%
</TABLE>
- ---------------
* Participation bonds, Investment Trust Units and Rights of bonds, warrants and
shares.
Bolsa de Valores de Lisboa: Nota Informativa 1997
B-75
<PAGE> 140
Stocks. Both market capitalizations and trading values of stocks have grown
rapidly in recent years. The following table showing recent history of the
growth of capitalization and trading value of stocks includes the dramatic rise
in trading that took place in 1997.
LISBON STOCK EXCHANGE
<TABLE>
<CAPTION>
MARKET CAPITALIZATION TRADING VALUE
NO. --------------------------- ---------------------------
OF COS. (BIL ESCUDOS) (BIL US $) (BIL ESCUDOS) (BIL US $)
------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1987................. 143 1,150.3 8.9 213.9 1.5
1988................. 171 1,052.3 7.2 163.4 1.1
1989................. 182 1,588.4 10.6 300.4 1.9
1990................. 181 1,257.2 9.4 240.4 1.7
1991................. 180 1,284.3 9.6 406.2 2.8
1992................. 191 1,353.6 9.2 467.3 3.5
1993................. 183 2,193.0 12.4 780.3 4.9
1994................. 195 2,586.8 16.3 874.6 5.3
1995................. 169 2,743.1 18.4 634.1 4.2
1996................. 170 3,828.4 24.5 1,102.6 7.1
1997*................ 159 7,161.7 39.1 3,670.6 20.9
</TABLE>
- ---------------
* Data are for Normal Sessions. In 1997 trading value, including Special
Session, was 4,11.6 bil escudos or $23.5 bil.
LISBON STOCK EXCHANGE
Stock Price Indexes. The BVL (Bolsa de Valores de Lisboa) Index has been the
official market index of the LSE since February 18, 1991. It has a base of 1000
at January 5, 1988 and includes all listed shares on the LSE official market.
The exact number of companies in the index can change daily as a result of
admissions, exclusions, suspensions and the absence of quotations. On January
11, 1993, the LSE began to calculate the BVL 30. This index, based on January 4,
1993=1000, includes the shares of 30 companies listed on the main
B-76
<PAGE> 141
market and is weighted by their market capitalization and liquidity. These
indexes are shown below in the following table:
STOCK PRICE INDEXES
BVL GENERAL INDEX (JANUARY 5, 1988=1000)
<TABLE>
<CAPTION>
HIGH DATE LOW DATE CLOSE PCT. CHG.
---- ---- --- ---- ---------------
<S> <C> <C> <C> <C> <C> <C>
1988................. 1,145.10 8-Jan 670.70 21-Oct 722.85
1989................. 1,041.59 24-Oct 691.11 22-Jun 951.91 31.7%
1990................. 953.76 4-Jan 627.57 5-Dec 638.30 -32.9%
1991................. 747.69 18-Mar 605.66 16-Jan 623.63 -2.3%
1992................. 651.63 11-May 541.60 20-Oct 553.71 -11.2%
1993................. 848.54 31-Dec 537.20 13-Jan 848.54 53.2%
1994................. 999.46 18-Feb 801.57 20-Jun 919.95 8.4%
1995................. 933.32 12-May 842.31 22-Nov 877.69 -4.6%
1996................. 1,163.54 31-Dec 877.17 2-Jan 1,163.54 32.6%
1997................. 1,922.72 31-Dec 1,163.47 2-Jan 1,922.72 65.2%
1998*................ 3,162.51 22-Apr 1,863.70 1-Oct 1,937.83 0.79%
</TABLE>
- ---------------
* Through October 6,1998
BVL 30 INDEX (JANUARY 4, 1993=1000)
<TABLE>
<CAPTION>
HIGH DATE LOW DATE CLOSE.
---- ---- --- ---- ------
<S> <C> <C> <C> <C> <C> <C>
1993................. 1565.16 31-Dec 980.14 13-Jan 1565.16
1994................. 1863.53 18-Feb 1447.56 20-Jun 1699.54 8.6%
1995................. 1740.05 12-May 1529.44 22-Nov 1605.30 -5.5%
1996................. 2165.92 30-Dec 1602.81 2-Jan 2164.50 34.8%
1997................. 3781.31 29-Dec 2165.57 2-Jan 3757.27 73.6%
1998*................ 6176.89 2-Oct 3599.08 6-Oct 3747.89 -0.2%
</TABLE>
- ---------------
* Through October 6, 1998
Source: Lisbon Stock Exchange.
Stock prices began to rise sharply in 1997 when it became likely that Portugal
might be included in the early admittance to EMU. The rise has continued and on
March 26, the day after the European Commission recommended Portugal's inclusion
in EMU, the BVL 30 was 5556.77 or 47.9% above the close of 1997. Prices have
subsequently declined and the index was 3747.89 on October 6, 1998.
The Oporto Stock Exchange has recently launched the PSI-20 which is made up of
the 20 most representative Portuguese official market issues. It aims to serve a
reliable benchmark for the national equity market and to facilitate the
introduction of derivatives based on a single indicator for the equity market.
B-77
<PAGE> 142
Most Actively Traded Stocks. The ten most actively traded stocks on the official
market in 1997 are shown below. These ten stocks accounted for 73% of trading on
the official market.
<TABLE>
<CAPTION>
NO OF VALUE OF TRADING
SHARES ------------------------
(MILLIONS) (MIL ESC.) (MIL. US$)
---------- ---------- ----------
<S> <C> <C> <C>
Portugal Telecom..................... 100 692,198 3,948
EDP-Nominativas...................... 140 446,148 2,545
BCP Nom. e Porta. Reg................ 95 312,992 1,785
CIMPOR-Cim.Port.SGPS-Nom............. 69 285,910 1,631
Telecel-Com.Pessoais-Nom............. 17 240,688 1,373
Banco Espirito Santo (BESCL)Nom
Port.Reg........................... 38 161,935 924
Sonae Invest.-SGPS................... 23 150,396 858
Banco Portugues de Investimento
(BPI).............................. 37 124,434 710
Banco Totta & Acores (BTA)-
Nom.Port.Reg....................... 40 122,265 697
Jeronimo Martins & Filho-SGPS........ 9 91,630 523
Total of above....................... 567 2,628,596 14,994
Grand Total.......................... 1,001 3,598,606 20,527
Percent of Grand Total............... 56.6% 73.0% 73.0%
</TABLE>
- ---------------
Bolsa de Valores de Lisboa: Nota Informativa 1997
Price-to-earnings and price-to-book ratios and dividend yields of Portuguese
stocks in the Internal Finance Corporation's Global Indexes are as follows:
PORTUGAL: IFC GLOBAL INDEX
<TABLE>
<CAPTION>
DIVIDEND
P/E RATIO P/BV RATIO YIELD %
--------- ---------- --------
<S> <C> <C> <C>
1987.................................. 22.6 5.4 1.3
1988.................................. 18.0 3.7 1.3
1989.................................. 19.0 3.4 1.9
1990.................................. 11.8 1.7 2.7
1991.................................. 10.9 1.3 3.7
1992.................................. 9.0 1.0 4.7
1993.................................. 18.0 1.7 2.9
1994.................................. 20.3 1.8 3.2
1995.................................. 14.8 1.4 3.3
1996.................................. 18.1 1.7 2.3
1997.................................. 22.9 3.1 1.7
July, 1998............................ 28.8 3.6 1.8
</TABLE>
- ---------------
IFC: Emerging Markets Data Base, and Morgan Stanley Capital International,
December 1997.
B-78
<PAGE> 143
Equity Market Trading. Listed securities for both exchanges are divided into
three sections. The "Market With Official Quotations" section allows for the
listing of bonds, shares and other securities which meet certain specific
requirements established by the Securities Market Commission, the most important
of which being a significantly diversified shareholding. The "Second Market"
section and the "Market Without Official Quotation" section include the
securities of issuers that do not satisfy the requirements for listing on the
Market with Official Quotations.
Prior to 1991, all shares were traded by an open-outcry procedure; prices were
fixed once or twice a day at the market-clearing price for all bids and offers
tendered. The Official Market, created in July 1991, is a nationwide market in
which most Portuguese securities having the greatest market capitalization are
listed.
In September 1991, the Continuous Trading System, designed to provide automatic
execution of orders and continuous trading through Tradis, a computerized
trading system, was introduced. As of December 31, 1995, all of the 77 equity
securities listed on the "Market With Official Quotations" were traded through
the Continuous Trading System. All other securities continue to trade by the
traditional open-outcry procedure, but it is currently planned that they will be
gradually introduced to the Continuous Trading System.
The Continuous Trading System linked the Stock Exchanges prior to the closure of
the Oporto Stock Exchange. The principal feature of the Continuous Trading
System is the computerized matching of buy and sell orders based, first, on
matching sales price and, second, on the time of entry of the order. Each order
is executed as soon as a matching order is entered, but can be modified or
canceled up to execution.
From 9:00 a.m. to 10:00 a.m. on each trading day (from Monday to Friday
excluding public holidays), an opening market clearing price is established for
each security on the Continuous Trading System based on the bids and offers
outstanding.
On any trading day, such opening price may not change more than 30% from the
most recent closing price. If a security has not traded within the immediately
preceding four trading days, the opening price will be fixed by the market
without restriction. Computer matched trading then proceeds on the Continuous
Trading System from 10:00 a.m. until 4:00 p.m. During such time, each price may
not change more than 5% from the prior executed price without a temporary
suspension to reset the market-clearing price.
At present, there are no official market makers or independent specialists in
the Continuous Trading System and therefore orders to buy or sell in excess of
corresponding orders to sell or buy will not be executed.
Only selected brokers and dealers may effect stock exchange transactions. The
market is served by 12 dealers, who may buy and sell for their own accounts and
eight brokers. All trades on the Lisbon Stock Exchange, including through the
Continuous Trading System, must be placed through a brokerage or a
B-79
<PAGE> 144
dealer firm. Stock prices are quoted directly in Escudos per share. Any trading
of stock listed on the Continuous Trading System that takes place off-the-
market (i.e., those shares that are not traded during the 10:00 a.m. to 4:00
p.m. trading hours referred to above) must be cleared through financial
institutions.
Pursuant to Portuguese law, dividends are paid to shareholders of record as of
the date established for payment. In order to effect such payment by means of
Portugal's book-entry clearance and settlement system, under current practice,
trading of Shares will be suspended for the four business days preceding any
such dividend payment date.
Clearing and Settlement. One of the most important aspects of the reform of the
Portuguese securities market has been the creation of the Central de Valores
Mobiliarios (the "CVM"), the Portuguese central securities depositary, the
creation of the Sistema de Liquidcao de Ambito Nacional (the "National Clearing
and Settlement System"). Both organizations are owned and managed by Interbolsa,
a non-profit organization owned by the Stock Exchange Associations of Lisbon and
Oporto. The CVM provides a system for the registration and control of
securities, including custody of certificates of securities and registration of
book-entry securities.
The National Clearing and Settlement System is currently the most commonly used
clearing and settlement system in Portugal. Under this system, the broker inputs
trade information on Tradis, the nationwide computerized trading system. The
custodian bank accepts the trade, at the latest, one day after the date of the
trade, becoming the legal party to the transaction until it settles. At the end
of the third day after the trade, the electronic book-entry for the transfer of
the securities takes place in the books of the Bank of Portugal (the "Central
Bank"). This physical settlement is provisional until financial settlement takes
place on the morning of the fourth day after the trade. The net amount due to or
from each participant's account with the Central Bank is posted to the closing
balance of the previous day. Under Portuguese law, physical and financial
settlement of a trade of a security must take place before any further
transaction with respect to such security may be effected. Accordingly, short
selling is not permitted.
Listing of Equity Securities. In order to be eligible for listing on the Lisbon
Stock Exchange--Market with Official Quotations, companies are required to meet
certain requirements.
General Requirements:
- - the company must comply with all the rules and regulations to which it is
subject, including its own memorandum and articles of incorporation;
- - the company's annual accounts for the three years preceding the listing must
have been published;
- - the company must have at least two years of activity;
- - the securities must be freely transferable, and
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<PAGE> 145
- - the listing must include all the securities of the same kind.
Specific requirements for shares.
- - the expected market capitalization must be at least Escudos 500 million;
- - 25% of the shares or, at least, 500,000 shares of the same category, should be
held by the public; and
- - the company must have an adequate financial and economic position.
PORTUGUESE EXCHANGE RATES, EXCHANGE CONTROL AND OTHER POLICIES AFFECTING
SECURITY HOLDERS
Official buying and selling rates for major trading and certain other specified
currencies are fixed daily by the Bank of Portugal in consultation with the
banks authorized to conduct foreign exchange business.
Since January 1, 1993, there have been no exchange controls imposed on the
Escudo by the Portuguese Government. In connection with certain currency
transactions, some formal requirements must be fulfilled and specific
information must be supplied, in certain cases, to the Bank of Portugal.
Foreign investors may freely invest in shares of Portuguese companies and need
no prior verification or authorization with the Portuguese authorities. In
certain cases, information reporting to the supervisory authorities is required.
Some non-European Union regulated entities, such as banks, financial companies
and insurance companies, need prior authorization from the Portuguese
authorities to operate in Portugal.
As Portuguese regulations conform with EU's second Banking Coordination
Directive (86/646) and the Investment Services Directive, N!93/22/CE, any
financial institution incorporated in and authorized to conduct business in
another member state of the EU will be permitted to conduct business in
Portugal.
Monetary and Banking System. Portuguese banking and monetary policy is
administered by the Bank of Portugal, a public law entity that operates as
Portugal's autonomous central bank. Except in its performance of public
functions, the Bank of Portugal's relations with third parties is governed by
private law and its actions are subject to the civil and commercial law codes.
Among other responsibilities, the Bank of Portugal is responsible for
determining and executing monetary policy with the main purpose of attaining
price stability (not being subject to instruction from the Government),
maintaining, administering and managing foreign exchange and precious metal
reserves of Portugal, promoting stability, good performance and operation of the
financial payment system, issuing Portuguese currency, rendering treasury
services to the Portuguese treasury and rendering services related to public
debt to the State.
B-81
<PAGE> 146
In addition, the Bank of Portugal exercises, general supervisory control over
all Portuguese credit institutions (including Banks) and financial companies and
may issue regulations concerning financial activities.
IV. SPAIN AND PORTUGAL AND THE
EUROPEAN MONETARY UNION
Both Spain and Portugal signed the Accession Treaty to the European Union (EU)
in 1985 and became full members on January 1, 1986. EU membership has provided a
framework to facilitate the implementation of structural reforms needed to
modernize their economies and provide for European integration. In 1989, the
government of Spain took the Peseta into the European Monetary System (EMS) and
in 1992, the government of Portugal took the escudo into the EMS. Structural
reforms and progress in both countries on reducing inflation and their
government deficits have led to their admission to the European Monetary Union
(EMU) from its start on January 1, 1999, pursuant to the decision of the EU
Council in May of 1998.
On February 25, 1998, the government of Portugal submitted figures to the
European Commission showing that Portugal complies with the criteria for joining
EMU. The government stated that its budget deficit fell to a low of 2.45% of GDP
in 1997, down from 5.8% in 1996. It also announced inflation of 1.9% and a
public debt of 62% of GDP. At the same time the Spanish government submitted
figures showing that its public deficit was 2.6% of GDP, down from 4.6% in 1996
and 7.3% in 1993. Public debt, although above the objective of 60% of GDP, had
come down from 70.1% to 68.3%. Inflation was reported to have been just over 2%
in 1997, down from 4.3% in 1996.
The following tables show how interest rates in Spain and Portugal have
converged to core EU rates.
NOMINAL SHORT-TERM INTEREST RATES
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Belgium.................... 9.4% 8.2% 5.7% 4.7% 3.2% 3.4%
Germany.................... 9.5% 7.2% 5.3% 4.5% 3.3% 3.3%
France..................... 10.4% 8.6% 5.9% 6.6% 3.9% 3.5%
Netherlands................ 9.4% 6.9% 5.2% 4.4% 3.0% 3.3%
Portugal................... 16.2% 13.3% 11.1% 9.8% 7.4% 5.7%
Spain...................... 13.3% 11.7% 8.0% 9.4% 7.5% 5.4%
</TABLE>
B-82
<PAGE> 147
NOMINAL LONG-TERM INTEREST RATES
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Belgium................... 8.6% 7.2% 7.8% 7.5% 6.5% 5.8%
Germany................... 8.0% 6.4% 6.9% 6.8% 6.2% 5.7%
France.................... 8.6% 6.7% 7.3% 7.5% 6.3% 5.6%
Netherlands............... 8.1% 6.3% 6.9% 6.9% 6.2% 5.6%
Portugal.................. 15.4% 9.5% 10.4% 11.5% 8.6% 6.4%
Spain..................... 12.2% 10.1% 10.1% 11.3% 8.7% 6.4%
</TABLE>
- ---------------
European Commission: European Economy, 1998 No. 65, pp. 316-9
The following tables show net borrowing of governments and gross debt as a
percent of Gross Domestic Product.
NET LENDING (+) OR NET BORROWING (-) OF GENERAL GOVERNMENT AS % OF GDP
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998*
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Belgium.............. -6.9% -7.1% -4.9% -3.9% -3.2% -2.1% -1.7%
Germany.............. -2.6% -3.2% -2.4% -3.3% -3.4% 2.7% -2.5%
France............... -3.9% -5.8% -5.8% -4.9% -4.1% -3.0% -2.9%
Netherlands.......... -3.9% -3.2% -3.8% -4.0% -2.3% -1.4% -1.6%
Portugal............. -3.0% -6.1% -6.0% -5.7% -3.2% -2.5% -2.5%
Spain................ -3.8% -6.9% -6.3% -7.3% -4.6% -2.6% -2.2%
</TABLE>
GENERAL GOVERNMENT CONSOLIDATED GROSS DEBT AS PERCENT OF GDP
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998*
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Belgium.............. 129.0 135.2 133.5 131.3 126.9 122.2 118.1
Germany.............. 44.1 48.0 50.2 58.0 60.4 61.3 61.2
France............... 39.8 45.3 48.5 52.7 55.7 58.0 58.1
Netherlands.......... 80.0 81.2 77.9 79.1 77.2 72.1 70.0
Portugal............. 60.1 63.1 63.8 65.9 65.0 62.0 60.0
Spain................ 48.0 60.0 62.6 65.5 70.1 68.8 67.4
</TABLE>
- ---------------
* Spring 1998 European Commission's Economic Forecast European Commission:
EUROPEAN ECONOMY, 1998 no. 65, pp. 364-5, 368-9
On March 25, 1998, the European Commission reported that all 11 candidates,
including Spain and Portugal, seeking admission to EMU had met the Maastricht
convergence criteria and the European Monetary Institute concurred, although it
stressed the challenges that lie ahead. The EU heads of government and Finance
Ministers decided the actual membership of the EMU, announced ERM central rates
used to fix bilateral conversion rates under EMU and nominated the head of the
European Central Bank (ECB) at meeting held on May 1-3, 1998, at which time it
was determined that Spain and Portugal will join the EMU.
B-83
<PAGE> 148
There are likely to be periods of uncertainty and confusion. The loss of an
independent monetary policy under EMU may complicate government policy if
economic trends in all of the countries are not synchronized. Spain and
Portugal, countries that have had periods of high inflation, may be particularly
vulnerable.
B-84
