SCUDDER
The fund seeks to provide above-
average capital appreciation over
the long term by investing primarily
in the equity securities of small
companies throughout the world.
Global
Discovery
Fund (010)
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
Prospectus
March 1, 1999
The Securities and Exchange
Commission has not approved or
disapproved these securities or
passed upon the adequacy of this
prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 Fund Description
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1 Investment objective
1 Main investment strategies
2 Other investments
2 Risk management strategies
3 Main risks
4 About the Fund
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Additional 4 Past performance
information that you
should know about the 5 Fee and expense information
fund
6 A message from the President
7 Investment adviser
8 Distributions
9 Taxes
10 Financial highlights
11 About Your Investment
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Information about 11 Transaction information
managing your fund
account 12 Buying and selling shares
12 Purchases
14 Exchanges and redemptions
15 Investment products and services
17 Directors and Officers
<PAGE>
Fund Description
Scudder Global Discovery Fund*
* Scudder Global Discovery Fund refers to the Scudder Shares of Global
Discovery Fund which are offered through this prospectus.
Investment objective
Scudder Global Discovery Fund pursues above-average capital appreciation over
the long term.
Unless otherwise indicated, the fund's investment objective and strategies may
be changed without a vote of shareholders.
Main investment strategies
The fund invests primarily in a diversified portfolio of equity securities of
small rapidly growing companies throughout the world that the fund's portfolio
management team believes offer the potential for above-average returns relative
to large companies, yet are frequently overlooked and thus undervalued by the
market. Under normal circumstances, the fund invests at least 65% of its total
assets in the equity securities of small companies. These companies are similar
in size to the smallest 20% of the companies represented by the Salomon Brothers
Broad Market Index -- typically these companies have a market value of between
approximately $50 million and $2 billion. However, the fund may invest in
companies with smaller market values. Under current market conditions, the
median market capitalizations of the companies in which the fund invests are not
expected to exceed $750 million.
The fund may invest in any region of the world. It can invest in the securities
of companies based in emerging markets, typically in the Far East, Latin America
and lesser developed countries in Europe, as well as in companies operating in
developed economies, such as some of those of the United States, Japan and
Western Europe. The fund intends to allocate investments among at least three
countries at all times, one of which may be the United States.
The fund's portfolio management team determines which securities to invest in by
evaluating potential investments from both a macroeconomic and microeconomic
perspective, using fundamental analysis, including field research. The fund's
portfolio management team determines which securities to sell by using the same
criteria. In evaluating the growth potential and relative value of a possible
investment, the portfolio management team considers many factors, including,
among other things:
1
<PAGE>
o the depth and quality of management;
o a company's product line, business strategy and competitive position;
o research and development efforts;
o financial strength, including degree of leverage;
o cost structure;
o revenue and earnings growth potential;
o price-to-earnings ratios and other stock valuation measures; and
o the attractiveness of the country and region in which a company is
located.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, make the
following investments:
The fund may invest up to 35% of its total assets in (i) equity securities of
larger companies located throughout the world and in (ii) debt securities if the
fund's portfolio management team determines that the capital appreciation of
debt securities is likely to exceed the capital appreciation of equity
securities. The fund may, but is not required to, purchase investment-grade
bonds, those rated Aaa, Aa, A, Baa/AAA, AA, A, BBB. The fund may also invest up
to 5% of its net assets in debt securities rated below investment-grade.
The fund may utilize other investments and investment techniques that may impact
fund performance including, but not limited to, options, futures and derivatives
(financial instruments that derive their value from other securities or
commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents. In such a case, the fund would not be pursuing, and may not
achieve, its investment objective.
2
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Main risks
The principal risks of investing in the fund are stock market risk and, more
specifically, the risks associated with global small company stocks.
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances, fluctuations in currency exchange rates and
incomplete or inaccurate accounting information on companies. Foreign markets
have been more volatile than the U.S. market. Foreign investments carry
additional risks, including potentially unfavorable currency exchange rates,
political disturbances, and incomplete or inaccurate accounting information on
companies.
As with all investments in the stock market, the fund's returns and net asset
value will go up and down. Stock market movements will affect the fund's share
price on a daily basis. Declines in value are possible both in the overall stock
market and in the types of securities held by the fund. In addition, the
portfolio management team's strategy and skill in choosing securities for the
fund will determine in large part the fund's ability to achieve its objective.
In addition, if the portfolio management team's choice of countries, market
sectors or specific investments do not perform as well as expected the fund
could lose money.
In pursuit of higher investment returns, this fund may incur greater risks and
more dramatic fluctuations in value than a fund that invests in stocks of larger
companies. The inherent business characteristics and risks of small companies
include such things as untested management, key personnel with varying degrees
of experience, less diversified product lines and weaker financial positions.
Also, small companies tend to have less predictable earnings and less liquid
securities than more established companies. Therefore, this fund is suitable for
long-term investors that have a high degree of risk tolerance.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
3
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About the Fund
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the Scudder Shares class of the fund has performed,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following table was represented as a bar chart in the printed materials.
1992 .............. -0.07%
1993 .............. 38.18%
1994 .............. -7.68%
1995 .............. 17.84%
1996 .............. 21.47%
1997 .............. 9.93%
1998 .............. 16.43%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 20.25% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -16.62% (the third quarter of 1998).
Average annual total returns
Salomon Brothers
For periods ended Global World Equity
December 31, 1998 Discovery Fund Extended Market Index
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One Year 16.43% 20.57%
Five Years 11.08% 15.94%
Since Inception (9/10/91) 12.83% 14.05%*
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* Index comparison begins August 30, 1991.
The Salomon Brothers World Equity Extended Market Index is an unmanaged small
capitalization stock universe of 22 countries. Index returns assume reinvestment
of dividends and, unlike fund returns, do not reflect any fees or expenses.
4
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Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold Scudder Shares of the fund.
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Shareholder fees: Fees paid directly from your investment.
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Maximum sales charge (load) imposed on purchases
(as % of offering price) NONE
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Maximum deferred sales charge (load) NONE
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Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
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Redemption fee (as % of amount redeemed, if applicable) NONE*
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Exchange fee NONE
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Annual fund operating expenses (expenses that are deducted from fund assets):
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Management fee 1.10%
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Distribution (12b-1) fees NONE
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Other expenses 0.55%
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Total annual fund operating expenses 1.65%
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* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and Redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
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One Year $ 168
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Three Years $ 520
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Five Years $ 897
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Ten Years $ 1,955
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Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
5
<PAGE>
A message from the President
[PHOTO OMITTED]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $280 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Edmond D. Villani
6
<PAGE>
Investment adviser
The fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, NY, to manage the fund's daily
investment and business affairs subject to the policies established by the
Board. The Adviser actively manages the fund's investments. Professional
management can be an important advantage for investors who do not have the time
or expertise to invest directly in individual securities.
Currently, the fund offers four classes of shares: Class A, Class B, Class C and
Scudder Shares. Shares from other classes may have different fees and expenses
(which may affect performance) may have different minimum investment
requirements and are entitled to different services. This prospectus offers only
the Scudder Shares of the fund.
For the fiscal year ended October 31, 1998, the Adviser received an investment
management fee of 1.10% of the fund's average daily net assets on an annual
basis.
Portfolio management
The fund is managed by a team of investment professionals, who each plays an
important role in the fund's management process. Team members work together to
develop investment strategies and 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.
The following investment professionals are associated with the fund as
indicated:
Name and Title Joined the fund Responsibilities and Background
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Gerald J. Moran 1991 Mr. Moran joined the Adviser as an
Lead Manager analyst in 1968, has focused on
small company stocks since 1982 and
has been a portfolio manager since
1985.
Sewall Hodges 1996 Mr. Hodges joined the Adviser in
Manager 1995 as a portfolio manager, and has
13 years of experience in global
analysis and portfolio management.
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7
<PAGE>
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. The 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, such as problems with calculating net asset value and difficulties
in implementing the fund's purchase and redemption procedures. 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 issuers whose securities are held by the fund or on global
markets or economies generally.
Euro conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and for the operation of the fund. The
Euro was introduced on January 1, 1999 by eleven member countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain European
community members, including the United Kingdom, did not officially implement
the Euro on January 1, 1999.
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 the fund's holdings is negative, it could
hurt the fund's performance.
Distributions
The fund intends to distribute dividends from its net investment income
annually, in December. The fund intends to distribute net realized capital gains
after utilization of capital loss carryforwards, if any, in December. An
additional distribution may be made at a later date, if necessary.
8
<PAGE>
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar year declared. Dividends ordinarily will vary
from one class of the fund to another.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of the same class of a fund. If an investment is
in the form of a retirement plan, all dividends and capital gains distributions
must be reinvested into the shareholder's account. Distributions are generally
taxable, whether received in cash or reinvested. Exchanges among funds are also
taxable events.
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions if any, are taxable to
shareholders as long-term capital gains, regardless of the length of time
shareholders have owned shares. Short-term capital gains and any other taxable
income distributions are taxable as ordinary income. A portion of dividends from
ordinary income may qualify for the dividends-received deduction for
corporations.
Unless your investment is in a tax-deferred account, you may want
to avoid investing a large amount close to the date of the fund's distribution
because you may receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss if the shares were held as a capital asset. Capital gains may be
long-term or short-term, depending on how long you owned the shares.
The fund sends detailed tax information to its shareholders about the amount and
type of its distributions by January 31 of the following year. In certain years,
you may be able to claim a credit or deduction on your income tax return for
your share of foreign taxes paid by the fund.
The fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide a fund
with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Any such withheld amounts may be credited against the
shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in the fund.
9
<PAGE>
Financial highlights
The financial highlights table below is intended to help you understand the
fund's financial performance for the fiscal periods indicated. Certain
information reflects financial results for a single class share. The total
return figures represent the rate that shareholders would have earned (or lost)
on an investment in the class, assuming reinvestment of all dividends and
distributions. This information has been audited by PricewaterhouseCoopers LLP
whose report, along with the fund's financial statements, is included in the
annual report, which is available upon request by calling Scudder Investor
Relations at 1-800-225-2470 or, for existing shareholders, by calling the
Scudder Automated Information Line (SAIL) at 1-800-343-2890.
Global Discovery Fund
<TABLE>
<CAPTION>
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Years Ended October 31,
Scudder Shares (b) 1998(a) 1997(a) 1996(a) 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------
Net asset value, beginning of period .. $21.64 $20.45 $17.54 $16.27 $16.14
-----------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .......... (.10) (.12) (.04) (.03) (.02)
Net realized and unrealized gain (loss)
on investment transactions .......... .32 2.30 3.59 1.38 .48
-----------------------------------------------------------------
Total from investment operations ...... .22 2.18 3.55 1.35 .46
-----------------------------------------------------------------
Less distributions:
From net investment income ............ (.64) (.13) (.20) -- --
In excess of net investment income .... -- -- -- -- (.18)
From net realized gains on investment
transactions ........................ (1.41) (.86) (.44) (.08) (.15)
-----------------------------------------------------------------
Total distributions ................... (2.05) (.99) (.64) (.08) (.33)
-----------------------------------------------------------------
-----------------------------------------------------------------
Net asset value, end of period ........ $19.81 $21.64 $20.45 $17.54 $16.27
-----------------------------------------------------------------
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Total Return (%) ...................... 1.19 11.14 20.97 8.32 2.80(c)
Ratios and Supplemental Data
Net assets, end of period
($ millions) ........................ 310 349 351 255 256
Ratio of operating expenses, net to
average daily net assets (%) ........ 1.65 1.63 1.60 1.69 1.70
Ratio of operating expenses before
expense reductions, to average daily
net assets (%) ...................... 1.65 1.63 1.60 1.69 1.76
Ratio of net investment income (loss)
to average daily net assets (%) ..... (.45) (.58) (.20) (.12) (.28)
Portfolio turnover rate (%) ........... 40.6 60.5 63.0 43.7 45.8
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</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On April 16, 1998 existing shares of the Fund were designated as Scudder
Shares and are generally not available to new investors.
(c) Total return would have been lower had certain expenses not been reduced.
10
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading.
Net asset value per share is calculated by dividing the value of total fund
assets attributable to the applicable class, less all liabilities attributable
to that class, by the total number of shares outstanding of that class. Market
prices are used to determine the value of the fund's assets. If market prices
are not readily available for a security or if a security's price is not
considered to be market indicative, that security may be valued by another
method that the Board or its delegate believes accurately reflects fair value.
In those circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
To the extent that the fund invests in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the fund does not price
its shares. As a result, the net asset value of the fund may change at a time
when shareholders are not able to purchase or redeem their shares.
Processing time
All purchase and redemption requests received in good order at the fund's
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value per share calculated at the close of trading
that day. All other requests that are in good order will be executed the
following business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. The fund will normally send
redemption proceeds within one business day following the redemption request,
but may take up to seven business days (or longer in the case of shares recently
purchased by check). For more information, please call 1-800-225-5163.
11
<PAGE>
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
fund and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in the fund's share price.
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in the fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to the fund.
The fund reserves the right, following 60 days written notice to shareholders,
to redeem all shares in accounts that have a value below $1,000 where such a
reduction in value has occurred due to a redemption, exchange or transfer out of
the account.
Third party transactions
If you buy and sell shares of the fund through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Other policies
The fund reserves the right to redeem in kind. That is, it may honor redemption
requests with readily marketable fund securities instead of cash. There may be
transaction costs associated with converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
Purchases
Scudder Shares are generally not available to new investors. Investors in the
fund as of April 15, 1998, can continue to purchase Scudder Shares. Shareowners
of any fund or class of a fund in the Scudder Family of Funds as of April 15,
1998, and their immediate family members at the same address, may also purchase
Scudder Shares. Certain other parties may be eligible to purchase Scudder
Shares. Please see the Scudder Shares' Statement of Additional Information for
more details, or call Scudder Investor Relations at 1-800-225-2470.
12
<PAGE>
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
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By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
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By Wire Call 1-800-225-5163 for instructions.
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In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston, Chicago,
New York and San Francisco.
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To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
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By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number and the
complete fund name, to the appropriate address listed above.
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By Wire Call 1-800-225-5163 for instructions.
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In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed above.
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By Telephone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
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13
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
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By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a day).
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By Mail Print or type your instructions and include:
or Fax - the name of the fund and class and the account number you
are exchanging from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
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To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from
Telephone 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a
day). You may have redemption proceeds sent to your
predesignated bank account, or redemption proceeds of up to
$100,000 sent to your address of record.
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By Mail Send your instructions for redemption to the appropriate address
or Fax or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By Automatic You may arrange to receive automatic cash payments periodically.
Withdrawal Call 1-800-225-5163 for more information and an enrollment form.
Plan
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14
<PAGE>
Investment products and services
The Scudder Family of Funds[
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Money Market
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market
Series -- Managed Shares*
Tax Free Money Market+
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series --
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and
Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
15
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**[[
Scudder Horizon Advantage**[[[
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. Scudder Global High Income Fund, Inc.
The Brazil Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Montgomery Street Income
Securities, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
[ Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
[[ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
[[[ A no-load variable annuity contract issued by Glenbrook Life and Annuity
Company and underwritten by Allstate Financial Services, Inc., sold by
Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various other stock
exchanges.
16
<PAGE>
Directors and Officers
- --------------------------------------------------------------------------------
Daniel Pierce*
Chairman of the Board,
Director and Vice President
Nicholas Bratt*
President
Paul Bancroft III
Director; Venture Capitalist
and Consultant
Sheryle J. Bolton
Director; Chief Executive Officer,
Scientific Learning Corporation
William T. Burgin
Director; General Partner, Bessemer
Venture Partners
Keith R. Fox
Director; President,
Exeter Capital Management Corporation
William H. Luers
Director; Chairman and
President,U.N. Association of
the U.S.A.
Kathryn L. Quirk*
Director, Vice President
and Assistant Secretary
Joan E. Spero
Director; President,
Doris Duke Charitable Foundation
Thomas J. Devine
Honorary Director; Consultant
William H. Gleysteen, Jr.
Honorary Director; Consultant; Guest
Scholar, Brookings Institute
Robert G. Stone, Jr.
Honorary Director;
Chairman Emeritus and Director,
Kirby Corporation
Susan E. Dahl*
Vice President
Thomas W. Joseph*
Vice President
Ann M. McCreary*
Vice President
Gerald J. Moran*
Vice President
M. Isabel Saltzman*
Vice President
Thomas F. McDonough*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
- -----------
* Scudder Kemper Investments, Inc.
17
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes
- --------------------------------------------------------------------------------
<PAGE>
Additional information about the fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected the fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Telephone Call Scudder Investor Relations at 1-800-225-2470
or
For existing Scudder investors, call the Scudder
Automated Information Line (SAIL) at
1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-4670
[PRINTED WITH SOY INK LOGO] [RECYCLE LOGO] Printed on recycled paper
10-2-39
PR010399
<PAGE>
GLOBAL DISCOVERY FUND -- SCUDDER SHARES
Global Discovery Fund is a series of Global/International Fund, Inc.
A Diversified Mutual Fund Series Which Seeks
Above-Average Capital Appreciation over the Long Term by
Investing Primarily in the Equity Securities of Small
Companies Located Throughout the World
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus. The
prospectus of the Scudder Shares class of Global Discovery Fund dated March 1,
1999, as amended from time to time, may be obtained without charge by writing to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Annual Report to Shareholders of Scudder Global Discovery Fund
dated October 31, 1998, is incorporated by reference and are hereby deemed to be
part of this Statement of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES............................................................1
General Investment Objective and Policies.......................................................1
Risk Factors....................................................................................2
Specialized Investment Techniques...............................................................9
Investment Restrictions........................................................................19
PURCHASES...............................................................................................20
Additional Information About Opening An Account................................................21
Minimum balances...............................................................................22
Additional Information About Making Subsequent Investments.....................................22
Additional Information About Making Subsequent Investments by QuickBuy.........................23
Checks.........................................................................................23
Wire Transfer of Federal Funds.................................................................23
Share Price....................................................................................24
Share Certificates.............................................................................24
Other Information..............................................................................24
EXCHANGES AND REDEMPTIONS...............................................................................24
Exchanges......................................................................................24
Redemption by Telephone........................................................................25
Redemption by QuickSell........................................................................26
Redemption by Mail or Fax......................................................................26
Redemption-in-Kind.............................................................................27
Other Information..............................................................................27
FEATURES AND SERVICES OFFERED BY THE FUND...............................................................28
The No-Load Concept............................................................................28
Internet Access................................................................................29
Dividend and Capital Gain Distribution Options.................................................29
Diversification................................................................................30
Scudder Investor Centers.......................................................................30
Reports to Shareholders........................................................................30
Transaction Summaries..........................................................................30
THE SCUDDER FAMILY OF FUNDS.............................................................................30
SPECIAL PLAN ACCOUNTS...................................................................................35
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations
and Self-Employed Individuals.............................................................35
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed
Individuals ..............................................................................36
Scudder IRA: Individual Retirement Account....................................................36
Scudder Roth IRA: Individual Retirement Account...............................................37
Scudder 403(b) Plan............................................................................37
Automatic Withdrawal Plan......................................................................37
Group or Salary Deduction Plan.................................................................38
Automatic Investment Plan......................................................................38
Uniform Transfers/Gifts to Minors Act..........................................................38
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS...............................................................38
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION.................................................................................39
Average Annual Total Return....................................................................39
Cumulative Total Return........................................................................39
Total Return...................................................................................40
Comparison of Portfolio Performance............................................................40
Taking a Global Approach.......................................................................43
Scudder's 30% Solution.........................................................................44
ORGANIZATION OF THE FUND................................................................................44
INVESTMENT ADVISER......................................................................................45
Personal Investments by Employees of the Adviser...............................................48
DIRECTORS AND OFFICERS..................................................................................48
REMUNERATION............................................................................................50
Responsibilities of the Board --Board and Committee Meetings...................................50
Compensation of Officers and Directors.........................................................51
DISTRIBUTOR.............................................................................................52
TAXES...................................................................................................52
PORTFOLIO TRANSACTIONS..................................................................................56
Brokerage......................................................................................56
Portfolio Turnover.............................................................................57
NET ASSET VALUE.........................................................................................57
ADDITIONAL INFORMATION..................................................................................58
Experts........................................................................................58
Other Information..............................................................................59
FINANCIAL STATEMENTS....................................................................................59
APPENDIX
</TABLE>
<PAGE>
THE FUND'S INVESTMENT OBJECTIVES AND POLICIES
(See "FUND SUMMARY -- Investment objectives and strategies and
Principal Risks", and "ABOUT THE FUND -- Principal Strategies,
Investments and Related Risks", in the Shares' prospectus.)
Global Discovery Fund (the "Fund") is a diversified series of
Global/International Fund, Inc. (the "Corporation"), an open-end management
investment company which continuously offers and redeems its shares at net asset
value. The Fund is a company of the type commonly known as a mutual fund.
Scudder Global Discovery Fund changed its name to Global Discovery Fund on April
16, 1998.
Global Discovery Fund offers the following classes of shares: Scudder
Shares (the "Scudder Shares" or "Shares"), and Kemper Global Discovery Fund
Class A, B and C Shares. Only the Scudder Shares of Global Discovery Fund are
offered herein.
Changes in portfolio securities are made on the basis of investment
considerations, and it is against the policy of management to make changes for
trading purposes. The Fund cannot guarantee a gain or eliminate the risk of loss
and the net asset value of the Fund's shares will increase or decrease with
changes in the market price of the Fund's investments.
Foreign securities such as those that may be purchased by the Fund may
be subject to foreign governmental taxes which could reduce the yield, if any,
on such securities, although a shareholder of the Fund may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Fund. (See "TAXES.")
Because of the Fund's investment considerations discussed herein and
their investment policies, investment in Shares of the Fund is not intended to
provide a complete investment program for an investor. The value of the Fund's
Shares when sold may be higher or lower than when purchased.
General Investment Objective and Policies
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which Global Discovery Fund may
engage (such as short selling, hedging, etc.) or a financial instrument in which
the Fund may purchase (such as options, forward foreign currency contracts,
etc.) are meant to descrbe the spectrum of investments that Scudder Kemper
Investments, Inc. (the "Adviser"), in its discretion, might, but is not required
to, use in managing the Fund's portfolio assets. The Adviser may, in its
discretion, at any time employ such practice, technique or instrument for one or
more funds but not for all fund advised by it. Furthermore, it is possible that
certain types of financial instruments or investment techniques described herein
may not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques, or instruments
may not be principal activities of the Fund but, to the extent employed, could
from time to time have a material impact on the Fund's performance.
Global Discovery Fund seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world. The Fund is designed for investors looking for
above-average appreciation potential (when compared with the overall domestic
stock market as reflected by Standard & Poor's 500 Corporation Composite Price
Index) and the benefits of investing globally, but who are willing to accept
above-average stock market risk, the impact of currency fluctuation and little
or no current income.
In pursuit of its objective, the Fund generally invests in small,
rapidly growing companies which offer the potential for above-average returns
relative to larger companies, yet are frequently overlooked and thus undervalued
by the market. The Fund has the flexibility to invest in any region of the
world. It can invest in companies based in emerging markets, typically in the
Far East, Latin America and Eastern Europe, as well as in firms operating in
developed economies, such as those of the United States, Japan and Western
Europe.
The Adviser invests the Fund's assets in companies it believes offer
above-average earnings, cash flow or asset growth potential. It also invests in
companies which may receive greater market recognition over time. The Adviser
believes that these factors offer significant opportunity for long-term capital
appreciation. The Adviser evaluates investments for the Fund from both a
macroeconomic and microeconomic perspective, using fundamental analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible investments. When evaluating an individual company, the
Adviser takes into consideration numerous factors, including the depth and
quality of management; a company's product line, business strategy and
competitive position; research and development efforts; financial strength,
including degree of
<PAGE>
leverage; cost structure; revenue and earnings growth potential; price-earnings
ratios and other stock valuation measures. Secondarily, the Adviser weighs the
attractiveness of the country and region in which a company is located.
While the Fund's Adviser believes that smaller, lesser-known companies
can offer greater growth potential than larger, more established firms, the
former also involve greater risk and price volatility. To help reduce risk, the
Fund expects, under usual market conditions, to diversify its portfolio widely
by company, industry and country. Under normal circumstances, the Fund invests
at least 65% of its total assets in the equity securities of small companies.
The Fund intends to allocate investments among at least three countries at all
times, one of which may be the United States.
The Fund invests primarily in companies whose individual equity market
capitalization would place them in the same size range as companies in
approximately the lowest 20% of world market capitalization as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small-, medium- and large-sized companies based in 22 markets
around the globe. Based on this policy, the companies represented in the Fund's
portfolio typically will have individual equity market capitalizations of
between approximately $50 million and $2 billion, although the Fund will be free
to invest in smaller capitalization issues. Furthermore, the median market
capitalizations of the companies in which the Fund invests are not expected to
exceed $750 million.
The equity securities in which the Fund may invest consist of common
stocks, preferred stocks (either convertible or nonconvertible), rights and
warrants. These securities may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter. For capital appreciation purposes, the
Fund may purchase notes, bonds, debentures, government securities and zero
coupon bonds (any of which may be convertible or nonconvertible). The Fund may
invest in foreign securities and American Depositary Receipts which may be
sponsored or unsponsored. The Fund may also invest in closed-end investment
companies holding foreign securities, enter into repurchase agreements and
engage in strategic transactions. For temporary defensive purposes, the Fund
may, during periods in which conditions in securities markets warrant, invest
without limit in cash and cash equivalents. It is impossible to predict how long
such alternative strategies will be utilized. More information about investment
techniques is provided under "Specialized Investment Techniques of the Funds."
Small Company Risk. The Adviser believes that smaller companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of smaller companies may be thinly
traded (and therefore have to be sold at a discount from current market prices
or sold in small lots over an extended period of time). Transaction costs in
smaller company stocks may be higher than those of larger companies.
Master/feeder Fund Structure. The Board of Directors has the discretion to
retain the current distribution arrangement for the Fund while investing in a
master fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which the Fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Risk Factors
Foreign Securities. Global Discovery Fund is intended to provide individual and
institutional investors with an opportunity to invest a portion of their assets
in a diversified portfolio of securities of U.S. and foreign companies located
worldwide and is designed for long-term investors who can accept international
investment risk. The Fund is designed for investors who can accept currency and
other forms of international investment risk. The Adviser believes that
allocation of the Fund's assets on a global basis decreases the degree to which
events in any one country, including the U.S., will affect an investor's entire
investment holdings. In the period since World War II, many leading foreign
economies have grown more rapidly than the U.S. economy and from time to time
have had interest rate levels that had a higher real return than the U.S. bond
market.
2
<PAGE>
Consequently, the securities of foreign issuers have provided attractive returns
relative to the returns provided by the securities of U.S. issuers, 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
affect the Fund's performance favorably or unfavorably. 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 stock markets, while growing
in volume of trading activity, have substantially less volume than that of the
New York Stock Exchange, 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 that in the U.S. market 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. Fixed commissions on some foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Adviser will endeavor to achieve the most favorable net
results on the Fund's portfolio transactions. Further, the Fund may encounter
difficulties or be unable to pursue legal remedies and obtain judgment in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, securities exchanges, brokers and listed
companies than in the U.S. It may be more difficult for the Fund's agents to
keep currently informed about corporate actions such as stock dividends or other
matters 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 confiscatory or withholding taxation,
political, social or economic instability, or diplomatic developments which
could affect U.S. 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. The Adviser seeks to mitigate the risks to the
Fund associated with the foregoing considerations through investment variation
and continuous professional management.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union. Global Discovery Fund may invest up to
5% of its total assets in the securities of issuers domiciled in Eastern
European countries.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Fund could lose a substantial portion of any investments it
has made in the affected countries. Further, no accounting standards exist in
East European countries. Finally, even though certain East European currencies
may be convertible into U.S. dollars, the conversion rates may be artificial to
the actual market values and may be adverse to the Fund's shareholders.
Foreign Currencies. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, the Fund may temporarily hold funds
in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency contracts, foreign currency
futures contracts and options on such contracts. Because of these factors, 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 Funds' custodian values the
Fund's assets daily in terms of U.S.
3
<PAGE>
dollars, none of the Funds intends to convert its holdings of foreign currencies
into U.S. dollars on a daily basis. The Fund 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 forward or futures contracts to purchase or sell
foreign currencies.
Because the Fund normally will be invested in both U.S. and 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. The Funds invest in many securities markets
around the world in an attempt to take advantage of opportunities wherever they
may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the U.S.
Emerging markets also 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. Delays in
settlement could result in temporary periods when a portion of the assets of the
Fund is uninvested and no cash 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 could result either 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. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of the Fund. Certain emerging
markets require prior governmental approval of investments by foreign persons,
limit the amount of investment by foreign persons in a particular company, limit
the investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain emerging markets may also restrict investment
opportunities in issuers in industries deemed important to national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
In the course of investment in emerging market debt obligations, the
Fund will be exposed to the direct or indirect consequences of political, social
and economic changes in one or more emerging markets. Political changes in
emerging market countries may affect the willingness of an emerging market
country governmental issuer to make or provide for timely payments of its
obligations. The country's economic status, as reflected, among other things, in
its inflation rate, the amount of its external debt and its gross domestic
product, also affects its ability to honor its obligations. While the Fund
manages its assets in a manner that will seek to minimize the exposure to such
risks, and will further reduce risk by owning the bonds of many issuers, there
can be no assurance that adverse political, social or economic changes will not
cause the Fund to suffer a loss of value in respect of the securities in the
Fund's portfolio.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in such
markets may not be readily available. The Corporation may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly if the Fund believes
that appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period
4
<PAGE>
commencing from the Fund's identification of such condition until the date of
the SEC action, the Fund's securities in the affected markets will be valued at
fair value determined in good faith by or under the direction of the
Corporation's Board of Directors.
Volume and liquidity in most foreign bond markets are less than in the
U.S. and securities of many foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Fund endeavors to achieve the most favorable net results
on its portfolio transactions. There is generally less government supervision
and regulation of business and industry practices, securities exchanges,
brokers, dealers and listed companies than in the U.S. Mail service between the
U.S. and foreign countries may be slower or 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 emerging markets, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Fund's investments in those countries.
Moreover, individual emerging market 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. The chart below sets forth the risk ratings of
selected emerging market countries' sovereign debt securities.
<TABLE>
<CAPTION>
Sovereign Risk Ratings for Selected Emerging Market Countries as of 12/31/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Investors Service Standard & Poor's Corporation
------- ------------------------- -----------------------------
<S> <C> <C>
Chile Baa1 A-
Turkey Ba3 B+
Mexico Ba2 BB
Czech Republic Baa1 A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B
Morocco NR NR
Argentina B1 BB-
Brazil B1 B+
Poland Baa3 BBB-
Ivory Coast NR NR
</TABLE>
The Fund may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by the Fund defaults, the Fund may incur additional expenses to
seek recovery. Debt obligations issued by emerging market country governments
differ from debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on private debt,
must be pursued in the courts of the defaulting party itself. The Fund's ability
to enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt may not contest payments to the holders
of debt obligations in the event of default under commercial bank loan
agreements. With four exceptions, (Panama, Cuba, Costa Rica and Yugoslavia), no
sovereign emerging markets borrower has defaulted on an external bond issue
since World War II.
Income from securities held by the Fund could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. The Fund's net asset value
may also be affected by changes in the rates or methods of taxation applicable
to the Fund or to entities in which the Fund has invested. The Adviser will
consider the cost of any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will not be subject to
change.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
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<PAGE>
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make
timely payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the Fund
could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The Fund may invest a portion of its assets in securities denominated
in currencies of Latin American countries. Accordingly, changes in the value of
these currencies against the U.S. dollar may result in corresponding changes in
the U.S. dollar value of the Fund's assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into
6
<PAGE>
other currencies. Further, certain Latin American currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. 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.
The economies of individual Latin American countries may differ
favorably or unfavorably from the U.S. economy in such respects as the rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Certain Latin
American countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the Fund
at a higher rate than those imposed by other foreign countries. This may reduce
the Fund's investment income available for distribution to shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico
are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region has a large population (roughly 300 million) representing a large
domestic market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in gross domestic product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions, and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect the Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
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, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in
which the Fund may participate, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country or the Fund's investment in the debt of that
country.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.
7
<PAGE>
Investing in Europe. Most Eastern European nations, including Hungary, Poland,
Czech Republic, Slovak Republic, and Romania have had centrally planned,
socialist economies since shortly after World War II. A number of their
governments, including those of Hungary, the Czech Republic, and Poland are
currently implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning, and move toward free market economies. At
present, no Eastern European country has a developed stock market, but Poland,
Hungary, and the Czech Republic have small securities markets in operation.
Ethnic and civil conflict currently rage through the former Yugoslavia. The
outcome is uncertain.
Both the European Community (the "EC") and Japan, among others, have
made overtures to establish trading arrangements and assist in the economic
development of the Eastern European nations. A great deal of interest also
surrounds opportunities created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable member of the EC and numerous other international alliances and
organizations. To reduce inflation caused by the unification of East and West
Germany, Germany has adopted a tight monetary policy which has led to weakened
exports and a reduced domestic demand for goods and services. However, in the
long-term, reunification could prove to be an engine for domestic and
international growth.
The conditions that have given rise to these developments are
changeable, and there is no assurance that reforms will continue or that their
goals will be achieved.
Portugal is a genuinely emerging market which has experienced rapid
growth since the mid-1980s, except for a brief period of stagnation over
1990-91. Portugal's government remains committed to privatization of the
financial system away from one dependent upon the banking system to a more
balanced structure appropriate for the requirements of a modern economy.
Inflation continues to be about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in
the 1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may
be subject to risks due to the inexperience of financial intermediaries, the
lack of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Fund's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
8
<PAGE>
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, general decline in oil prices has had an adverse impact on many
economies.
Specialized Investment Techniques
Debt Securities. If the Adviser determines that the capital appreciation on debt
securities is likely to exceed that of common stocks, the Fund may invest in
debt securities of foreign and U.S. issuers. Portfolio debt investments will be
selected on the basis of capital appreciation potential, by evaluating, among
other things, potential yield, if any, credit quality, and the fundamental
outlooks for currency and interest rate trends in different parts of the world,
taking into account the ability to hedge a degree of currency or local bond
price risk. The Fund may purchase "investment-grade" bonds, which are those
rated Aaa, Aa, A or Baa by Moody's Investors Service ("Moody's") or AAA, AA, A
or BBB by Standard & Poor's Corporation ("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. The Fund may
also invest up to 5% of its net assets in debt securities which are rated below
investment-grade, that is, rated below Baa by Moody's or below BBB by S&P and in
unrated securities of equivalent quality.
High Yield/High Risk Securities. Below investment-grade securities, commonly
referred to as "junk bonds" (rated Ba and lower by Moody's and BB and lower by
S&P), or unrated securities of equivalent quality, in which the Fund may invest
up to 5% of its net assets, carry a high degree of risk (including the
possibility of default or bankruptcy of the issuers of such securities),
generally involve greater volatility of price and risk of principal and income,
and may be less liquid, than securities in the higher rating categories and are
considered speculative. The lower the ratings of such debt securities, the
greater their risks render them like equity securities. See the Appendix to this
Statement of Additional Information for a more complete description of the
ratings assigned by ratings organizations and their respective characteristics.
Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have a greater adverse impact on the value of such
obligations than on comparable higher quality debt securities. During an
economic downturn or period of rising interest rates, highly leveraged issues
may experience financial stress which could adversely affect their ability to
service their principal and interest payment obligations. Prices and yields of
high yield securities will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely affect the Fund's
net asset value. In addition, investments in high yield zero coupon or
pay-in-kind bonds, rather than income-bearing high yield securities, may be more
speculative and may be subject to greater fluctuations in value due to changes
in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"TAXES."
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<PAGE>
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other 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.
The convertible securities in which the Fund may invest are either
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
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.
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" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933 (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.
Generally speaking, restricted securities may be sold 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.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, with any domestic or foreign broker/dealer
which is recognized as a reporting government securities dealer, or any foreign
bank, if the repurchase agreement is fully secured by government securities of
the particular foreign jurisdiction, if
10
<PAGE>
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, or to be at least equal to that of issuers of commercial paper rated
within the two highest grades assigned by Moody's or S&P.
A repurchase agreement provides a means for the Fund to earn income on
assets for periods as short as overnight. It is an arrangement under which the
Fund acquires a security ("Obligation") and the seller agrees, at the time of
sale, to repurchase the Obligation at a specified time and price. Obligations
subject to a repurchase agreement are held in a segregated account and the value
of such securities 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
upon repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Obligation itself. Obligations will be held by the
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 that Fund's investment restriction
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 a 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 delay 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. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase 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. To protect
against such potential loss, if the market value (including interest) 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 (including interest) 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 impose on the seller a contractual obligation to deliver additional
securities. A repurchase agreement with foreign banks may be available with
respect to government securities of the particular foreign jurisdiction, and
such repurchase agreements involve risks similar to repurchase agreements with
U.S. entities.
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 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. The Fund will
establish a segregated account with the Funds' custodian in which it will
maintain cash or liquid assets equal in value to commitments for when-issued or
forward delivery securities. Such segregated securities either will mature or,
if necessary, be sold on or before the settlement date. The Fund will not enter
into such transactions for leverage purposes.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC, such loans
may be made to member firms of the New York Stock Exchange (the "Exchange"), and
would be required to be secured continuously by collateral in cash or liquid
assets maintained on a current basis at an amount at least equal to the market
value and accrued interest of the securities loaned. The Fund would have the
right to call a loan and obtain the securities loaned on no more than five days'
notice. During the existence of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the securities loaned and would
also receive compensation based on investment of the collateral. As with other
extensions of credit there are risks of delay in recovery or even loss of rights
in the collateral should
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the borrower of the securities fail financially. However, the loans would be
made only to firms deemed by the Adviser to be of good standing, and when, in
the judgment of the Adviser, the consideration which can be earned currently
from securities loans of this type justifies the attendant risk. If the Fund
determines to make securities loans, the value of the securities loaned will not
exceed 5% of the value of the Fund's total assets at the time any loan is made.
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 follows 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 Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act.
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 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").
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 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").
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FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Directors do not currently intend to borrow for investment leverage
purposes, if such a strategy were implemented in the future it would increase
the Fund's volatility and the risk of loss in a declining market. Borrowing by
the Fund will involve special risk considerations. Although the principal of the
Fund's borrowings will be fixed, the Fund's assets may change in value during
the time a borrowing is outstanding, thus increasing exposure to capital risk.
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 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 in the Fund's portfolio, 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
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 to create leveraged exposure in the Fund.
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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 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 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.
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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 A-1 from S&P or
P-1 from Moody's or an equivalent rating from any other 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 Funds'
limitation on investing no more than 15% of its assets 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 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.
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<PAGE>
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.
No Fund will 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
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 of
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 currency transactions such as futures, options,
options on futures and swaps will be limited to hedging involving either
specific transactions or portfolio positions except as described below.
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.
No Fund will 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,
other than with respect to forward currency contracts entered into for
non-hedging purposes, or to proxy hedging or cross hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
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To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
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 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
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. Neither Fund will 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
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Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from an 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.
Warrants. The Fund may invest in warrants up to 5% of the value of its net
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
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.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
high grade 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 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 assets 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 cash or liquid
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
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<PAGE>
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 cash or
liquid 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 cash or liquid 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 liquid 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 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 cash or liquid 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, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Investment Restrictions
Unless specified to the contrary, the following fundamental policies
may not be changed without the approval of a majority of the outstanding voting
securities of the Fund which, under the 1940 Act and the rules thereunder and as
used in this Statement of Additional Information, means the lesser of (1) 67% or
more of the voting securities of the Fund present at such meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy, or (2) more than 50% of the outstanding voting
securities of the Fund.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Fund's assets will
not be considered a violation of the restriction.
The Fund has elected to be classified as a diversified series of an
open-end investment company. In addition, as a matter of fundamental policy, the
Fund may not:
1. borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
2. issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
3. purchase physical commodities or contracts relating to
physical commodities;
4. concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
5. engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
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6. purchase or sell real estate, which term does not include
securities or companies which deal in real estate or interests
therein, except that the Fund reserves freedom of action to
hold and to sell real estate acquired as a result of the
Fund's ownership of securities; or
7. make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Directors of the
Corporation and without shareholder approval. As a matter of
nonfundamental policy, the Fund does not currently intend to:
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, dollar rolls, 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 or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
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;
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); and
7. lend portfolio securities in an amount greater than 5% of its
total assets.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" above is adhered to at the time an
investment is made, a later change in percentage resulting from changes in the
value or the total cost of the Fund's assets will not be considered a violation
of the restriction.
PURCHASES
(See "Purchases" and "Transaction Information" in the Shares' prospectus.)
Scudder Shares of Global Discovery Fund require a $2,500 minimum
initial investment and a minimum subsequent investment of $100. The minimum
investment requirements may be waived or lowered for investments effected
through banks and other institutions that have entered into special arrangements
with the Fund and for investments effected on a group basis by certain other
entities and their employees, such as pursuant to a payroll deduction plan and
for investments made in an Individual Retirement Account offered by the Fund.
Investment minimums may also be waived for Directors and officers of the Fund.
The Fund, Scudder Investor Services, Inc., Kemper Distributors, Inc. and Scudder
Financial Intermediary Services Group each reserves the right to reject any
purchase order. All funds will be invested in full and fractional shares.
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<PAGE>
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
The name Scudder Global Discovery Fund as used herein and in the
prospectus also means Global Discovery Fund, which is a series of
Global/International Fund, Inc. All shares of Global Discovery Fund outstanding
on April 16, 1998, were redesignated as Scudder Shares of Global Discovery Fund
(also represented as "Scudder Global Discovery Fund"). Investors in Global
Discovery Fund as of April 15, 1998, can continue to purchase Scudder Shares.
Scudder Shares are not available to new investors with the following exceptions:
1. Existing shareholders of any fund or class of a Fund in the
Scudder Family of Funds as of April 15, 1998, and their
immediate family members residing at the same address, may
purchase Scudder Shares.
2. Shareholders who owned shares of the Global Discovery Fund
through any broker-dealer or service agent omnibus account as
of April 15, 1998, may continue to purchase Scudder Shares.
Existing shareholders of any fund in the Scudder Family of
Funds through certain broker-dealers or service agent omnibus
accounts as of April 15, 1998, may purchase Scudder Shares
when made available from that broker-dealer or service agent.
Call the broker-dealer or service agent for more information.
3. Retirement, employee stock, bonus, pension or profit sharing
plans offering the Scudder Family of Funds as of April 15,
1998, may add new participants and accounts. Scudder Shares
are also available to prospective plan sponsors, as well as to
existing plans which had not previously offered the Global
Discovery Fund as an investment option.
4. An employee who owns Scudder Shares through a retirement,
employee stock, bonus, pension or profit sharing plan as of
April 15, 1998, may, at a later date, open a new individual
account to purchase Scudder Shares.
5. Any employee who owns Scudder Shares through a retirement,
employee stock, bonus, pension or profit sharing plan may
complete a direct rollover to an IRA holding Scudder Shares.
6. Scudder Shares are available to the Scudder Kemper
Investments, Inc. retirement plans.
7. Officers and Fund Directors, and full-time employees of
Scudder Kemper Investments, Inc. and its subsidiaries, and
their family members, may purchase Scudder Shares.
8. Scudder Shares are available to any accounts managed by
Scudder Kemper Investments, Inc., any advisory products
offered by Scudder Kemper Investments, Inc. or Scudder
Investor Services, Inc., and to the portfolios of Scudder
Pathway Series.
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9. Registered investment advisors ("RIAs") and certified
financial planners ("CFPs") with clients invested in the
Scudder Family of Funds as of April 15, 1998, may purchase
additional Scudder Shares or open new individual client or
omnibus accounts purchasing Scudder Shares. RIAs and CFPs who
do not have clients invested in the Funds as of April 15,
1998, may enter into a written agreement with Scudder Investor
Services in order to purchase Scudder Shares. Call Scudder
Financial Intermediary Services at 1-800-854-8525 for more
information.
10. Broker-dealers, RIAs and CFPs who have clients participating
in comprehensive fee programs may enter into an agreement with
Scudder Investor Services in order to purchase Scudder Shares.
Call Scudder Financial Intermediary Services at 1-800-854-8525
for more information.
11. Institutional alliances trading through NSCC/FundServ may
purchase Scudder Shares. Call Scudder Financial Intermediary
Services at 1-800-854-8525 for more information.
12. Partnership shareholders invested in Global Discovery Fund as
of April 15, 1998, through an account registered in the name
of a partnership may open new accounts to purchase Scudder
Shares, whether or not they are listed on the account
registration. Corporate shareholders invested in Global
Discovery Fund as of April 15, 1998, may open new accounts
using the same registration, or if the corporation is
reorganized, the new companies may purchase Scudder Shares.
Scudder Investor Services may, at its discretion, require appropriate
documentation that an investor is indeed eligible to purchase Scudder Shares.
For more information, please call Scudder Investor Relations at 1-800-225-5163.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Directors. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the Fee to be paid
to the Fund) for any non-fiduciary/non-custodial account
without an automatic investment plan (AIP) in place and a
balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a
reduction in value has occurred due to a redemption, exchange
or transfer out of the account. The Fund will mail the
proceeds of the redeemed account to the shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by
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<PAGE>
reason of such cancellation. If the purchaser is a shareholder, the Corporation
shall have the authority, as agent of the shareholder, to redeem shares in the
account in order to reimburse the Fund or the principal underwriter for the loss
incurred. Net losses on such transactions which are not recovered from the
purchaser will be absorbed by the principal underwriter. Any net profit on the
liquidation of unpaid shares will accrue to the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectable, the Corporation reserves the right to cancel the purchase
immediately and the purchaser will be responsible for any loss incurred by the
Corporation or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Corporation will have the authority, as agent of
the shareholder, to redeem shares in the account in order to reimburse the Fund
or the principal underwriter for the loss incurred. Investors whose orders have
been canceled may be prohibited from, or restricted in, placing future orders in
any of the Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by Brown
Brothers Harriman & Co. (the "Custodian") of "wired funds," but the right to
charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
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<PAGE>
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Corporation's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Directors and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Directors and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Board of Directors and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund 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.
The Corporation may issue shares at net asset value in connection with
any merger or consolidation with, or acquisition of the assets of, any
investment company or personal holding company, subject to the requirements of
the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See "Exchanges and Redemptions" and "Transaction Information"
in the Shares' prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in the other fund. When an exchange involves a new account, the
new account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account
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<PAGE>
must be for $100 or more. If the account receiving the exchange proceeds is to
be different in any respect, the exchange request must be in writing and must
contain an original signature guarantee as described under "Transaction
Information -- Redeeming shares -- Signature guarantees" in the Shares'
prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Corporation and the Transfer Agent each reserves the right to
suspend or terminate the privilege of the Automatic Exchange Program at any
time.
No commission is charged to the shareholder for any exchange described
above. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder, and
the proceeds of such an exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Corporation employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Corporation does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Corporation will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Corporation, the Funds, and the Transfer Agent each reserves the
right to suspend or terminate the privilege of exchanging by telephone or fax at
any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have proceeds mailed to
their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption payments
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
Telephone redemption is not available with respect to shares
represented by share certificates or shares held in certain retirement accounts.
25
<PAGE>
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Corporation employs procedures, including recording telephone
calls, testing a caller's identity, and sending written confirmation of
telephone transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Corporation does not follow such procedures, it may be liable for
losses due to unauthorized or fraudulent telephone instructions. The Corporation
will not be liable for acting upon instructions communicated by telephone that
it reasonably believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared which may take up to seven
business days.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program, may redeem shares of the Fund by telephone.
Redemptions must be for at least $250. Redemption proceeds will be transferred
to your bank checking account in two or three business days following your call.
For requests received by the close of regular trading on the Exchange, normally
4:00 p.m. eastern time, shares will be redeemed at the net asset value per share
calculated at the close of trading on the day of your call. QuickSell requests
after the close of regular trading on the Exchange will begin their processing
and be redeemed at the net asset value calculated as of the close of regular
trading on the Exchange the following business day. QuickSell transactions are
not available for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing an QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to redemptions to ensure
that all necessary documents accompany the request. When shares are held in the
name of a corporation, trust, fiduciary, agent, attorney or partnership, the
Transfer Agent requires, in addition to the stock power, certified evidence of
authority to sign. These procedures are for the protection of shareholders and
should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within five business days after receipt by the Transfer Agent of a
request for redemption that complies with the above requirements. Delays in
payment of more than seven days for shares tendered for repurchase or redemption
may result, but only until the purchase check has cleared.
26
<PAGE>
The requirements for IRA redemptions are different from those for
regular accounts. For more information please call 1-800-225-5163.
Redemption-in-Kind
The Corporation reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Corporation and valued as they are for purposes of computing the Fund's net
asset value (a redemption-in-kind). If payment is made in securities, a
shareholder may incur transaction expenses in converting these securities into
cash. The Corporation has elected, however, to be governed by Rule 18f-1 under
the 1940 Act as a result of which the Fund is obligated to redeem 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 relevant Fund at the
beginning of the period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to the
Fund through Scudder Investor Services, Inc. at Two International Place, Boston,
Massachusetts 02110-4103 by letter, fax, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the repurchase
request. A written request in good order with a proper original signature
guarantee, as described in the Fund's prospectus under "Transaction information
- -- Signature guarantees," should be sent with a copy of the invoice to Scudder
Funds, c/o Scudder Confirmed Processing, Two International Place, Boston,
Massachusetts 02110-4103. Failure to deliver shares or required documents (see
above) by the settlement date may result in cancellation of the trade and the
shareholder will be responsible for any loss incurred by the Fund or the
principal underwriter by reason of such cancellation. Net losses on such
transactions which are not recovered from the shareholder will be absorbed by
the principal underwriter. Any net gains so resulting will accrue to the Fund.
For this group, repurchases will be carried out at the net asset value next
computed after such repurchase requests have been received. The arrangements
described in this paragraph for repurchasing shares are discretionary and may be
discontinued at any time.
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Corporation does not impose a redemption or repurchase charge although wire
charges may be applicable for redemption proceeds wired to an investor's bank
account. Redemption of shares, including an exchange into another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and the
proceeds of such redemptions may be subject to backup withholding. (See
"TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustees or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (d) a
governmental body having jurisdiction over the Fund may by order of the SEC
permit such a suspension for the protection of the Corporation's shareholders;
provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) shall govern as to whether the conditions prescribed in
(b), (c) or (d) exist.
Shareholders should maintain a share balance worth at least $2,500
($1,000 for IRAs, Uniform Gift to Minor Act, and Uniform Trust to Minor Act
accounts), which amount may be changed by the Board of Directors. Scudder
retirement plans have similar or lower minimum balance requirements. A
shareholder may open an account with at least $1,000 ($500 for an UGMA, UTMA,
IRA and other retirement accounts), if an automatic investment plan (AIP) of
$100/month ($50/month for an UGMA, UTMA, IRA and other retirement accounts) is
established.
Shareholders who maintain a non-fiduciary account balance of less than
$2,500 in the Fund, without establishing an AIP, will be assessed an annual
$10.00 per fund charge with the fee to be reinvested in the Fund. The $10.00
charge will not apply to shareholders with a combined household account balance
in any of the Scudder Funds of $100,000 or more. The Fund reserves the right,
following 60 days' written notice to shareholders, to redeem all shares in
accounts below $250,
27
<PAGE>
including accounts of new investors, where a reduction in value has occurred due
to a redemption or exchange out of the account. The Fund will mail the proceeds
of the redeemed account to the shareholder at the address of record. Reductions
in value that result solely from market activity will not trigger an involuntary
redemption. UGMA, UTMA, IRA and other retirement accounts will not be assessed
the $10.00 charge or be subject to automatic liquidation.
FEATURES AND SERVICES OFFERED BY THE FUND
(See "Investment Products and Services" in the Shares' prospectus.)
The No- Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes funds in its
Scudder Family of Funds from the vast majority of mutual funds available today.
The primary distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not the
Fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of the Fund's average annual net assets, and the maximum
charge for a service fee is 0.25% of the Fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the NASD
Conduct Rules, a mutual fund can call itself a "no-load" fund only if the 12b-1
fee and/or service fee does not exceed 0.25% of the Fund's average annual net
assets.
Because Scudder funds and classes in the Scudder Family of Funds do not
pay any asset-based sales charges or service fees, Scudder developed and
trademarked the phrase no- load to distinguish funds and classes in the Scudder
Family of Funds from other no-load mutual funds. Scudder pioneered the no-load
concept when it created the nation's first no-load fund in 1928, and later
developed the nation's first family of no-load mutual funds. The Scudder Family
of Funds consists of those Funds or classes of Funds advised by Scudder which
are offered without commissions to purchase or redeem shares or to exchange from
one Fund to another.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder no-load fund over investing the same amount in a
load fund that collects an 8.50% front-end load, a load fund that collects only
a 0.75% 12b-1 and/or service fee, and a no-load fund charging only a 0.25% 12b-1
and/or service fee. The hypothetical figures in the chart show the value of an
account assuming a constant 10% rate of return over the time periods indicated
and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
Scudder Family
of Funds Load Fund with 0.75% No-Load Fund with
YEARS No- Load Fund 8.50% Load Fund 12b-1 Fee 0.25% 12b-1 Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $25,937 $23,733 $24,222 $25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
28
<PAGE>
Investors are encouraged to review the fee table of the Fund's
prospectus for more specific information about the rates at which management
fees and other expenses are assessed.
Internet Access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividend and Capital Gain Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of the same Fund. A change of instructions for the
method of payment must be received by the Transfer Agent at least five days
prior to a dividend record date. Shareholders may change their dividend option
either by calling 1-800-225-5163 or by sending written instructions to the
Transfer Agent. Please include your account number with your written request.
See "How to contact Scudder" in the Fund's Prospectus for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of the relevant Fund.
29
<PAGE>
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Diversification
Your investment in the Fund represents an interest in a large,
diversified portfolio of carefully selected securities. Diversification may
protect you against the possible risks of concentrating in fewer securities or
in a specific market sector.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Shares' prospectus. The Investor Centers are designed
to provide individuals with services during any business day. Investors may pick
up literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Investor Centers but should be mailed to "The Scudder Funds" at
the address listed under "Investment Products and Services" in the Shares'
prospectus.
Reports to Shareholders
The Corporation issues to the Fund's shareholders semiannual and annual
financial statements audited by independent accountants, including a list of
investments held and statements of assets and liabilities, operations, changes
in net assets and financial highlights.
Transaction Summaries
Annual summaries of all transactions in the Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment Products and Services" in the Shares' prospectus.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
30
<PAGE>
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
- ------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
31
<PAGE>
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund*seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
32
<PAGE>
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
- ------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
33
<PAGE>
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
- ------------------------
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
34
<PAGE>
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; no-load funds with no commissions to purchase or redeem
shares or Rule 12b-1 distribution fees; individual attention from a service
representative of Scudder Investor Relations; and easy telephone exchanges into
other Scudder funds. Certain Scudder funds or classes thereof may not be
available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See "Transaction Information," "Purchases" and "Exchanges and
Redemptions" in the Shares' prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
35
<PAGE>
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
36
<PAGE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the Corporation or its agent on written notice, and will be
terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the Corporation of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
37
<PAGE>
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Corporation and its agents reserve the right to establish a
maintenance charge in the future depending on the services required by the
investor.
The Corporation reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Corporation reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "DISTRIBUTIONS -- Dividends and Capital Gains Distributions and
Taxes" in the Shares' prospectus.)
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 ordinary 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
the interest of shareholders to distribute less than the required amount. (See
"TAXES.")
The Fund intends to distribute investment company taxable income and
any net realized capital gains in December each year. Any dividends or capital
gains distributions declared in October, November or December with a record date
in such a month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared. Additional distributions may be made if necessary.
38
<PAGE>
All distributions will be made in shares of the Fund and confirmations
will be mailed to each shareholder unless a shareholder has elected to receive
cash, in which case a check will be sent. Distributions are taxable, whether
made in shares or cash. (See "TAXES.")
PERFORMANCE INFORMATION
(See "FUND SUMMARY -- Past Performance" in the Shares' prospectus.)
From time to time, quotations of the Shares' performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. Effective April 16, 1998, Global Discovery Fund was
divided into four classes of shares. Shares of Global Discovery Fund outstanding
on that date were redesignated Scudder Shares of the Fund. The performance
information will be calculated separately for each class of Global Discovery
Fund's shares. These performance figures are calculated in the following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for, where applicable, the periods of one year, five years, ten years (or
such shorter periods as may be applicable dating from the commencement of the
Fund's operations), all ended on the last day of a recent calendar quarter.
Average annual total return quotations reflect changes in the price of the
Fund's shares and assume that all dividends and capital gains distributions
during the respective periods were reinvested in Fund shares. Average annual
total return is calculated by finding the average annual compound rates of
return of a hypothetical investment, over such periods, according to the
following formula (average annual total return is then expressed as a
percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
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.
<TABLE>
<CAPTION>
Average Annual Total Return for periods ended October 31, 1998
One Year Five Years Life of the Fund
<S> <C> <C> <C>
Global Discovery Fund* 1.19% 8.66% 10.75%(1)
</TABLE>
(1) For the period beginning September 10, 1991.
* On April 16, 1998, Global Discovery Fund adopted its present name.
Prior to that date, the Fund was known as Scudder Global Discovery Fund
since it changed its name from Scudder Global Small Company Fund on
March 6, 1996. Performance information provided is for the Fund's
Scudder Shares class.
Cumulative Total Return
Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
Total Return quotations reflect changes in the price of the Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative Total Return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
39
<PAGE>
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.
Cumulative Total Return for periods ended October 31, 1998
<TABLE>
<CAPTION>
One Year Five Years Life of the Fund
<S> <C> <C> <C>
Global Discovery Fund* 1.19% 41.06% 79.34%(1)
</TABLE>
(1) For the period beginning September 10, 1991.
* On April 16, 1998, Global Discovery Fund adopted its present name.
Prior to that date, the Fund was known as Scudder Global Discovery Fund
since it changed its name from Scudder Global Small Company Fund on
March 6, 1996. Performance information provided is for the Fund's
Scudder Shares class.
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
Comparison of Portfolio Performance2Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
Because some or all of the Fund's investments are denominated in
foreign currencies, the strength or weakness of the U.S. dollar as 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.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations. In addition, the Fund's performance may also be
compared to the performance of broad groups of comparable mutual funds.
Unmanaged indices with which the Fund's performance may be compared include, but
are not limited to, the following:
The Europe/Australia/Far East (EAFE) Index
International Finance Corporation's Latin America Investable
Total Return Index
Morgan Stanley Capital International World Index
J.P. Morgan Global Traded Bond Index
40
<PAGE>
Salomon Brothers World Government Bond Index
Nasdaq Composite Index
Wilshire 5000 Stock Index
From time to time, in marketing and other Fund literature, Directors
and officers of the Corporation, the Fund's portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Fund. In addition, the amount of assets that the Adviser has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
41
<PAGE>
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
42
<PAGE>
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
43
<PAGE>
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.
Scudder's 30% Solution
The 30 Percent Solution -- A Global Guide for Investors Seeking Better
Performance With Reduced Portfolio Risk is a booklet, created by Scudder, to
convey its vision about the new global investment dynamic. This dynamic is a
result of the profound and ongoing changes in the global economy and the
financial markets. The booklet explains how Scudder believes an equity
investment portfolio with up to 30% in international holdings and 70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.
ORGANIZATION OF THE FUND
(See "Investment Adviser" in the Shares' prospectus.)
The Fund is a separate series of Global/International Fund, Inc., a
Maryland corporation organized on May 15, 1986. The name of the Corporation was
changed from Scudder Global Fund, Inc. on May 28, 1998. The name of the Fund was
changed, effective April 16, 1998, from Scudder Global Discovery Fund to Global
Discovery Fund. The Corporation's shares are currently divided into five series:
Global Discovery Fund, Scudder Global Fund, Scudder Emerging Markets Income
Fund, Scudder Global Bond Fund and Scudder International Bond Fund. The Fund's
shares are currently divided into four classes: the Scudder Shares, and Kemper
Global Discovery Fund Class A, B and C shares. Although shareholders of
different classes of a series have an interest in the same portfolio of assets,
shareholders of different classes may bear different expenses in connection with
different methods of distribution.
The authorized capital stock of the Corporation consists of 800 million
shares with $.01 par value, of which 100 million shares are allocated to Global
Discovery Fund. Each share of each series of the Corporation has equal voting
rights as to each other share of that series as to voting for Directors,
redemption, dividends and liquidation. Shareholders have one vote for each share
held. All shares issued and outstanding are fully paid and non-assessable,
transferable, and redeemable at net asset value at the option of the
shareholder. Shares have no pre-emptive or conversion rights.
Shares of the Corporation entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The shares of the Corporation have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so, and, in such
event, the holders of the remaining less than 50% of the shares voting for the
election of Directors will not be able to elect any person or persons to the
Board of Directors.
Each share of each class of the Fund shall be entitled to one vote (or
fraction thereof in respect of a fractional share) on matters that such shares
(or class of shares) shall be entitled to vote. Shareholders of the Fund shall
vote together on any matter, except to the extent otherwise required by the 1940
Act, or when the Board of Directors has determined that the matter affects only
the interest of shareholders of one or more classes of the Fund, in which case
only the shareholders of such class or classes of the Fund shall be entitled to
vote thereon. 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 Fund'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
Fund'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 Fund's outstanding shares. The term "majority", when referring to the
approvals to be obtained from shareholders in connection with matters affecting
a single Fund or any other single portfolio (e.g., annual approval of
44
<PAGE>
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. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
The Directors, in their discretion, may authorize the division of
shares of a series into different classes permitting shares of different classes
to be distributed by different methods. Although shareholders of different
classes of a series would have an interest in the same portfolio of assets,
shareholders of any subsequently created classes may bear different expenses in
connection with different methods of distribution of their classes.
Maryland corporate law provides that a Director of the Corporation
shall not be liable for actions taken in good faith, in a manner he or she
reasonably believes to be in the best interests of the Corporation and with the
care that an ordinarily prudent person in a like position would use under
similar circumstances. In so acting, a Director shall be fully protected in
relying in good faith upon the records of the Corporation and upon reports made
to the Corporation by persons selected in good faith by the Directors as
qualified to make such reports.
The Articles of Amendment and Restatement provide that the Directors of
the Corporation, to the fullest extent permitted by Maryland General Corporation
Law and the 1940 Act shall not be liable to the Corporation or its shareholders
for damages. As a result, Directors of the Corporation may be immune from
liability in certain instances in which they could otherwise be held liable. The
Articles and the By-Laws provide that the Corporation will indemnify its
Directors, officers, employees or agents against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Corporation to the fullest extent permitted by applicable
law. Nothing in the Articles or the By-Laws protects or indemnifies a Director,
officer, employee or agent against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of that
person's office.
No series of the Corporation shall be liable for the obligations of any
other series.
INVESTMENT ADVISER
(See "Investment Adviser" in the Shares' prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., 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. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder'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"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder Institutional Fund, Inc., Scudder International Fund,
Inc., Investment Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc.,
Scudder New Asia Fund, Inc., Scudder New Europe Fund, Inc., Scudder Pathway
Series, Scudder Securities Trust, Scudder State Tax Free Trust, Scudder Tax Free
Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund, Scudder
45
<PAGE>
Variable Life Investment Fund, The Argentina Fund, Inc., The Brazil Fund, Inc.,
The Korea Fund, Inc., The Japan Fund, Inc. and Scudder Spain and Portugal Fund,
Inc. Some of the foregoing companies or trusts have two or more series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous 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 variety of sources, including
brokers and dealers who may execute portfolio transactions for the Fund and for
clients of the Adviser, but conclusions are based primarily on investigations
and critical analyses by the Adviser's own research specialists. The Adviser's
international investment management team travels the world, researching hundreds
of companies.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Funds 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 for that Fund.
The transaction between Scudder and Zurich resulted in the assignment
of the Fund's investment management agreement with Scudder, that agreement was
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, a new investment management agreement
between the Corporation on behalf of the Fund, and the Adviser was approved by
the Corporation's Directors. At the special meeting of the Fund's shareholders
on October 27, 1997, the shareholders also approved the investment management
agreement. The new investment management agreement became effective as of
December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with Scudder Kemper, which is substantially
identical to the current investment management agreement, except for the dates
of execution and termination. The agreement became effective September 7, 1998,
upon the termination of the then current investment management agreement and was
approved at a shareholder meeting held in December 1998.
The Agreement dated September 7, 1998, was approved by the Directors of
the Corporation on August 11, 1998. The Agreement will continue in effect until
September 30, 1999 and from year to year thereafter 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
46
<PAGE>
the Adviser or the Fund, cast in person at a meeting called for the purpose of
voting on such approval, and either by a vote of the Corporation's Directors or
of a majority 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 regularly 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, held or sold, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the
Corporation's Articles of Incorporation and By-Laws, of the 1940 Act and the
Internal Revenue Code of 1986 and to the Fund's investment objectives, policies
and restrictions, as each may be amended, and subject, further, to such policies
and instructions as the Board of Directors may from time to time establish.
Under the agreement, the Adviser 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 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 except those for
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts of all Directors, officers and executive employees of the
Corporation affiliated with the Adviser and makes available, without expense to
the Funds, the services of such directors, officers and employees of the Adviser
as may duly be elected officers, subject to their individual consent to serve
and to any limitations imposed by law, and provides the Funds' office space and
facilities.
For these services, Global Discovery Fund pays the Adviser an annual
fee equal to 1.10% of the average daily net assets of such Fund. For the fiscal
year ended October 31, 1996, the management fee amounted to $3,201,957. For the
fiscal year ended October 31, 1997, the management fee amounted to $3,960,949.
For the fiscal year ended October 31, 1998, the management fee amounted to
$3,960,160, of which $326,115 was unpaid at October 31, 1998.
The fee is payable monthly, provided the Fund will make such interim
payments as may be requested by the Adviser not to exceed 75% of the amount of
the fee then accrued on the books of the Fund and unpaid. Under the agreement,
the Fund is responsible for all of its other expenses including: organization
expenses; fees and expenses incurred in connection with membership in investment
company organizations; broker's 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 share
certificates and any other expenses, including expenses of issuance, redemption
or repurchase of shares; the expenses of and the fees for registering or
qualifying securities for sale; the fees and expenses of the Directors, officers
and employees 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 expenses of shareholders' meetings, the cost of
responding to shareholders' inquiries, and 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 identified the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Corporation, with respect to the Funds, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Corporation's investment products
and services.
In reviewing the terms of the agreement and in discussions with the
Adviser concerning such Agreement, the Directors who are not "interested
persons" of the Corporation have been represented by independent counsel at the
relevant Fund's expense.
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<PAGE>
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 Funds' 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 may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Fund.
Personal Investments by Employees of the Adviser
Employees of the Adviser 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 the Funds. 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.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Address and Age Position with Corporation Principal Occupation** Services, Inc.
- --------------------- ------------------------- ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce*+ (64) Chairman of the Board and Chairman of the Board and Vice President,
Director Managing Director of Assistant Treasurer
Scudder Kemper and Director
Investments, Inc.
Nicholas Bratt*#@++ (50) President-- Global Managing Director of --
Discovery Fund Scudder Kemper
Investments, Inc.
Paul Bancroft III (69) Director Venture Capitalist and --
79 Pine Lane Consultant; Retired
Box 6639 President, Chief
Snowmass Village, CO 81615 Executive Officer and
Director, Bessemer
Securities Corporation
Sheryle J. Bolton (52) Director Chief Executive Officer --
Scientific Learning Corporation and Director, Board of
1995 University Avenue Directors, Scientific
Suite 400 Learning Corporation;
Berkeley, CA 94704 Former President and
Chief Operating Officer,
Physicians Online, Inc.
(Electronic transmission
of clinical information for
physicians [1994-1995])
William T. Burgin (55) Director General Partner, --
83 Walnut Street Bessemer Venture
Wellesley, MA 02481-2101 Partners; General Partner,
Deer & Company;
Director, Fort James
Corporation; Director of
various privately held
companies
48
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Address and Age Position with Corporation Principal Occupation** Services, Inc.
- --------------------- ------------------------- ---------------------- --------------
Thomas J. Devine (72) Honorary Director Consultant --
450 Park Avenue
New York, NY 10022
Keith R. Fox (44) Director Private Equity Investor, --
10 East 53rd Street Exeter Capital
New York, NY 10022 Management Corporation
William H. Gleysteen, Jr. (72) Honorary Director Consultant; Guest --
4937 Crescent Street Scholar, Brookings
Bethesda, MD 20816 Institution; President, The
Japan Society (1989-
1995)
William H. Luers (68) Director Chairman and President, --
993 Fifth Avenue U.N. Association of the
New York, NY 10028 U.S.A.
Kathryn L. Quirk++ (47) Director, Vice President and Managing Director of Director, Senior Vice
Assistant Secretary Scudder Kemper President and Clerk
Investments, Inc.
Joan E. Spero (54) Director President, Doris Duke --
Dori Duke Charitable Charitable Foundation;
Foundation Department of State
650 Fifth Avenue - 19th Floor Undersecretary of State
New York, NY 10128 for Economic Business
and Agricultural Affairs
(1993-1997)
Robert G. Stone, Jr. (75) Honorary Director Chairman Emeritus & --
405 Lexington Avenue 39th Floor Director, Kirby
New York, NY 10174 Corporation (inland and
offshore marine
transportation and diesel
repairs)
Susan E. Dahl+ (33) Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
Gary P. Johnson+ (45) Vice President Senior Vice President of --
Scudder Kemper
Investments, Inc.
Thomas W. Joseph+ (59) Vice President Senior Vice President of Vice President,
Scudder Kemper Treasurer, Assistant
Investments, Inc. Clerk and Director
Ann M. McCreary Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
Thomas F. McDonough+ (52) Vice President and Secretary Senior Vice President of Assistant Clerk
Scudder Kemper
Investments, Inc.
Gerald J. Moran++ (59) Vice President Senior Vice President of --
Scudder Kemper
Investments, Inc.
49
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Address and Age Position with Corporation Principal Occupation** Services, Inc.
- --------------------- ------------------------- ---------------------- --------------
John R. Hebble+ (40) Treasurer Senior Vice President of --
Scudder Kemper
Investments, Inc.
Caroline Pearson + (36) Assistant Secretary Senior Vice President of --
Scudder Kemper
Investments, Inc.;
Associate, Dechert Price
& Rhoads (law firm),
1989-1997
M. Isabel Saltzman+ (44) Vice President Managing Director of --
Scudder Kemper
Investments, Inc.
* Messrs. Bratt and Pierce, and Ms. Quirk are considered by the Corporation and its counsel to be persons who
are "interested persons" of the Adviser or of the Corporation (within the meaning of the 1940 Act).
** Unless otherwise stated, all the Directors and officers have been
associated with their respective companies for more than five years, but
not necessarily in the same capacity.
# Mr. Pierce and Ms. Quirk are members of the Executive Committee, which may exercise powers of the Directors
when they are not in session.
@ The President of a series shall have the status of Vice President of the Corporation.
+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154
</TABLE>
Certain accounts for which the Adviser acts as investment adviser owned
1,649,695 shares in the aggregate of Global Discovery Fund, or 10.52% of the
outstanding shares on January 29, 1999. The Adviser may be deemed to be the
beneficial owner of such shares of Global Discovery Fund, but disclaims any
beneficial ownership therein.
As of January 29, 1999, 953,449 shares in the aggregate, 6.08% of the
outstanding shares of Scudder Global Discovery Fund were held in the name of
Charles Schwab & Co., 101 Montgomery Street, San Francisco, CA 94104-4122, who
may be deemed to be the beneficial owner of certain of these shares, but
disclaims any beneficial ownership therein.
To the knowledge of the Trust, as of January 29, 1999 all Directors and
officers as a group owned beneficially (as the term is defined in Section 13(d)
under the Securities Exchange Act of 1934) 460,173 shares, or 2.93% of the
shares of Global Discovery Fund outstanding on such date.
To the knowledge of the Trust, except as stated above, as of January
29, 1999, no person owned beneficially more than 5% of the Fund's outstanding
shares.
The Directors and officers of the Corporation also serve in similar
capacities with respect to other Scudder Funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Directors is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Directors" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Directors meets at least quarterly to review the
investment performance of the Fund and other operational matters, including
policies and procedures designed to ensure compliance with various regulatory
requirements. At least annually, the Independent Directors review the fees paid
to the Adviser and its affiliates for investment advisory
50
<PAGE>
services and other administrative and shareholder services. In this regard, they
evaluate, among other things, the Fund's investment performance, the quality and
efficiency of the various other services provided, costs incurred by the Adviser
and its affiliates and comparative information regarding fees and expenses of
competitive funds. They are assisted in this process by the Fund's independent
public accountants and by independent legal counsel selected by the Independent
Directors.
All the Independent Directors serve on the Committee on Independent
Directors, which nominates Independent Directors and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Directors from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Directors
The Independent Directors receive the following compensation from
Global Discovery Fund of Global/International Fund, Inc.: an annual trustee's
fee of $3,500; a fee of $325 for attendance at each board meeting, audit
committee meeting or other meeting held for the purposes of considering
arrangements between the Trust on behalf of the Fund and the Adviser or any
affiliate of the Adviser; $100 for all other committee meetings; and
reimbursement of expenses incurred for travel to and from Board Meetings. No
additional compensation is paid to any Independent Director for travel time to
meetings, attendance at directors' educational seminars or conferences, service
on industry or association committees, participation as speakers at directors'
conferences or service on special trustee task forces or subcommittees.
Independent Directors do not receive any employee benefits such as pension or
retirement benefits or health insurance. Notwithstanding the schedule of fees,
the Independent Directors have in the past and may in the future waive a portion
of their compensation.
The Independent Directors also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Director fee schedules. The
following table shows the aggregate compensation received by each Independent
Director during 1998 from the Corporation and from all of the Scudder funds as a
group.
<TABLE>
<CAPTION>
Global/International Fund, Inc.* All Scudder Funds
-------------------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Funds the Adviser the Funds the Adviser**
- ---- --------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $38,500 $2,125 $174,200 $8,925 (23 funds)
Director
Sheryle J. Bolton, $38,500 $0 $149,050 $0 (21 funds)
Director
William T. Burgin, $38,500 $2,125 $150,950 $8,925 (21 funds)
Director
Thomas J. Devine, $38,500 $2,125 $162,450 $8,925 (22 funds)
Honorary Director
Keith R. Fox, Director $39,750 $2,125 $156,800 $8,925 (21 funds)
William H. Gleysteen, $38,500 $2,125 $123,200@ $4,675 (15 funds)
Jr., Honorary Director
William H. Luers, $34,750 $2,125 $157,050 $8,925 (24 funds)
Director
Joan E. Spero*** $8,340 $0 $29,736 $0 (21 funds)
</TABLE>
* Global/International Fund, Inc. consists of five funds: Scudder Global
Fund, Scudder International Bond Fund, Scudder Global Bond Fund, Global
Discovery Fund and Scudder Emerging Markets Income Fund.
** Meetings associated with the Adviser's alliance with Zurich Insurance
Company. See "Insurance Adviser" for additional information.
*** Elected as Director of the Corporation in September 1998.
@ This amount does not reflect $6,208 in retirement benefits accrued as
part of Fund Complex expenses, and $3,000, in estimated annual benefits
payable upon retirement. Retirement benefits accrued and proposed are
to be paid to Mr. Gleysteen as additional compensation for serving on
the Board of The Japan Fund, Inc.
51
<PAGE>
Members of the Board of Directors who are employees of the Adviser or
its affiliates receive no direct compensation from the Corporation, although
they are compensated as employees of the Adviser, or its affiliates, as a result
of which they may be deemed to participate in fees paid by the Fund.
DISTRIBUTOR
The Corporation, on behalf of the Fund, has an underwriting agreement
with Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts, 02110-4103 (the "Distributor"), a Massachusetts corporation,
which is a subsidiary of the Adviser, a Delaware corporation. The Corporation's
underwriting agreement dated September 7, 1998 will remain in effect from year
to year thereafter only if its continuance is approved annually by a majority of
the members of the Directors who are not parties to such agreement or interested
persons of any such party and either by vote of a majority of the Directors or a
majority of the outstanding voting securities of the Corporation. The
underwriting agreement was most recently approved by the Directors on August 6,
1998.
Under the underwriting agreement, the Corporation is responsible for:
the payment of all fees and expenses in connection with the preparation and
filing with the SEC of the Corporation's registration statement and prospectus
and any amendments and supplements thereto, the registration and qualification
of shares for sale in the various states, including registering the Corporation
as a broker/dealer in various states as required; the fees and expenses of
preparing, printing and mailing prospectuses (see below for expenses relating to
prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications (including newsletters) to shareholders of the Fund; the
cost of printing and mailing confirmations of purchases of shares and the
prospectuses accompanying such confirmations; any issue taxes or any initial
transfer taxes; any of shareholder toll-free telephone charges and expenses of
shareholder service representatives; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); the cost of printing and postage of business reply envelopes; and
any of the cost of computer terminals used by both the Corporation and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of Fund shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, any of the cost of toll-free telephone service and expenses of service
representatives, any of the cost of computer terminals, and of any activity
which is primarily intended to result in the sale of shares issued by the
Corporation.
Note: Although the Scudder Shares currently has no 12b-1 Plan and
shareholder approval would be required in order to adopt one,
the underwriting agreement provides that the Fund will also
pay those fees and expenses permitted to be paid or assumed by
the Fund pursuant to a 12b-1 Plan, if any, adopted by the
Fund, notwithstanding any other provision to the contrary in
the underwriting agreement, and the Fund or a third party will
pay those fees and expenses not specifically allocated to the
Distributor in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged to the investor. The Distributor has made no firm
commitment to acquire shares of the Corporation.
TAXES
(See "DISTRIBUTIONS -- Dividends and Capital
Gains Distributions and Taxes" in the Shares' Prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. Such qualification does not involve governmental
supervision or management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code. Global Discovery Fund intends to distribute
at least annually all of its respective investment company taxable income and
net realized capital gains and therefore do not expect to pay
52
<PAGE>
federal income tax, although in certain circumstances the Fund may determine
that it is in the interest of shareholders to distribute less than that amount.
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 the Fund to distribute to shareholders during a calendar year an amount
equal to at least 98% of the Fund's ordinary income for the 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, net
short-term capital gains in excess of net long-term capital losses, and certain
foreign currency gains, if any, less expenses and certain foreign currency
losses, if any. 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 taxable to shareholders at a maximum 20% or 28% capital gains rate
(depending on the Fund's holding period for the assets giving rise to the gain),
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 entitled to increase the adjusted tax basis on Fund shares by the
difference between a pro rata share of such gains owned and the individual tax
credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are expected to comprise some
portion of the Fund's gross income. To the extent that such dividends constitute
any of the Fund's gross income, a portion of the income distributions of the
Fund will be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent that either the Fund
shares, or the underlying shares of stock held by the Fund, with respect to
which dividends are received, are treated as debt-financed under federal income
tax law and is eliminated if either those shares or shares of the Fund are
deemed to have been held by the Fund or the shareholder, as the case may be, for
less than 46 days during the 90-day period beginning 45 days before the shares
become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gains over net short-term capital losses are taxable to shareholders at
a maximum 20% or 28% capital gains rate (depending on the Fund's holding period
for the assets giving rise to the gain), regardless of the length of time the
shares of the Fund have been held by such individual 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 from the date of their purchase 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.
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 Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution of up to
$2,000 or, if less, the amount of the individual's earned income for any taxable
year only if (i) neither the individual nor his or her spouse (unless filing
separate returns) is an active participant in an employer's retirement plan, or
(ii) the individual (and his or her spouse, if applicable) has an adjusted gross
income below a certain level ($40,050 for married individuals filing a joint
return, with a phase-out of the deduction for adjusted gross income between
$40,050 and $50,000; $25,050 for a single individual, with a phase-out for
adjusted gross income between $25,050 and $35,000). However, an individual not
permitted to make a deductible contribution to an IRA for any such taxable year
may nonetheless make nondeductible contributions up to $2,000 to an IRA
53
<PAGE>
(up to $2,000 per individual for married couples if only one spouse has earned
income) for that year. 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 not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
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 generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
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 a fund level tax when distributed to shareholders as a
dividend. Alternatively, the Fund may elect to include as income and gain its
share of 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 options on stock and options on narrow-based
stock indices) written or purchased by the Fund and over-the-counter options on
debt securities 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 stock. 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 put or 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 written by the Fund is exercised any resulting
gain or loss is a 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 contracts and certain foreign currency forward contracts
entered into by the Fund and all listed non-equity options written or purchased
by the Fund (including options on futures contracts and options on broad-based
stock indices) 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 generally will be treated as 60% long-term and
40% short-term capital gain or loss, and on the last trading day of the Fund's
fiscal year, 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 and similar
financial instruments entered into or acquired by the Fund will be
54
<PAGE>
treated as ordinary income. 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 which consist 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 which consist of at least one position not
governed by Section 1256 and at least one futures contract or forward contract
or nonequity option 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." Mixed straddles are subject to the straddle rules of Section
1092 of the Code, and may result in the deferral of losses if the non-Section
1256 position is in an unrealized gain at the end of a reporting period.
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
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract 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.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
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 level of the Fund. Shareholders will be subject to income tax
on such original issue discount, whether or not they elect to receive their
distributions in cash.
If the Fund invests in stock of certain passive foreign investment
companies, that Fund may be subject to U.S. federal income taxation on a portion
of any "excess distribution" with respect to, or gain from the disposition of,
such stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The distribution
or gain so allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to the Fund at
the highest ordinary income rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election 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 stock would be
deductible as ordinary losses to the extent of any net mark-to-market gains
previously included in income in prior years. The effect of this election
55
<PAGE>
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 Funds may elect to include as
income and gain their share of the ordinary earnings and net capital gain of
certain foreign investment companies in lieu of being taxed in the manner
described above.
The Fund will be required to report to the IRS all distributions of
investment company 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 investment company 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.
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.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Corporation 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.
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 generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage
Allocation of brokerage is supervised 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 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
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.
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<PAGE>
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 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 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 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 or other funds managed by the
Adviser.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through Scudder Investor Services, Inc.
("SIS"), a corporation registered as a broker-dealer and a subsidiary of the
Adviser. SIS will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. SIS will not receive any commission, fee or other
remuneration from the Fund for this service.
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 of 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.
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.
For the fiscal years ended October 31, 1998, 1997 and 1996, Global
Discovery Fund paid brokerage commissions of $526,742, $759,086 and $587,657,
respectively. During the fiscal year ended October 31, 1998, the Fund paid
brokerage commissions of $378,833 (71.92% of the total brokerage commissions),
resulting from orders placed, consistent with the policy of seeking to obtain
the most favorable net results, for transactions placed with brokers and dealers
who provided supplementary research, market and statistical information to the
Corporation or Adviser. The total amount of brokerage transactions aggregated
$188,229,557 (61.18% of all brokerage transactions). The balance of such
brokerage was not allocated to any particular broker or dealer or with regard to
the above-mentioned or any other special factors.
Portfolio Turnover
The Fund's average annual portfolio turnover rate (defined by the SEC
as the ratio of the lesser of sales or purchases to the monthly average value of
such securities owned during the year, excluding all securities with maturities
at the time of acquisition of one year or less). Purchases and sales are made
for the Fund's portfolio whenever necessary, in management's opinion, to meet
the Fund's objective. The Fund's portfolio turnover rates for the fiscal years
ended October 31, 1998, 1997 and 1996 were 40.6%, 60.5% and 63.0%, respectively.
NET ASSET VALUE
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 "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
57
<PAGE>
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities , by the total number of shares outstanding .
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. 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") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system will be valued at its most recent sale
price on such system as of the Value Time. Lacking any sales, the security will
be valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, 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 with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost , which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the 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 Fund's Valuation Committee, 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.
ADDITIONAL INFORMATION
Experts
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been so included or incorporated by reference in reliance on
the report of PricewaterhouseCoopers LLP, One Post Office Square, Boston,
Massachusetts 02109, independent accountants, and given on the authority of that
firm as experts in accounting and auditing. PricewaterhouseCoopers, LLP is
responsible for performing annual audits of the financial statements and
financial highlights of the Fund in accordance with generally accepted auditing
standards, and the preparation of federal tax returns.
58
<PAGE>
Other Information
Many of the investment changes in the Fund will be made at prices
different from those prevailing at the time such changes 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 investment objectives
and policies of the Fund, and such factors as its other portfolio holdings and
tax considerations should not be construed as recommendations for similar action
by other investors.
The CUSIP number of the Scudder Shares of Global Discovery Fund is:
811150-40-8.
The Fund's fiscal year end is October 31.
The law firm of Dechert Price & Rhoads is counsel for the Fund.
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, is employed as custodian for the Fund. Brown Brothers Harriman & Co. has
entered into agreements with foreign subcustodians approved by the Directors of
the Corporation pursuant to Rule 17f-5 of the Investment Company Act.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Fund. The Fund pays SFAC an annual fee equal to 0.065% of
the first $150 million of average daily net assets, 0.040% of such assets in
excess of $150 million and 0.020% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. Scudder Fund Accounting
Corporation charged Global Discovery Fund an aggregate fee of $302,281, $207,838
and $189,560 for the fiscal years ended October 31, 1998, 1997 and 1996,
respectively.
Information set forth below for periods prior to April 16, 1998 with
respect to Global Discovery Fund is provided at the Fund level since that Fund
consisted of one class of shares (which class was re-designated as "Scudder
Global Discovery Shares") until April 16, 1998.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a subsidiary of the Adviser, is the transfer and dividend paying
agent for the Scudder Shares. Scudder Service Corporation also serves as
shareholder service agent and provides subaccounting and recordkeeping services
for shareholder accounts in certain retirement and employee benefit plans. The
Fund pays Scudder Service Corporation an annual fee for each account maintained
as a participant. The fee incurred by Global Discovery Fund for the year ended
October 31, 1996 amounted to $514,910, of which $45,204 was unpaid at October
31, 1996. The fee incurred by Global Discovery Fund for the year ended October
31, 1997 amounted to $851,578, of which $64,821was unpaid at October 31, 1997.
The fee incurred by Global Discovery Fund on behalf of the Scudder Shares, for
the year ended October 31, 1998, amounted to $734,090, of which $58,838 was
unpaid at October 31, 1998.
Scudder Trust Company, an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by the Funds
to Scudder Trust Company, Two International Place, Boston, Massachusetts
02110-4103 for such accounts. The Fund pays Scudder Trust company an annual fee
of $26.00 per shareholder account. Global Discovery Fund incurred fees of
$92,508, of which $16,738 is unpaid at October 31, 1996. The fee incurred by
Global Discovery Fund for the year ended October 31, 1997 amounted to $186,872,
of which $15,665 was unpaid at October 31, 1997. The fee incurred by Global
Discovery Fund for the year ended October 31, 1998 amounted to $200,043, of
which $17,404 was unpaid at October 31, 1998.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the
Corporation 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. This Registration Statement is available
for inspection by the public at the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Global Discovery Fund
The financial statements, including the Investment Portfolio of Global
Discovery Fund -- Scudder Shares, together with the Report of Independent
Accountants, and Financial Highlights, are incorporated by reference and
attached hereto in the Annual Report to Shareholders of the Fund dated October
31, 1998, and are deemed to be a part of this Statement of Additional
Information.
59
<PAGE>
APPENDIX
The following is a description of the ratings given by Moody's and S&P
to corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
S&P:
Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. Debt rated AA
has a very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree. 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. 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.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
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. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. 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.
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. Bonds which are rated Ba are
judged to have speculative
<PAGE>
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 other good and bad times over the future.
Uncertainty of position characterizes bonds in this class. 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.
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. 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. 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.
<PAGE>
[LOGO] KEMPER FUNDS
Kemper Global and International Funds
PROSPECTUS March 1, 1999
KEMPER GLOBAL AND INTERNATIONAL FUNDS
222 South Riverside Plaza, Chicago, Illinois 60606 (800) 621-1048
This prospectus describes a choice of funds managed by Scudder Kemper
Investments, Inc.
Global Discovery Fund
Growth Fund Of Spain
Kemper Asian Growth Fund
Kemper Emerging Markets Growth Fund
Kemper Emerging Markets Income Fund
Kemper Europe Fund
Kemper Global Blue Chip Fund
Kemper Global Income Fund
Kemper International Fund
Kemper International Growth and Income Fund
Kemper Latin America Fund
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
FOREIGN INVESTING
INVESTMENT APPROACH
The funds described in this prospectus invest primarily in non-U.S. issuers.
Each fund has its own investment objective, investment strategy and risk
profile.
PRINCIPAL RISK FACTORS
There are market and investment risks with any security and the value of an
investment in the funds will fluctuate over time and it is possible to lose
money invested in the funds.
Stock Market. Each stock fund's returns and net asset value will go up and down.
Stock market movements will affect the funds' share prices on a daily basis.
Declines in value are possible both in the overall stock market and in the types
of securities held by the funds.
Bond Market. When interest rates rise, the price of bonds typically falls in
proportion to their duration. It is also possible that bonds in the fund's
portfolio could be downgraded in credit rating or go into default.
Duration, a measurement based on the estimated pay-back period or duration of a
bond (or portfolio of bonds), is the most widely used gauge of sensitivity to
interest rate change. Like maturity, duration is expressed in years. The longer
a fund's duration, the more sharply its share price is likely to rise or fall
when interest rates change.
Portfolio Strategy. The portfolio managers' skill in choosing appropriate
investments for the funds will determine in large part the funds' ability to
achieve their respective investment objectives.
Foreign Securities. Foreign investments, particularly investments in emerging
markets, carry added risks due to inadequate or inaccurate financial information
about companies, potential political disturbances and fluctuations in currency
exchange rates.
2 Global Investing
<PAGE>
ABOUT THE FUNDS
GROWTH FUND OF SPAIN
INVESTMENT OBJECTIVE
Growth Fund Of Spain seeks long-term capital appreciation. Unless otherwise
indicated, the fund's investment objective and policies are fundamental and
cannot be changed without a vote of shareholders.
Main investment strategies
The fund seeks to achieve its objective by investing primarily in equity
securities of Spanish companies. A company is deemed to be Spanish if it is:
o organized under the laws of Spain; or
o traded in the Spanish securities markets and doing business in Spain.
Under normal market conditions, at least 65% of the fund's total assets will be
invested in equity securities of Spanish companies. The fund may 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. The fund
may invest up to 35% of its total assets in investment-grade fixed income
securities denominated in Pesetas or U.S. dollars.
As an operating policy the investment manager intends to evaluate investment
opportunities throughout the Iberian Peninsula (i.e., Spain and Portugal). As a
matter of non-fundamental policy, the fund may invest up to 35% of its total
assets in equity securities of companies other than Spanish companies, and may
focus such investments in whole or in part in equity securities of companies
organized under the laws of Portugal or traded in the Portuguese securities
markets and doing business in Portugal.
In selecting its investments, the fund will look for companies with (i) strong
and sustainable earnings growth, (ii) solid management and (iii) reasonable
stock market valuations.
A stock is typically sold when, in the opinion of the portfolio manager, (i) the
stock has reached its fair market value, (ii) a company's fundamentals have
deteriorated and (iii) the fund's portfolio is too heavily weighted in a
particular industry or sector.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Growth Fund Of Spain 3
<PAGE>
Other investments
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, 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. In such a case, the fund would not be
pursuing, and may not achieve, its investment objective. The fund may also at
any time invest funds in U.S. dollar-denominated money market instruments as
reserves for expenses and dividends and other distributions to shareholders.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
The securities markets of Spain and Portugal have substantially less volume than
the securities markets of the U.S. 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 U.S.
Because the fund is non-diversified, the fund may invest a relatively high
percentage of its assets in a limited number of issuers. Accordingly, the fund's
investment returns are more likely to be impacted by changes in the market value
and returns of any one portfolio holding.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The fund is the successor entity to The Growth Fund of Spain, Inc., a closed-end
fund whose shares were exchanged for Class A shares of the fund in connection
with a reorganization transaction completed on December 11, 1998. The
information provided in the chart is for The Growth Fund of Spain, Inc. through
December 11, 1998 and for the fund's Class A shares thereafter, and does not
reflect sales charges, which reduce return. Open-end funds generally have higher
expenses than closed-end funds and, accordingly, the fund expects that
4 Growth Fund Of Spain
<PAGE>
its expense ratio will be higher than that of its predecessor. Expenses
adversely affect performance.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1991................. 15.82%
1992................. -23.48%
1993................. 28.79%
1994................. 2.26%
1995................. 22.11%
1996................. 31.12%
1997................. 19.47%
1998................. 49.85%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 32.17% (the first quarter of 1998), and the fund's lowest
return for a calendar quarter was -21.84% (the third quarter of 1992).
Average Annual Total Returns
For periods ended
December 31, 1998 Class A[ Class B Class C IBEX 35 Index
- ----------------- ------- ------- ------- -------------
One Year 41.21% -- -- 47.47%
Five Years 22.52% -- -- 25.23%
Ten Years -- -- -- --
Since Class
Inception* 13.19% 3.22%** 6.44%** ***
- -----------
[ The information provided is for The Growth Fund of Spain, Inc. through
December 11, 1998 and for the fund's Class A shares thereafter, and
assumes deduction of the Class A sales charge.
* Inception date for Class A shares is 2/14/90, which was the inception date
for the fund's predecessor, The Growth Fund of Spain, Inc. and for Class B
and C shares is 12/14/98.
** Aggregate returns.
*** Index return for the life of each class: 14.82% (2/14/90) for Class A
shares, and 4.65% (12/14/98) for Class B and C shares.
The IBEX 35 Index is a capitalization-weighted index of the 35 most liquid
Spanish stocks traded on the continuous markets. Index returns assume
reinvestment of dividends and, unlike fund returns, do not reflect any fees,
expenses or sales charges.
Growth Fund Of Spain 5
<PAGE>
Fee and Expense information
The following information is designed to help you understand the costs of
investing in the fund. Each class of shares has a different set of transaction
fees, which will vary based on the length of time you hold shares in the fund
and the amount of your investment. You will find details about fee discounts and
waivers in the Buying shares and Choosing a share class -- Special features
sections of this prospectus.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) 2.00%* 2.00%* 2.00%*
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets**
- --------------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 1.10% 1.35% 1.30%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.85% 2.85% 2.80%
- --------------------------------------------------------------------------------
* A 2% redemption fee, which is retained by the fund, is imposed upon
redemptions or exchanges of shares held less than one year, with limited
exceptions. See "Redemption Fee."
** The fund was reorganized from a closed-end fund to an open-end fund in
December 1998. The fees and expenses of open-end funds are, in many cases,
higher than those of closed-end funds. Accordingly, the expense ratios
shown above are estimated, based on the fund's current fee schedule and
expenses incurred by the fund during its most recent fiscal year, for the
fund's current fiscal year ending on October 31, 1999. The actual expenses
for each class of shares in future years may be 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.
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
6 Growth Fund of Spain
<PAGE>
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold your shares after:
Class A Class B Class C
------- ------- -------
1 Year $941 $888 $583
3 Years $1,123 $1,183 $868
5 Years $1,518 $1,704 $1,479
10 Years $2,619 $2,719 $3,128
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $752 $288 $283
3 Years $1,123 $883 $868
5 Years $1,518 $1,504 $1,479
10 Years $2,619 $2,719 $3,128
Growth Fund Of Spain 7
<PAGE>
KEMPER ASIAN GROWTH FUND
INVESTMENT OBJECTIVE
Kemper Asian Growth Fund seeks long-term capital growth. Unless otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
Main investment strategies
The fund seeks to achieve its investment objective by investing in a diversified
portfolio consisting primarily of equity securities of Asian companies.
Under normal circumstances the fund will invest at least 85% of its total assets
in equity securities of Asian companies. The fund considers an issuer of
securities to be an Asian company if:
o the company is organized under the laws of an Asian country and has a
principal office in an Asian country;
o the company derives 50% or more of its total revenues from business in
Asia; or
o the company's equity securities are traded principally on a stock exchange
in Asia.
Furthermore, the fund will invest at least 65% of its total assets in securities
of Asian companies which satisfy at least one of the first two criteria
described above.
The fund invests principally in developing or emerging countries. The fund may
invest without limit in emerging Asian countries, such as China, Indonesia,
Korea, Malaysia, Philippines, Thailand and Taiwan. The fund may also invest
without limit in developed Asian countries, such as Japan and Singapore.
However, the fund will only invest in Japan when economic conditions warrant,
and then only in limited amounts. From time to time, the fund may have 40% or
more of its total assets invested in any major Asian industrial or developed
country.
The fund's investment manager determines the appropriate distribution of
investments among various Asian countries and geographic regions by considering
numerous factors, including the following, among other things:
o prospects for relative economic growth of Asian countries;
o expected levels of inflation;
o relative price levels of the various capital markets;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to investors in
Asian companies.
In selecting its investments, the fund will look for companies with (i)
identifiable market niches, (ii) clean balance sheets and (iii) strong
valuations.
8 Kemper Asian Growth Fund
<PAGE>
A stock is typically sold when, in the opinion of the portfolio manager, (i) the
stock has reached its fair market value, (ii) a company's fundamentals have
deteriorated and (iii) the fund's portfolio is too heavily weighted in a
particular industry or sector.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest in other types of securities including, but not limited to,
equity securities of non-Asian companies, bonds, notes, and other debt
securities of domestic or foreign companies and obligations of domestic or
foreign governments and their political subdivisions. The fund does not
currently intend to invest more than 5% of its net assets in debt securities.
The fund considers Asian equity securities to include shares of closed-end
management investment companies, the assets of which are invested primarily in
equity securities of Asian companies and depository receipts where the
underlying or deposited securities are equity securities of Asian companies.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in high-grade debt securities, cash and cash equivalents. In such a case, the
fund would not be pursuing, and may not achieve, its investment objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
The fund invests primarily in one geographic region. Common economic forces and
other factors may affect investments in a single region, even though a number of
different countries within a region may be represented within the fund. Factors
affecting Asian investments may present a greater risk to the fund than
investments in a more geographically diversified fund.
Kemper Asian Growth Fund 9
<PAGE>
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1997................. -34.60%
1998................. -19.02%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 19.46% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -33.05% (the second quarter of 1998).
Average Annual Total Returns
MSCI All Country
For periods ended Asia Free
December 31, 1998 Class A Class B Class C Ex-Japan Index
- ----------------- ------- ------- ------- --------------
One Year -23.70% -22.37% -20.06% -4.82%
Five Years -- -- -- --
Ten Years -- -- -- --
Since Class
Inception** -25.10% -24.90% -23.77% *
- -----------
* Index returns for the life of each class: -26.49% (11/30/96) for Class A,
B, and C, respectively.
** Inception date for Class A, B and C shares is 10/21/96.
10 Kemper Asian Growth Fund
<PAGE>
The Morgan Stanley Capital International All Country Asia Free Ex-Japan Index is
a capitalized weighted index that is representative of the equity securities for
the following countries: Hong Kong, Indonesia, Korea (at 20%), Malaysia,
Philippines free, Singapore free and Thailand. Index returns assume reinvestment
of dividends and unlike the fund's returns, do not reflect any fees, expenses,
or sales charges.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 0.85% 0.85% 0.85%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 1.80% 2.69% 2.96%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.65% 4.29% 4.56%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended November 30, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.80%, Class B shares to 2.78%, and Class C shares to 2.71%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. As a result, for the fiscal year ended November 30, 1998,
"Total Annual Fund Operating Expenses" were reduced by 0.85%, 1.51% and 1.85%
for Class A, Class B and Class C and actual total
Kemper Asian Growth Fund 11
<PAGE>
annual fund operating expenses were 1.80% for Class A, 2.78% for Class B and
2.71% for Class C.
Total Annual Fund Operating Expenses are currently limited to 1.85% for Class A
shares, 2.79% for Class B shares, and 3.25% for Class C shares; provided,
however transfer agency fees and related out-of-pocket expenses are not subject
to this reimbursement. Therefore, if transfer agency fees and related
out-of-pocket expenses were to exceed the limits upon Total Operating Expenses
for a particular class during the period of the reimbursement (contrary to
current estimates), such expenses would be charged to the class in the actual
amount incurred and Total Annual Fund Operating Expenses for the class would
exceed the limits described above during the period. Provided further, that such
reimbursement may be discontinued at any time. It is estimated that Total Annual
Fund Operating Expenses, without the effect of any waiver or reimbursement, will
be 3.23% for Class A shares, 4.11% for Class B shares and 6.30% for Class C
shares.
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $828 $831 $557
3 Years $1,351 $1,601 $1,377
5 Years $1,899 $2,383 $2,305
10 Years $3,387 $3,788 $4,662
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $828 $431 $457
3 Years $1,351 $1,301 $1,377
5 Years $1,899 $2,183 $2,305
10 Years $3,387 $3,788 $4,662
12 Kemper Asian Growth Fund
<PAGE>
KEMPER EMERGING MARKETS GROWTH FUND
INVESTMENT OBJECTIVE
Kemper Emerging Markets Growth Fund seeks long-term growth of capital. Unless
otherwise indicated, the fund's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The fund seeks to achieve its investment objective through equity investment in
emerging markets around the globe. Normally, at least 65% of the fund's total
assets will be invested in the equity securities of emerging market issuers.
The investment manager takes a top-down approach to evaluating investments for
the fund, using extensive fundamental and field research. The process begins
with a study of the economic fundamentals of each country and region, as well as
an examination of regional themes such as growing trade, increases in direct
foreign investment and deregulation of capital markets. Understanding regional
themes allows the investment manager to identify industries and companies that
the investment manager believes are most likely to benefit from the political,
social and economic changes taking place in a given region of the world.
Within a market, the investment manager looks for, among other things,
individual companies with exceptional business prospects, which may be due to
market dominance, unique franchises, high growth potential, or innovative
services, products or technologies. The investment manager seeks to identify
companies with favorable potential for appreciation through growing earnings or
greater market recognition over time. While these companies may be among the
largest in their local markets, they may be small by the standards of U.S. stock
market capitalization.
A stock is typically sold when, in the opinion of the portfolio manager (i) the
stock has reached it fair market value and its appreciation is limited, (ii) a
company's fundamentals have deteriorated, (iii) the fund's portfolio is too
heavily weighted in a particular industry or sector, and (iv) country risk
outweighs probable return.
The fund considers "emerging markets" to include any country that is defined as
an emerging or developing economy by any of the following: the International
Bank for Reconstruction and Development (i.e., the World Bank), the
International Finance Corporation or the United Nations or its authorities.
The investment manager may pursue investment opportunities in Asia, Africa,
Latin America, the Middle East and the developing countries of Europe, primarily
in Eastern Europe. The fund deems an issuer to be located in an emerging market
if:
o the issuer is organized under the laws of an emerging market country;
o the issuer's principal securities trading market is in an emerging market;
or
Kemper Emerging Markets Growth Fund 13
<PAGE>
o at least 50% of the issuer's non-current assets, capitalization, gross
revenue or profit in any one of the two most recent fiscal years is
derived (directly or indirectly through subsidiaries) from assets or
activities located in emerging markets.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest up to 35% of its total assets in emerging market and
domestic debt securities which may be below investment-grade or unrated if the
investment manager determines that capital appreciation of debt securities is
likely to equal or exceed the capital appreciation of equity securities.
Under normal market conditions, the fund may invest up to 35% of its total
assets in equity securities of issuers in the U.S. and other developed markets.
The fund may invest in closed-end investment companies investing primarily in
the emerging markets. Such closed-end company investments will generally only be
made when market access or liquidity considerations restricts direct investment
in the market.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may hold, without limit, debt
instruments, as well as cash and cash equivalents, including foreign and
domestic money market instruments, short-term government and corporate
obligations, and repurchase agreements. In such a case, the fund would not be
pursuing, and may not achieve, its investment objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
Because the fund is non-diversified, the fund may invest a relatively high
percentage of its assets in a limited number of issuers. Accordingly, the fund's
investment returns are more likely to be impacted by changes in the market value
and returns of any one portfolio holding.
14 Kemper Emerging Markets Growth Fund
<PAGE>
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 1.25% 1.25% 1.25%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 21.13% 22.06% 22.03%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 22.38% 24.06% 24.03%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended October 31, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 2.28%, Class B shares to 3.18%, and Class C shares to 3.15%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. In addition, for the fiscal year ended October 31, 1998,
the investment manager agreed to waive 0.35% of its management fee. As a result,
for the fiscal year ended October 31, 1998, "Total Annual Fund Operating
Expenses" were reduced by 20.10%, 20.88% and 20.88% for Class A, Class B and
Class C and actual total annual fund operating expenses were 2.28% for Class A,
3.18% for Class B and 3.15% for Class C.
Total Annual Fund Operating Expenses are currently limited to 2.19% for Class A
shares, 3.06% for Class B shares, and 3.03% for Class C shares; provided,
however transfer agency fees and related out-of-pocket expenses are not subject
to this reimbursement. Therefore, if transfer agency fees and related
out-of-pocket expenses were to exceed the limits upon Total Operating Expenses
for a particular class during the period of the reimbursement (contrary
Kemper Emerging Markets Growth Fund 15
<PAGE>
to current estimates), such expenses would be charged to the class in the actual
amount incurred and Total Annual Fund Operating Expenses for the class would
exceed the limits described above during the period. Provided further, that such
reimbursement may be discontinued at any time. The investment manager has agreed
to continue to waive 0.35% of its management fee until December 31, 1999. It is
estimated that Total Annual Fund Operating Expenses, without the effect of any
waiver or reimbursement, will be 17.82% for Class A shares, 19.05% for Class B
shares and 17.48% for Class C shares.
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $2,501 $2,577 $2,274
3 Years $5,407 $5,665 $5,360
5 Years $7,391 $7,653 $7,449
10 Years $10,014 $9,914 $10,042
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $2,501 $2,177 $2,174
3 Years $5,407 $5,365 $5,360
5 Years $7,391 $7,453 $7,449
10 Years $10,014 $9,914 $10,042
16 Kemper Emerging Markets Growth Fund
<PAGE>
KEMPER EMERGING MARKETS INCOME FUND
INVESTMENT OBJECTIVES
Kemper Emerging Markets Income Fund has dual investment objectives. The fund's
primary investment objective is to provide investors with high current income.
As a secondary investment objective, the fund seeks long-term capital
appreciation. Unless otherwise indicated, the fund's investment objectives and
policies may be changed without a vote of shareholders.
Main investment strategies
In pursuing its investment objectives, the fund invests primarily in
high-yielding debt securities issued by governments and corporations in emerging
markets.
The fund can invest entirely in high yield/high risk bonds (also called "junk"
bonds). The fund invests in lower quality securities of emerging market issuers,
some of which have defaulted in the past on certain of their financial
obligations. The fund's weighted average maturity may vary from period to
period.
In seeking high current income and, secondarily, long-term capital appreciation,
the fund invests, under normal market conditions, at least 65% of its total
assets in debt securities issued by governments, government-related entities and
corporations in emerging markets, or in debt securities, the return on which is
derived primarily from emerging markets.
The fund considers "emerging markets" to include any country that is defined as
an emerging or developing economy by any of the following: the International
Bank for Reconstruction and Development (i.e., the World Bank), the
International Finance Corporation or the United Nations or its authorities.
The investment manager may pursue investment opportunities in Asia, Africa,
Latin America, the Middle East and the developing countries of Europe, primarily
in Eastern Europe. The fund deems an issuer to be located in an emerging market
if:
o The issuer is organized under the laws of an emerging market country;
o The issuer's principal securities trading market is in an emerging market;
or
o at least 50% of the issuer's non-current assets, capitalization, gross
revenue or profit in any one of the two most recent fiscal years is
derived (directly or indirectly from subsidiaries) from assets or
activities located in emerging markets.
The portfolio manager seeks to buy securities of companies with good credit,
strong fundamentals and strong valuations, and conversely, to sell securities
which cannot meet these criteria.
In an attempt to reduce or eliminate currency risk, the debt securities in which
the fund invests are exclusively U.S. dollar-denominated debt securities, or
foreign currency denominated debt securities that are fully hedged back into the
U.S. dollar.
Kemper Emerging Markets Income Fund 17
<PAGE>
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but not required to, invest in the
following:
The fund may invest up to 35% of its total assets in securities other than debt
obligations issued in emerging markets. These holdings include debt securities
and money market instruments issued by corporations and governments based in
developed markets.
The fund may invest up to 20% of its total assets in U.S. fixed income
instruments which may be below investment-grade.
The fund may acquire shares of closed-end investment companies that invest
primarily in emerging market debt securities.
The fund is authorized to borrow from banks and other entities in an amount
equal to up to 20% of the fund's total assets (including the amount borrowed),
less all liabilities and indebtedness other than the borrowing, and may use
proceeds of the borrowings for investment purposes. Borrowing creates leverage,
which is a speculative characteristic.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
The fund will not commit more than 40% of its total assets to issuers in a
single country.
For temporary defensive purposes, the fund may invest without limit in U.S. debt
securities, including short-term money market securities. In such a case, the
fund would not be pursuing, and may not achieve, its investment objective.
18 Kemper Emerging Markets Income Fund
<PAGE>
Main risks
The fund's principal risks are associated with investing in the bond market, the
investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
The fund invests in emerging securities markets that may have substantially less
volume and are subject to less government supervision than U.S. securities
markets. Securities of many issuers in emerging markets may be less liquid and
more volatile than securities of comparable domestic issuers. In addition, there
is less regulation of securities exchanges, securities dealers, and listed and
unlisted companies in emerging markets than in the U.S.
Emerging markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have not kept pace with
the volume of securities transactions. Certain emerging markets require prior
governmental approval of the type and/or amount of investments by foreign
persons.
Issuers whose bonds are below investment-grade may be in impaired financial
condition and may be affected by stock market shifts. The prices of their bonds,
therefore, tend to change based on stock market movements to a greater degree
than investment-grade bond prices.
Because the fund is non-diversified, the fund may invest a relatively high
percentage of its assets in a limited number of issuers. Accordingly, the fund's
investment returns are more likely to be impacted by changes in the market value
and returns of any one portfolio holding.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Kemper Emerging Markets Income Fund 19
<PAGE>
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1998................. -36.38%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 10.31% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -38.46% (the second quarter of 1998).
Average Annual Total Returns
For periods ended JP Morgan
December 31, 1998 Class A Class B Class C EMBI+ Index
- ----------------- ------- ------- ------- -----------
One Year* -39.20% -38.78% -36.96% -14.35%
Five Years -- -- -- --
Ten Years -- -- -- --
- -----------
* Inception date for Class A, B and C shares is 12/31/97.
The unmanaged JP Morgan Emerging Markets Bond Index Plus (EMBI+) tracks total
returns for traded external debt instruments in the emerging markets. Included
in the index are U.S. dollar and other external-currency-denominated Brady
bonds, loans, Eurobonds, and local market instruments. Index returns assume
reinvestment of dividends and unlike the fund's returns, do not reflect any
fees, expenses or sales charges.
Fee and Expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
20 Kemper Emerging Markets Income Fund
<PAGE>
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 4.5% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 4.12% 5.00% 4.97%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 5.12% 6.75% 6.72%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended October 31, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.68%, Class B shares to 2.56%, and Class C shares to 2.53%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. In addition, for the fiscal year ended October 31, 1998,
the investment manager agreed to waive 0.70% of its management fee. As a result,
for the fiscal year ended October 31, 1998, "Total Annual Fund Operating
Expenses" were reduced by 3.44%, 4.19% and 4.19% for Class A, Class B and Class
C and actual total annual fund operating expenses were 1.68% for Class A, 2.56%
for Class B and 2.53% for Class C.
Total Annual Fund Operating Expenses are currently limited at the same level as
for the fiscal year ended October 31, 1998; provided, however transfer agency
fees and related out-of-pocket expenses are not subject to this reimbursement.
Therefore, if transfer agency fees and related out-of-pocket expenses were to
exceed the limits upon Total Operating Expenses for a particular class during
the period of the reimbursement (contrary to current estimates), such expenses
would be charged to the class in the actual amount incurred and Total Annual
Fund Operating Expenses for the class would exceed the limits described above
during the period. Provided further that such reimbursement may be discontinued
at any time. The investment manager has agreed to continue to waive 0.70% of its
management fee until December 31, 1999. It is estimated that Total Annual Fund
Operating Expenses, without the effect of any waiver or reimbursement, will be
4.71% for Class A shares, 4.49% for Class B shares and 4.94% for Class C shares.
Kemper Emerging Markets Income Fund 21
<PAGE>
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $939 $1,069 $766
3 Years $1,914 $2,272 $1,964
5 Years $2,887 $3,430 $3,218
10 Years $5,310 $5,622 $6,170
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $939 $669 $666
3 Years $1,914 $1,972 $1,964
5 Years $2,887 $3,230 $3,218
10 Years $5,310 $5,622 $6,170
22 Kemper Emerging Markets Income Fund
<PAGE>
KEMPER EUROPE FUND
INVESTMENT OBJECTIVE
Kemper Europe Fund seeks long-term capital growth. Unless otherwise indicated,
the fund's investment objective and policies may be changed without a vote of
shareholders.
Main investment strategies
The fund seeks to achieve its investment objective by investing in a diversified
portfolio consisting primarily of equity securities of European companies.
Under normal circumstances the fund will invest at least 85% of its total assets
in securities of European companies. The fund considers an issuer of securities
to be a European company if:
o the company is organized under the laws of a European country and has a
principal office in a European country;
o the company derives 50% or more of its total revenues from business in
Europe; or
o the company's equity securities are traded principally on a stock exchange
in Europe.
Furthermore, the fund will invest at least 65% of its total assets in securities
of European companies which satisfy at least one of the first two criteria
described above.
The fund invests principally in developed countries, but may invest up to 25% of
its total assets in developing or "emerging" countries. Currently, the developed
European countries in which the fund may invest without limit include Austria,
France, Germany, the Netherlands, Switzerland, Spain, Italy, Luxembourg, United
Kingdom, Ireland, Belgium, Denmark, Sweden, Norway and Finland. The fund may
invest without limit in other European countries in the future if they become
developed countries. From time to time, the fund may have 25% or more of its
total assets invested in any major European industrial or developed country.
The fund's investment manager determines the appropriate distribution of
investments among various European countries and geographic regions by
considering numerous factors, including the following, among other things:
o prospects for relative economic growth of European countries;
o expected levels of inflation;
o relative price levels of the various capital markets;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to investors in
European companies.
Kemper Europe Fund 23
<PAGE>
In selecting its investments, the fund will look for companies with (i) strong
earnings growth, (ii) clean balance sheets, (iii) strong management and (iv)
increasing revenue.
A stock is typically sold when, in the opinion of the portfolio manager, (i) the
stock has reached a predetermined value, (ii) the company's fundamentals have
deteriorated, and (iii) the company deviates from a previously demonstrated
business plan.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest in other types of securities including, but not limited to,
equity securities of non-European companies, bonds, notes, and other debt
securities of domestic or foreign companies and obligations of domestic or
foreign governments and their political subdivisions.
The fund considers European equity securities to include shares of closed-end
management investment companies, the assets of which are invested primarily in
equity securities of European companies and depository receipts where the
underlying or deposited securities are equity securities of European companies.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in high-grade debt securities, cash and cash equivalents. In such a case, the
fund would not be pursuing, and may not achieve, its investment objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
The fund invests primarily in one geographic region. Common economic forces and
other factors may affect investments in a single region, even though a
24 Kemper Europe Fund
<PAGE>
number of different countries within a region may be represented within the
fund. Factors affecting European investments may present a greater risk to the
fund than investments in a more geographically diversified fund.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1997................. 15.87%
1998................. 19.96%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 18.12% (the first quarter of 1998), and the fund's lowest
return for a calendar quarter was -15.94% ( the third quarter of 1998).
Average Annual Total Returns
For periods ended FT/S&P World Europe
December 31, 1998 Class A Class B Class C Index
- ----------------- ------- ------- ------- -----
One Year 13.10% 15.63% 19.26% 27.55%
Five Years -- -- -- --
Ten Years -- -- -- --
Since Class
Inception** 17.39% 18.07% 19.19% *
- -----------
* Index returns for the life of each class: 25.92% (4/30/96) for Class A, B,
and C shares, respectively.
** Inception date for the Class A, B and C shares is 5/1/96.
Kemper Europe Fund 25
<PAGE>
The Financial Times/Standard & Poor's Actuaries World Index - Europe is an
unmanaged index that is generally representative of the equity securities of
European Markets. Index returns assume reinvestment of dividends and unlike the
fund's returns, do not reflect any fees, expenses or sales charges.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 1.53% 2.92% 1.39%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.28% 4.42% 2.89%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended November 30, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.53%, Class B shares to 2.67%, and Class C shares to 2.08%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. As a result, for the fiscal year ended November 30, 1998,
"Total Annual Fund Operating Expenses" were reduced by 0.75%, 1.75% and 0.81%
for Class A, Class B and Class C and actual total annual fund operating expenses
were 1.53% for Class A, 2.67% for Class B and 2.08% for Class C.
26 Kemper Europe Fund
<PAGE>
Total Annual Fund Operating Expenses are currently limited to 1.75% for Class A
shares, 2.65% for Class B shares, and 2.62% for Class C shares; provided,
however transfer agency fees and related out-of-pocket expenses are not subject
to this reimbursement. Therefore, if transfer agency fees and related
out-of-pocket expenses were to exceed the limits upon Total Operating Expenses
for a particular class during the period of the reimbursement (contrary to
current estimates), such expenses would be charged to the class in the actual
amount incurred and Total Annual Fund Operating Expenses for the class would
exceed the limits described above during the period. Provided further, that such
reimbursement may be discontinued at any time. It is estimated that Total Annual
Fund Operating Expenses, without the effect of any waiver or reimbursement, will
be 1.73% for Class A shares, 3.27% for Class B shares and 2.38% for Class C
shares.
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $793 $843 $392
3 Years $1,246 $1,638 $895
5 Years $1,725 $2,442 $1,523
10 Years $3,040 $3,695 $3,214
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $793 $443 $292
3 Years $1,246 $1,338 $895
5 Years $1,725 $2,242 $1,523
10 Years $3,040 $3,695 $3,214
Kemper Europe Fund 27
<PAGE>
Proposed reorganization
The Board of Trustees of the Kemper Europe Fund has agreed in principle to
propose to shareholders that the Fund be reorganized into the Scudder New Europe
Fund, Inc. In connection with the reorganization, the Scudder New Europe Fund,
which is currently a closed-end investment company, will be converted to an
open-end investment company (mutual fund). After the reorganization, it is
expected that the Scudder New Europe Fund will change its name to the Kemper
Europe Fund, Inc. and will become a part of the Kemper family of funds.
The reorganization is expected to occur during the third quarter of 1999 and is
subject to a number of conditions, including final approval by the board and
approval by shareholders of each fund.
28 Kemper Europe Fund
<PAGE>
KEMPER GLOBAL BLUE CHIP FUND
INVESTMENT OBJECTIVE
Kemper Global Blue Chip Fund seeks long-term growth of capital. Unless otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
Main investment strategies
The fund will pursue its investment objective through a diversified worldwide
portfolio of marketable securities, primarily equity securities, including
common stock, preferred stocks and debt securities convertible into common
stocks.
The fund will emphasize investments in common stocks of large, well known
companies. Companies of this general type are often referred to as "blue chip"
companies. "Blue Chip" companies are generally identified by their:
o substantial capitalization;
o established history of earnings and dividends;
o easy access to credit;
o good industry position; and
o superior management structure.
Global "blue chip" companies are believed to generally exhibit less investment
risk and less price volatility, on average, than companies lacking these
characteristics, such as smaller, less seasoned companies. In addition, the
large market of publicly held shares for such companies and the generally high
trading volume in those shares usually results in a relatively high degree of
liquidity for such investments.
In general, the fund will seek to invest in companies that the investment
manager believes will benefit from global economic trends, promising
technologies or products and specific country opportunities resulting from
changing geopolitical, currency or economic relationships. The fund will also
invest in companies which possess attractive valuations.
A stock is typically sold when, in the opinion of the portfolio manager, (i) it
no longer has favorable fundamentals or valuations and (ii) it is not expected
to benefit from long-term changes in the global economy.
The fund will invest primarily in developed markets. The fund may be invested
100% in non-U.S. issues, although under normal circumstances, it is expected
that both foreign and U.S. investments will be represented in the fund's
portfolio.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Kemper Global Blue Chip Fund 29
<PAGE>
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest up to 15% of its total assets in debt or equity securities
of developing or emerging markets. The fund may invest in closed-end investment
companies that invest primarily in emerging market debt securities.
The fund may invest in securities traded over-the-counter. The fund may invest
in high-quality debt securities with credit ratings of Aaa/AAA through Baa/BBB
(and their unrated equivalents) of U.S. and foreign issuers. The fund may also
invest up to 5% of its total assets in debt securities rated Baa/BBB or below
(and their unrated equivalents), often referred to as "junk" bonds of U.S. and
foreign issuers.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in U.S. issues, high-grade debt securities, cash and cash equivalents. In such a
case, the fund would not be pursuing, and may not achieve, its investment
objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
Convertible debt securities in which the fund may invest are subject to some of
the same interest rate risk as bonds; that is, their prices tend to drop when
interest rates rise.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
30 Kemper Global Blue Chip Fund
<PAGE>
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1998................. 13.79%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 10.32% (the first quarter of 1998), and the fund's lowest
return for a calendar quarter was -8.00% (the third quarter of 1998).
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B Class C MSCI World Index
- ----------------- ------- ------- ------- ----------------
One Year* 7.24% 9.63% 12.84% 24.80%
Five Years -- -- -- --
Ten Years -- -- -- --
- -----------
* Inception date for Class A, B and C shares is 12/31/97.
The MSCI (Morgan Stanley Capital International) World Index measures performance
of a range of developed country general stock markets, including the United
States, Canada, Europe, Australia, New Zealand and the Far East. Index returns
assume reinvestment of dividends and unlike the fund's returns, do not reflect
any fees, expenses or sales charges.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Kemper Global Blue Chip Fund 31
<PAGE>
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 5.06% 5.94% 5.91%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 6.06% 7.69% 7.66%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended October 31, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.80%, Class B shares to 2.68%, and Class C shares to 2.65%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. In addition, for the fiscal year ended October 31, 1998,
the investment manager agreed to waive 0.15% of its management fee. As a result,
for the fiscal year ended October 31, 1998, "Total Annual Fund Operating
Expenses" were reduced by 4.26%, 5.01% and 5.01% for Class A, Class B and Class
C and actual total annual fund operating expenses were 1.80% for Class A, 2.68%
for Class B and 2.65% for Class C.
32 Kemper Global Blue Chip Fund
<PAGE>
Total Annual Fund Operating Expenses are currently limited at the same level as
for the fiscal year ended October 31, 1998; provided, however transfer agency
fees and related out-of-pocket expenses are not subject to this reimbursement.
Therefore, if transfer agency fees and related out-of-pocket expenses were to
exceed the limits upon Total Operating Expenses for a particular class during
the period of the reimbursement (contrary to current estimates), such expenses
would be charged to the class in the actual amount incurred and Total Annual
Fund Operating Expenses for the class would exceed the limits described above
during the period. Provided further, that such reimbursement may be discontinued
at any time. The investment manager has agreed to continue to waive 0.15% of its
management fee until December 31, 1999. It is estimated that Total Annual Fund
Operating Expenses, without the effect of any waiver or reimbursement, will be
3.63% for Class A shares, 4.53% for Class B shares and 5.81% for Class C shares.
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $1,143 $1,159 $856
3 Years $2,261 $2,515 $2,208
5 Years $3,356 $3,795 $3,583
10 Years $5,993 $6,207 $6,715
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $1,143 $759 $756
3 Years $2,261 $2,215 $2,208
5 Years $3,356 $3,595 $3,583
10 Years $5,993 $6,207 $6,715
Kemper Global Blue Chip Fund 33
<PAGE>
KEMPER GLOBAL DISCOVERY FUND*
* Kemper Global Discovery Fund refers to the Kemper shares of Global
Discovery Fund which are offered through this prospectus.
INVESTMENT OBJECTIVE
The fund seeks above-average capital appreciation over the long term. Unless
otherwise indicated, the fund's investment objective and strategies may be
changed without a vote of shareholders.
Main investment strategies
The fund invests primarily in a diversified portfolio of equity securities of
small rapidly growing companies throughout the world that the fund's management
believes offer the potential for above-average returns relative to large
companies, yet are frequently overlooked, and thus, undervalued by the market.
Under normal circumstances the fund invests at least 65% of its total assets in
the equity securities of small companies. These companies are similar in size to
the smallest 20% of world market capitalization as represented by the Salomon
Brothers Broad Market Index - typically these companies have a market value of
between approximately $50 million and $2 billion. However, the fund may invest
in companies with smaller market values. Under current market conditions, the
median market capitalizations of the companies in which the fund invests is not
expected to exceed $750 million.
The fund may invest in any region of the world. It can invest in the securities
of companies based in emerging markets, typically in the Far East, Latin America
and lesser developed countries in Europe, as well as in companies operating in
developed economies, such as some of those of the United States, Japan and
Western Europe. The fund intends to allocate investments among at least three
countries at all times, one of which may be the United States.
The fund's investment manager determines which securities to invest in by
evaluating potential investments from both a macroeconomic and microeconomic
perspective, using fundamental analysis, including field research. The fund's
investment manager determines which securities to sell using the same criteria.
In evaluating the growth potential and relative value of a possible investment,
the investment manager considers many factors, including, among other things:
o the depth and quality of management;
o a company's product line, business strategy and competitive position;
o research and development efforts;
o financial strength, including degree of leverage;
o cost structure;
o revenue and earnings growth potential;
o price-to-earnings ratios and other stock valuation measures; and
o the attractiveness of the country and region in which a company is
located.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
34 Global Discovery Fund
<PAGE>
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest up to 35% of its total assets in (i) equity securities of
larger companies located throughout the world and in (ii) debt securities if the
fund's investment adviser determines that the capital appreciation of debt
securities is likely to exceed the capital appreciation of equity securities.
The fund may purchase investment-grade bonds, those rated Aaa, Aa, A, Baa/AAA,
AA, A, BBB. The fund may also invest up to 5% of its net assets in debt
securities rated below investment-grade.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest, without limit, in cash
and cash equivalents. In such a case, the fund would not be pursuing, and may
not achieve, its investment objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities, primarily global small company stocks. You will find a discussion of
these risks under "Foreign Investing" at the front of this prospectus.
In pursuit of higher investment returns, this fund may incur greater risks and
more dramatic fluctuations in value than a fund that invests in stocks of larger
companies. The inherent business characteristics and risks of small companies
include such things as untested management, key personnel with varying degrees
of experience, less diversified product lines and weaker financial positions.
Also, small companies tend to have less predictable earnings and less liquid
securities than more established companies.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance. Because
Classes A, B and C commenced operations during the course of 1998, the
performance information set forth below is for Class S shares. It does not
reflect sales charges, which reduce return.
Global Discovery Fund 35
<PAGE>
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1992................. -0.07%
1993................. 38.18%
1994................. -7.68%
1995................. 17.84%
1996................. 21.47%
1997................. 9.93%
1998................. 16.43%
The fund currently offers four classes of shares. This prospectus sets forth
information about classes A, B and C. The original class of shares is designated
as Class S, and is not offered in this prospectus. All share classes invest in
the same underlying portfolio of securities and have the same management team.
Because of different fees and expenses, performance of share classes will
differ. Otherwise, the share classes will have substantially similar returns.
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 20.25% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -16.62% (the third quarter of 1998).
Average annual total returns
Salomon Brothers
For periods ended Global World Equity
December 31, 1998 Discovery Fund Extended Market Index
- ----------------- -------------- ---------------------
One Year 16.43% 20.57%
Five Years 11.08% 15.94%
Since Inception (9/10/91) 12.83% 14.05%*
* Index comparison begins August 30, 1991.
The Salomon Brothers World Equity Extended Market Index is an unmanaged small
capitalization index made up of holdings selected from a 22 country universe.
Index returns assume reinvestment of dividends and, unlike fund returns, do not
reflect any fees, expenses or sales charges.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
36 Global Discovery Fund
<PAGE>
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 1.10% 1.10% 1.10%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 1.10% 1.28% 1.38%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.20% 3.13% 3.23%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended October 31, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.95%, Class B shares to 2.83%, and Class C shares to 2.80%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. As a result, for the fiscal year ended October 31, 1998,
"Total Annual Fund Operating Expenses" were reduced by 0.25%, 0.30% and 0.43%
for Class A, Class B and Class C and actual total annual fund operating expenses
were 1.95% for Class A, 2.83% for Class B and 2.80% for Class C.
Total Annual Fund Operating Expenses are currently limited at the same level as
for the fiscal year ended October 31, 1998; provided, however transfer agency
fees and related out-of-pocket expenses are not subject to this reimbursement.
Therefore, if transfer agency fees and related out-of-pocket expenses were to
exceed the limits upon Total Operating Expenses for a particular class during
the period of the reimbursement (contrary to current estimates), such expenses
would be charged to the class in the actual amount incurred and Total Annual
Fund Operating Expenses for the class would exceed the limits described above
during the period. Provided further, that such reimbursement may be discontinued
at any time. It is estimated that Total Annual Fund Operating Expenses, without
the effect of any waiver or reimbursement, will be 2.07% for Class A shares,
2.81% for Class B shares and 2.75% for Class C shares.
Global Discovery Fund 37
<PAGE>
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $785 $716 $426
3 Years $1,224 $1,266 $995
5 Years $1,687 $1,840 $1,688
10 Years $2,963 $3,007 $3,531
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $785 $316 $326
3 Years $1,224 $966 $995
5 Years $1,687 $1,640 $1,688
10 Years $2,963 $3,007 $3,531
38 Global Discovery Fund
<PAGE>
KEMPER GLOBAL INCOME FUND
INVESTMENT OBJECTIVE
Kemper Global Income Fund seeks to provide high current income consistent with
prudent total return asset management. Unless otherwise indicated, the fund's
investment objective and policies may be changed without a vote of shareholders.
Main investment strategies
The fund seeks to achieve its investment objective by investing primarily in
investment grade foreign and domestic fixed income securities. In managing the
fund's portfolio to provide a high level of current income, the investment
manager also seeks to protect net asset value and to provide investors with a
total return, which is measured by changes in net asset value as well as income
earned. The fund's weighted average maturity may vary from period to period.
The fund may invest in securities issued by any issuer and in any currency and
may hold foreign currency. Under normal market conditions, the fund will invest
at least 65% of its assets in the securities of issuers located in at least
three countries, one of which may be the United States. It is currently
anticipated that the fund's assets will be invested principally within
Australia, Canada, Japan, New Zealand, the United States, and Western Europe,
and in securities denominated in the currencies of these countries or
denominated in multinational currency units, such as the Euro.
In managing the fund's portfolio in an effort to reduce volatility and increase
returns, the fund may allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its investment objective based upon the following:
o relative interest rates among currencies;
o the outlook for changes in these interest rates; and
o anticipated changes in worldwide exchange rates.
In considering these factors, a country's economic and political state,
including such factors as inflation rate, growth prospects, global trade
patterns and government policies, will be evaluated.
The fund will buy and sell its investments on the basis of, among other things,
various economic fundamentals, including inflation rates, interest rates and
exchange rates.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Kemper Global Income Fund 39
<PAGE>
Other investments
To a more limited extent, the fund may, but is not required to, utilize other
investments and investment techniques that may impact fund performance,
including, but not limited to, options, futures and other derivatives (financial
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in high-grade debt securities, cash and cash equivalents. In such a case, the
fund would not be pursuing, and may not achieve, its investment objective.
Main risks
The fund's principal risks are associated with investing in the bond market, the
investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
Because the fund is non-diversified, the fund may invest a relatively high
percentage of its assets in a limited number of issuers. Accordingly, the fund's
investment returns are more likely to be impacted by changes in the market value
and returns of any one portfolio holding.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance. Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
40 Kemper Global Income Fund
<PAGE>
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1990................. 22.66%
1991................. 11.13%
1992................. -1.90%
1993................. 10.23%
1994................. -1.47%
1995................. 19.89%
1996................. 5.87%
1997................. 1.80%
1998................. 10.48%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 11.23% (the first quarter of 1995), and the fund's lowest
return for a calendar quarter was -4.32% (the first quarter of 1992).
Average Annual Total Returns
For periods ended SB World Government
December 31, 1998 Class A Class B Class C Bond Index
- ----------------- ------- ------- ------- ----------
One Year 5.56% 6.56% 9.72% 6.92%
Five Years 6.08% -- -- 7.34%
Ten Years -- -- -- --
Since Class
Inception** 8.21% 7.49% 7.93% *
- -----------
* Index returns for the life of each class: 9.57% (10/1/89) for Class A
shares and 8.77% (5/31/94) for B, and C shares.
** Inception dates for Class A, B, and C shares are 10/1/89, 5/31/94 and
5/31/94, respectively.
The Salomon Smith Barney World Government Bond Index is an unmanaged index
comprised of government bonds from eighteen countries (United States, Japan,
United Kingdom, Germany, France, Canada, the Netherlands, Australia,
Switzerland, Denmark, Austria, Belgium, Finland, Ireland, Italy, Portugal, Spain
and Sweden) with maturities greater than one year. Index returns assume
reinvestment of dividends and, unlike fund returns, do not reflect any fees,
expenses or sales charges.
Fee and Expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
Kemper Global Income Fund 41
<PAGE>
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 4.5% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 0.75% 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 0.83% 0.82% 0.63%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.58% 2.32% 2.13%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $603 $635 $316
3 Years $926 $1,024 $667
5 Years $1,272 $1,440 $1,144
10 Years $2,244 $2,302 $2,462
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $603 $235 $216
3 Years $926 $724 $667
5 Years $1,272 $1,240 $1,144
10 Years $2,244 $2,302 $2,462
42 Kemper Global Income Fund
<PAGE>
KEMPER INTERNATIONAL FUND
INVESTMENT OBJECTIVE
Kemper International Fund seeks total return, a combination of capital growth
and income. Unless otherwise indicated, the fund's investment objective and
policies may be changed without a vote of shareholders.
Main investment strategies
In pursuing its investment objective, the fund invests primarily in common
stocks of established non-U.S. companies believed to have potential for capital
growth, income or both.
There is no limitation on the percentage or amount of the fund's assets that may
be invested in growth or income, and therefore at any particular time the
investment emphasis may be placed solely or primarily on growth of capital or on
income. In determining whether the fund will be invested for capital growth or
income, the investment manager analyzes the international equity and fixed
income markets and seeks to assess the degree of risk and level of return that
can be expected from each market.
The fund invests primarily in non-U.S. issuers, and under normal circumstances
more than 80% of the fund's total assets will be invested in non-U.S. issuers.
From time to time, the fund may have more than 25% of its assets invested in any
major industrial or developed country which in the view of the investment
manager poses no unique investment risk.
In determining the appropriate distribution of investments among various
countries and geographic regions, the investment manager ordinarily considers
the following factors, among other things:
o prospects for relative economic growth among foreign countries;
o expected levels of inflation;
o relative price levels of the various capital markets;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to the
international investor.
In selecting its investments, the fund will look for companies with (i) strong
earnings growth, (ii) clean balance sheets, (iii) strong management and (iv)
increasing revenue. The fund will also look for previously unmanaged companies
which are undergoing a turnaround as a result of new management, product focus
or balance sheet restructuring.
A stock is typically sold when the stock (i) has reached a predetermined value,
(ii) the company's fundamentals have deteriorated, and (iii) the company
deviates from a previously demonstrated business plan.
Kemper International Fund 43
<PAGE>
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest in debt securities that can be converted into common stocks,
also known as convertibles. The fund may also invest in debt securities,
preferred stocks, bonds, notes and other debt securities of companies and
futures contracts.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest up to 100% of its assets
in U.S. Government obligations or securities of companies incorporated in and
having their principal activities in the United States. In such cases, the fund
would not be pursuing, and may not achieve, its investment objective.
The fund may also establish and maintain reserves for defensive purposes and to
enable the fund to take advantage of buying opportunities. The fund's reserves
may be invested in domestic as well as foreign short-term money market
instruments.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
44 Kemper International Fund
<PAGE>
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1989................. 18.57%
1990................. -7.50%
1991................. 9.13%
1992................. -4.79%
1993................. 35.65%
1994................. -4.00%
1995................. 12.96%
1996................. 17.05%
1997................. 9.00%
1998................. 7.88%
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 14.53% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -17.89% (the third quarter of 1998).
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B Class C MSCI EAFE Index
- ----------------- ------- ------- ------- ---------------
One Year 1.65% 4.05% 6.79% 20.33%
Five Years 7.07% -- -- 9.50%
Ten Years 8.08% -- -- 5.85%
Since Class
Inception** 11.92% 8.29% 8.63% *
- -----------
* Index returns for the life of each class: 14.02% (5/31/81) for Class A
shares and 8.71% (5/31/94) for Class B and C shares.
** Inception date for the Class A shares is 5/21/81 and Class B and C shares
is 5/31/94.
The EAFE Index (Morgan Stanley Capital International Europe, Austral-Asia, Far
East Index) is a generally accepted benchmark for performance of major overseas
markets. Index returns assume reinvestment of dividends and, unlike fund
returns, do not reflect any fees, expenses or sales charges.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Kemper International Fund 45
<PAGE>
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 0.73% 0.73% 0.73%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 0.91% 1.14% 1.07%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.64% 2.62% 2.55%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $732 $665 $358
3 Years $1,063 $1,114 $794
5 Years $1,415 $1,590 $1,355
10 Years $2,407 $2,496 $2,885
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $732 $265 $258
3 Years $1,063 $814 $794
5 Years $1,415 $1,390 $1,355
10 Years $2,407 $2,496 $2,885
46 Kemper International Fund
<PAGE>
KEMPER INTERNATIONAL GROWTH AND INCOME FUND
INVESTMENT OBJECTIVE
Kemper International Growth and Income Fund seeks long-term growth of capital
and current income. Unless otherwise indicated, the fund's investment objective
and policies may be changed without a vote of shareholders.
Main investment strategies
The fund seeks to achieve its investment objective by investing primarily in
foreign equity securities. The fund invests generally in common stocks of
established companies listed on foreign exchanges, which offer prospects for
growth of earnings while paying relatively high current dividends.
At least 80% of the fund's net assets will normally be invested in the equity
securities of established non-U.S. companies. The fund focuses its investments
on the developed foreign countries included in the Morgan Stanley Capital
International World ex-US Index.
Stocks are selected for the fund using a disciplined, multi-part investment
approach with four stages as follows:
o Stage 1: The investment manager analyzes the pool of dividend-paying
foreign securities, primarily from the world's more mature markets,
targeting stocks that have high relative yields compared to the average
for their markets.
o Stage 2: The investment manager identifies what it believes are the most
promising stocks for the fund's portfolio.
o Stage 3: The investment manager diversifies the fund's portfolio among
different industry sectors.
o Stage 4: The investment manager diversifies the fund's portfolio among
different countries.
A stock is typically sold when a company's dividend yield reaches a
predetermined level versus the market yield. A stock is also sold when, in the
opinion of the portfolio manager, a company's financial situation begins to
deteriorate, especially through the assumption of large amounts of debt.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
Kemper International Growth and Income Fund 47
<PAGE>
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
Under normal conditions, the fund may also invest up to 20% of its net assets in
debt securities convertible into common stock and fixed income securities of
governments, governmental agencies, supranational agencies and private issuers
when the investment manager believes the potential for appreciation and income
will equal or exceed that available from investments in equity securities. These
securities will predominantly be "investment grade" securities which are those
rated Aaa/AAA through Baa/BBB (and their unrated equivalents).
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash and
cash equivalents which may include domestic and foreign money market
instruments, short-term government and corporate obligations and repurchase
agreements. The fund may also hold up to 20% of its net assets in the U.S. and
foreign fixed income securities for temporary defensive purposes. In such cases,
the fund would not be pursuing, and may not achieve, its investment objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
48 Kemper International Growth and Income Fund
<PAGE>
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1998................. 8.94%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 14.21% (the first quarter of 1998), and the fund's lowest
return for a calendar quarter was -16.55% (the third quarter of 1998).
Average Annual Total Returns
For periods ended MSCI EAFE+Canada
December 31, 1998 Class A Class B Class C Index
- ----------------- ------- ------- ------- -----
One Year* 2.67% 5.03% 8.04% 19.11%
Five Years -- -- -- --
Ten Years -- -- -- --
- -----------
* Inception date for Class A, B and C shares is 12/31/97.
The Morgan Stanley Capital International World+Canada Index is an unmanaged
index of global stock markets, excluding the U.S. Index returns assume
reinvestment of dividends and, unlike fund returns, do not reflect any fees,
expenses or sales charges.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
Kemper International Growth and Income Fund 49
<PAGE>
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 12.58% 13.46% 13.43%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 13.58% 15.21% 15.18%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended October 31, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 1.81%, Class B shares to 2.69%, and Class C shares to 2.66%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. In addition, for the fiscal year ended October 31, 1998,
the investment manager agreed to waive 0.30% of its management fee. As a result,
for the fiscal year ended October 31, 1998, "Total Annual Fund Operating
Expenses" were reduced by 11.77%, 12.52% and 12.52% for Class A, Class B and
Class C and actual total annual fund operating expenses were 1.81% for Class A,
2.69% for Class B and 2.66% for Class C.
50 Kemper International Growth and Income Fund
<PAGE>
Total Annual Fund Operating Expenses are currently limited at the same level as
for the fiscal year ended October 31, 1998; provided, however transfer agency
fees and related out-of-pocket expenses are not subject to this reimbursement.
Therefore, if transfer agency fees and related out-of-pocket expenses were to
exceed the limits upon Total Operating Expenses for a particular class during
the period of the reimbursement (contrary to current estimates), such expenses
would be charged to the class in the actual amount incurred and Total Annual
Fund Operating Expenses for the class would exceed the limits described above
during the period. Provided further, that such reimbursement may be discontinued
at any time. The investment manager has agreed to continue to waive 0.30% of its
management fee until December 31, 1999. It is estimated that Total Annual Fund
Operating Expenses, without the effect of any waiver or reimbursement, will be
13.43% for Class A shares, 14.49% for Class B shares and 14.27% for Class C
shares.
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $1,800 $1,843 $1,541
3 Years $3,944 $4,203 $3,897
5 Years $5,735 $6,086 $5,879
10 Years $9,031 $9,043 $9,316
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $1,800 $1,443 $1,441
3 Years $3,944 $3,903 $3,897
5 Years $5,735 $5,886 $5,879
10 Years $9,031 $9,043 $9,316
Kemper International Growth and Income Fund 51
<PAGE>
KEMPER LATIN AMERICA FUND
INVESTMENT OBJECTIVE
Kemper Latin America Fund seeks long-term capital appreciation. Unless otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
Main investment strategies
The fund pursues its investment objective by investing at least 65% of its total
assets in Latin American equity securities. Latin America is defined as Mexico,
Central America, South America and the islands of the Caribbean.
The fund defines securities of Latin American issuers as follows:
o securities of companies organized under the laws of a Latin American
country or for which the principal trading market is in Latin America;
o securities issued or guaranteed by the government of a Latin American
country, its agencies or instrumentalities, political subdivisions or the
central bank of such country;
o securities of companies, wherever organized, when at least 50% of an
issuer's non-current assets, capitalization, gross revenue or profit in
any one of the two most recent fiscal years represents assets or
activities located in Latin America; or
o securities of Latin American issuers, as defined above, in the form of
depositary shares.
In managing its portfolio, the investment manager seeks out investment
opportunities created from changing economic and political trends in Latin
America. These trends are supported by governmental initiatives designed to
promote freer trade and market-oriented economies. The investment manager
believes that active management, based on disciplined fundamental research, will
yield promising investment opportunities for long-term capital appreciation.
In selecting companies for investment, the investment manager typically
evaluates, among other things, industry trends, a company's financial strength,
its competitive position in domestic and export markets, technology, recent
developments and profitability, together with overall growth prospects. Other
considerations generally include quality and depth of management, governmental
regulation, and availability and cost of labor and raw materials.
A stock is typically sold when, in the opinion of the portfolio manager, the
stock no longer falls within certain valuation parameters.
Presently, the fund expects to focus its investments in Argentina, Brazil,
Chile, Colombia, Mexico and Peru. However, the fund may invest in other
countries in Latin America when the investment manager deems it appropriate.
Of course, there can be no guarantee that by following these investment
strategies, the fund will achieve its objective.
52 Kemper Latin America Fund
<PAGE>
Other investments
To a more limited extent, the fund may, but is not required to, invest in the
following:
The fund may invest in debt securities when the investment manager determines
that the capital appreciation of debt securities is likely to equal or exceed
that of equity securities. The fund may also invest in debt securities which are
rated below investment grade (commonly referred to as "junk bonds").
In addition, the fund may invest up to 35% of its total assets in the equity
securities of U.S. and other non-Latin American issuers. In evaluating non-Latin
American investments, the investment manager generally seeks investments where
an issuer's Latin American business activities and the impact of developments in
Latin America may have a positive and significant effect on the issuer's
business results.
The fund may invest in closed-end investment companies investing primarily in
Latin America.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of certain derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in cash or
cash equivalents and money market instruments, or invest all or a portion of its
assets in securities of U.S. or other non-Latin American issuers. In such a
case, the fund would not be pursuing, and may not achieve, its investment
objective.
Main risks
The fund's principal risks are associated with investing in the stock market,
the investment manager's skill in managing the fund's portfolio and foreign
securities. You will find a discussion of these risks under "Foreign Investing"
at the front of this prospectus.
The fund invests primarily in one geographic region. Common economic forces and
other factors may affect investments in a single region, even though a number of
different countries within a region may be represented within the fund. Factors
affecting Latin American investments may present a greater risk to the fund than
investments in a more geographically diversified fund.
Because the fund is non-diversified, the fund may invest a relatively high
percentage of its assets in a limited number of issuers. Accordingly, the fund's
investment returns are more likely to be impacted by changes in the market value
and returns of any one portfolio holding.
Kemper Latin America Fund 53
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed from year to year and
comparing this information to a broad measure of market performance. Of course,
past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares, and does not
reflect sales charges, which reduce return.
Total returns for years ended December 31
[The following table was originally a bar chart in the printed materials.]
1998................. -24.32%
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 7.14% (the fourth quarter of 1998), and the fund's lowest
return for a calendar quarter was -19.35% (the third quarter of 1998).
Average Annual Total Returns
IFC Latin America
For periods ended Investable
December 31, 1998 Class A Class B Class C Return Index
- ----------------- ------- ------- ------- ------------
One Year* -28.68% -27.20% -25.05% -38.10%
Five Years -- -- -- --
Ten Years -- -- -- --
- -----------
* Inception date for Class A, B and C shares is 12/31/97.
The IFC Latin America Investable Return Index is prepared by the International
Finance Corporation. It is an unmanaged, market capitalization-weighted
representation of stock performance in seven Latin American markets, and
measures the returns of stocks that are legally and practically available to
investors. Index returns assume reinvestment of dividends and, unlike fund
returns, do not reflect any fees, expenses or sales charges.
54 Kemper Latin America Fund
<PAGE>
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund. Each class of
shares has a different set of transaction fees, which will vary based on the
length of time you hold shares in the fund and the amount of your investment.
You will find details about fee discounts and waivers in the Buying shares and
Choosing a share class -- Special features sections of this prospectus.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Class A Class B Class C
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Purchases (as % of
offering price) 5.75% None None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(Load) (as % of redemption proceeds) None(1) 4% 1%
- --------------------------------------------------------------------------------
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends/Distributions None None None
- --------------------------------------------------------------------------------
Redemption Fee (as % of amount
redeemed, if applicable) None None None
- --------------------------------------------------------------------------------
Exchange Fee None None None
- --------------------------------------------------------------------------------
Annual fund operating expenses: Expenses that are deducted from fund assets.
- --------------------------------------------------------------------------------
Management Fee 1.25% 1.25% 1.25%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None 0.75% 0.75%
- --------------------------------------------------------------------------------
Other Expenses 11.50% 12.38% 12.34%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 12.75% 14.38% 14.34%
- --------------------------------------------------------------------------------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year of purchase.
For the fiscal year ended October 31, 1998, Scudder Kemper Investments, Inc.
agreed to reimburse temporarily certain operating expenses to the extent
necessary to limit the fund's "Total Annual Fund Operating Expenses" of Class A
shares to 2.21%, Class B shares to 3.09%, and Class C shares to 3.06%; provided,
however transfer agency fees and related out-of-pocket expenses were not subject
to this reimbursement. In addition, for the fiscal year ended October 31, 1998,
the investment manager agreed to waive 0.35% of its management fee. As a result,
for the fiscal year ended October 31, 1998, "Total Annual Fund Operating
Expenses" were reduced by 10.54%, 11.29% and 11.28% for Class A, Class B and
Class C and actual total annual fund operating expenses were 2.21% for Class A,
3.09% for Class B and 3.06% for Class C.
Kemper Latin America Fund 55
<PAGE>
Total Annual Fund Operating Expenses are currently limited to 2.19% for Class A
shares, 3.07% for Class B shares, and 3.04% for Class C shares; provided,
however transfer agency fees and related out-of-pocket expenses are not subject
to this reimbursement. Therefore, if transfer agency fees and related
out-of-pocket expenses were to exceed the limits upon Total Operating Expenses
for a particular class during the period of the reimbursement (contrary to
current estimates), such expenses would be charged to the class in the actual
amount incurred and Total Annual Fund Operating Expenses for the class would
exceed the limits described above during the period. Provided further, that such
reimbursement may be discontinued at any time. The investment manager has agreed
to continue to waive 0.35% of its management fee until December 31, 1999. It is
estimated that Total Annual Fund Operating Expenses, without the effect of any
waiver or reimbursement, will be 9.28% for Class A shares, 10.36% for Class B
shares and 11.02% for Class C shares.
The information contained in the above table and the example below reflects the
expenses of the fund without taking into account any applicable fee waivers
and/or reimbursements.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The example
is hypothetical: actual fund expenses and return vary from year to year, and may
be higher or lower than those shown.
Fees and expenses if you sold shares after:
Class A Class B Class C
------- ------- -------
1 Year $1,730 $1,771 $1,467
3 Years $3,779 $4,038 $3,730
5 Years $5,522 $5,882 $5,672
10 Years $8,827 $8,856 $9,146
Fees and expenses if you did not sell your shares:
Class A Class B Class C
------- ------- -------
1 Year $1,730 $1,371 $1,367
3 Years $3,779 $3,738 $3,730
5 Years $5,522 $5,682 $5,672
10 Years $8,827 $8,856 $9,146
56 Kemper Latin America Fund
<PAGE>
INVESTMENT MANAGER
Each fund retains the investment management firm of Scudder Kemper Investments,
Inc., 345 Park Avenue, New York, New York, to manage its daily
investment and business affairs subject to the policies established by the
funds' Boards. Scudder Kemper Investments, Inc. actively manages the funds'
investments. Professional management can be an important advantage for investors
who do not have the time or expertise to invest directly in individual
securities. Scudder Kemper Investments, Inc. is one of the largest and most
experienced investment management organizations worldwide, managing more than
$280 billion in assets globally for mutual fund investors, retirement and
pension plans, institutional and corporate clients, and private family and
individual accounts.
Each fund pays the investment manager a (graduated) monthly investment
management fee. Fees paid for each fund's most recently completed fiscal year
are shown below:
As a % of average
daily net assets
----------------
Growth Fund Of Spain 0.75%
Kemper Asian Growth Fund 0.85%
Kemper Emerging Markets Growth Fund* 1.25%
Kemper Emerging Markets Income Fund* 1.00%
Kemper Europe Fund 0.75%
Kemper Global Blue Chip Fund* 1.00%
Global Discovery Fund 1.10%
Kemper Global Income Fund 0.75%
Kemper International Fund 0.73%
Kemper International Growth and Income Fund* 1.00%
Kemper Latin America Fund* 1.25%
- ----------
* The investment manager has agreed to waive 0.15%, 0.30%, 0.70%, 0.35%, and
0.35% of its management fee until December 31, 1999 for Kemper Global Blue
Chip Fund, Kemper International Growth and Income Fund, Kemper Emerging
Markets Income Fund, Kemper Emerging Markets Growth Fund and Kemper Latin
America Fund, respectively.
Scudder Investments (U.K.) Limited, 1 South Place, London, U.K., an affiliate of
Scudder Kemper Investments, Inc., is the sub-adviser for Kemper Europe Fund,
Kemper Global Income Fund, and Kemper International Fund. Scudder Investments
(U.K.) Limited has served as sub-adviser for mutual funds since December, 1996
and investment adviser for certain institutional accounts since August, 1998.
Investment Manager 57
<PAGE>
Scudder Investments (U.K.) Limited renders investment advisory and management
services with regard to the portion of each fund's portfolio as allocated to
Scudder Investments (U.K.) Limited by Scudder Kemper Investments, Inc. from
time-to-time for management, including services related to foreign securities,
foreign currency transactions and related investments.
For its services, Scudder Investments (U.K.) Limited will receive from Scudder
Kemper Investments, Inc. a monthly fee at the annual rate of 0.30% for Kemper
Global Income Fund and 0.35% for each of Kemper Europe Fund and Kemper
International Fund of the portion of the average daily net assets of each fund
allocated by the investment manager to the sub-adviser for management.
PORTFOLIO MANAGEMENT
The following investment professionals are associated with the funds as
indicated:
Growth Fund Of Spain
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Joan R. Gregory 1998 Joined Scudder Kemper in 1992.
Lead Manager She is a member of the firm's
Global Equity Group and is on
the portfolio management teams
for other affiliated
international mutual funds. She
began her investment career in
1989. Prior to joining Scudder
Kemper, she worked in the
international investment
department at a bank.
Nicholas Bratt 1998 Joined Scudder Kemper in 1976 as
Manager a portfolio manager. Since then
he has served as portfolio
manager for other affiliated
international mutual funds and
has over 20 years of
international investment
experience. He is Head of the
firm's Global Equity Group,
responsible for the strategic
direction of the firm's equity
management business.
- --------------------------------------------------------------------------------
58 Investment Manager
<PAGE>
Kemper Asian Growth Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Theresa Gusman 1998 Joined Scudder Kemper in 1992 as an
Lead Manager equity analyst responsible for
China, Hong Kong, Indonesia and
Taiwan. She then joined the Pacific
Basin portfolio management team in
1996. She began her investment
career in 1983. Prior to joining
Scudder Kemper, she was an equity
research analyst at an unaffiliated
investment management company.
Elizabeth J. Allan 1998 Joined Scudder Kemper in 1987,
Manager researching investments for some of
the firm's other international
mutual funds. Since then she has
served as a portfolio manager for
other affiliated mutual funds. She
has numerous years of Pacific Basin
research and investing experience.
Prior to joining Scudder Kemper, she
spent several years working for an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------
Kemper Emerging Markets Growth Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Joyce E. Cornell 1998 Joined Scudder Kemper in 1991 and
Lead Manager has been a portfolio manager since
1993. She is a member of the firm's
Global Equity Group, focusing her
portfolio management and research
responsibilities on the emerging
markets. She began her investment
career in 1987. Prior to joining
Scudder Kemper, she was a security
analyst at an unaffiliated
investment management company.
Andre J. DeSimone 1998 Joined Scudder Kemper in 1997 as
Manager part of the firm's emerging markets
portfolio management teams. He began
his investment career in 1981. Prior
to joining Scudder Kemper, he was
the founder and Chief Executive
Officer of a stock brokerage company
in Kenya.
- --------------------------------------------------------------------------------
Investment Manager 59
<PAGE>
Kemper Emerging Markets Growth Fund (continued)
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Tara C. Kenney 1998 Joined Scudder Kemper in 1995 as a
Manager portfolio manager. She is a member
of the firm's Global Equity Group,
focusing on portfolio management of
Latin American equity securities.
She has 15 years of experience in
the field. Prior to joining Scudder
Kemper, she was responsible for the
origination and execution of
corporate finance transactions in
Latin America at a banking trust
company.
Theresa Gusman 1998 Joined Scudder Kemper in 1992 as an
Manager equity analyst responsible for
China, Hong Kong, Indonesia and
Taiwan. She then joined the Pacific
Basin portfolio management team in
1996. She began her investment
career in 1983. Prior to joining
Scudder Kemper, she was an equity
research analyst at an unaffiliated
investment management company.
- --------------------------------------------------------------------------------
Kemper Emerging Markets Income Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
M. Isabel Saltzman 1997 Joined Scudder Kemper in 1990 as a
Lead Manager portfolio manager. She is the
Product Leader and a Senior
Portfolio Manager for the firm's
Emerging Markets Bond Group. She
began her investment career in
1979. Prior to joining Scudder
Kemper, she worked in international
finance at a bank.
Susan E. Dahl 1997 Joined Scudder Kemper in 1987 as
Manager head of fixed income trading. She
has over seven years of emerging
markets investment experience as a
portfolio manager. She is the
Capital Markets Strategist and a
Senior Portfolio Manager for the
firm's Emerging Markets Bond Group.
She began her investment career in
1987.
- --------------------------------------------------------------------------------
60 Investment Manager
<PAGE>
Kemper Europe Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Marc Slendebroek 1998 Joined Scudder Kemper in 1994 as a
Lead Manager European equity analyst. He is an
International Portfolio Manager at
Scudder Investments, UK Ltd., an
affiliated investment management
company. He began his investment
career in 1990. Prior to joining
Scudder Kemper, he worked for an
unaffiliated investment management
company responsible for the Dutch
equity research product.
Carol L. Franklin 1999 Joined Scudder Kemper in 1981 as a
Manager portfolio manager. She is a member
of the firm's Global Equity Group
and is a portfolio manager for
other affiliated international
mutual funds. She began her
investment career in 1975. Prior to
joining Scudder Kemper, she worked
for an unaffiliated investment
management company.
Joan R. Gregory 1999 Joined Scudder Kemper in 1992. She
Manager is a member of the firm's Global
Equity Group and is on the portfolio
management teams for other
affiliated international mutual
funds. She began her investment
career in 1989. Prior to joining
Scudder Kemper, she worked in the
international investment department
at a bank.
- --------------------------------------------------------------------------------
Investment Manager 61
<PAGE>
Kemper Global Blue Chip Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Diego Espinosa 1998 Joined Scudder Kemper in 1996 as an
Lead Manager analyst for Latin American equity
securities. He has over five years
of direct investment experience as
both an analyst and portfolio
manager. He began his investment
career in 1991. Prior to joining
Scudder Kemper, he was a Latin
American equities securities analyst
for an unaffiliated investment
management company.
William E. Holzer 1998 Joined Scudder Kemper in 1980 as an
Manager analyst and portfolio manager. He is
Product Leader of the firm's global
equity investment product and is on
the portfolio management teams for
other affiliated international
mutual funds. He began his
investment career in 1970. Prior to
joining Scudder Kemper, he was a
credit analyst in the international
department at a banking trust
company.
Nicholas Bratt 1998 Joined Scudder Kemper in 1976 as a
Manager portfolio manager. Since then he has
served as portfolio manager for
other affiliated international
mutual funds and has over 20 years
of international investment
experience. He is Head of the firm's
Global Equity Group, responsible for
the strategic direction of the
firm's equity management business.
- --------------------------------------------------------------------------------
62 Investment Manager
<PAGE>
Global Discovery Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Gerald J. Moran 1991 Joined Scudder Kemper in 1968 as an
Lead Manager analyst. Since then he has worked
within the firm's research
department and has served as
portfolio manager for other
affiliated mutual funds. For the
last decade, he has worked
exclusively with small cap stocks.
He has over 30 years of industry
experience.
Sewall F. Hodges 1996 Joined Scudder Kemper in 1995 as a
Manager portfolio manager. He is a member of
the firm's Global Equity Group. He
began his investment career in 1978.
Prior to joining the firm, he was a
global equity portfolio manager and
research analyst at an unaffiliated
investment management company.
- --------------------------------------------------------------------------------
Kemper Global Income Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Terence C. Prideaux 1998 Joined Scudder Kemper in 1989 as an
Lead Manager associate director. He is an
International Portfolio Manager at
Scudder Investments, UK Ltd., an
affiliated investment management
company. He has over 20 years of
investment experience. Prior to
joining Scudder Kemper, he was a
fund manager for the fixed income
portfolios of a life insurance
company.
- --------------------------------------------------------------------------------
Investment Manager 63
<PAGE>
Kemper International Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Stephen P. Dexter 1998 Joined Scudder Kemper in 1986 as an
Co-Lead Manager equity analyst. Since then he has
served as a portfolio manager for
other affiliated mutual funds. He
began his investment career in
1983. Prior to joining Scudder
Kemper, he worked for an
unaffiliated investment management
company where he followed venture
capital and small cap companies.
Marc J. Slendebroeck 1998 Joined Scudder Kemper in 1994 as a
Co-Lead Manager European equity analyst. He is an
International Portfolio Manager at
Scudder Investments, UK Ltd., an
affiliated investment management
company. He began his investment
career in 1990. Prior to joining
Scudder Kemper, he worked for an
unaffiliated investment management
company responsible for the Dutch
equity research product.
- --------------------------------------------------------------------------------
Kemper International Growth and Income Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Sheridan P. Reilly 1998 Joined Scudder Kemper in 1995 as an
Lead Manager analyst. He is a member of the
firm's Global Equity Group and is on
the portfolio management teams for
other affiliated international
mutual funds. He began his
investment career in 1987. Prior to
joining Scudder Kemper, he focused
on strategies for global bonds
portfolios, currency hedging, and
foreign equity markets at an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------
64 Investment Manager
<PAGE>
Kemper International Growth and Income Fund (continued)
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Irene T. Cheng 1998 Joined Scudder Kemper in 1993 as a
Manager portfolio manager. She is a member
of the firm's Global Equity Group
and has over six years of
experience as a portfolio manager.
She began her investment career in
1985. Prior to joining Scudder
Kemper, she spent three years in
merchant banking activities and
three years as an equity analyst.
Lauren C. Lambert 1999 Joined Scudder Kemper in 1994 as a
European equity analyst. He is an
International Portfolio Manager at
Scudder Investments, UK Ltd., an
affiliated investment management
company. He began his investment
career in 1990. Prior to joining
Scudder Kemper, he worked for an
unaffiliated investment management
company responsible for the Dutch
equity research product.
- --------------------------------------------------------------------------------
Investment Manager 65
<PAGE>
Kemper Latin America Fund
Joined the Fund
as a Portfolio
Name & Title Manager Background
- --------------------------------------------------------------------------------
Tara C. Kenney 1996 Joined Scudder Kemper in 1995 as a
Lead Manager portfolio manager. She is a member
of the firm's Global Equity Group,
focusing on portfolio management of
Latin American equity securities.
She has 15 years of experience in
the field. Prior to joining Scudder
Kemper, she was responsible for the
origination and execution of
corporate finance transactions in
Latin America at a banking trust
company.
Edmund B. Games, Jr. 1992 Joined Scudder Kemper in 1960. Since
Manager then he has served as portfolio
manager for other affiliated
international mutual funds and has
over 39 years of international
investment experience. He is a
member of the firm's Global Equity
Group.
Paul H. Rogers 1996 Joined Scudder Kemper in 1994 and
Manager was responsible for Latin American
corporate bond research in the
firm's Emerging Markets/High Yield
Bond Group. Since then he has served
as portfolio manager for other
affiliated international mutual
funds. He began his investment
career in 1985. Prior to joining
Scudder Kemper he worked in the
Latin American group for a bank.
- --------------------------------------------------------------------------------
66 Investment Manager
<PAGE>
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
funds could be adversely affected if computer systems on which a fund relies,
which primarily include those used by the investment manager, 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 funds' business and
operations, such as problems with calculating net asset value and difficulties
in implementing a fund's purchase and redemption procedures. The investment
manager has commenced a review of the Year 2000 Issue as it may affect the funds
and is taking steps it believes are reasonably designed to address the Year 2000
Issue, although there can be no assurances that these steps will be sufficient.
In addition, there can be no assurances that the Year 2000 Issue will not have
an adverse effect on the issuers whose securities are held by a fund or on
global markets or economies generally.
Euro conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operation of each fund. The Euro
was introduced on January 1, 1999 by eleven European countries that are members
of the European Economic and Monetary Union (EMU). The introduction of the Euro
will require the redenomination of European debt and equity securities over a
period of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain other
European community members, including the United Kingdom, did not officially
implement the Euro on January 1, 1999.
The investment manager is actively working to address Euro-related issues and
understands that other key service providers are taking similar steps. At this
time, however, no one knows precisely what the degree of impact will be. To the
extent that the market impact or effect on a fund's holdings is negative, it
could hurt the fund's performance.
Investment Manager 67
<PAGE>
ABOUT YOUR INVESTMENT
CHOOSING A SHARE CLASS
Each fund provides investors with the option of purchasing shares in the
following ways:
- --------------------------------------------------------------------------------
Class A Shares(1) Offered at net asset value plus a maximum sales charge of
5.75% of the offering price, or 4.5% of the offering price
in the cases of Kemper Global Income Fund and Kemper
Emerging Markets Income Fund.
Reduced sales charges apply to purchases of $50,000 or
more for all funds except Kemper Global Income Fund and
Kemper Emerging Markets Income Fund. Reduced sales charges
apply to purchases of $100,000 or more for Kemper Global
Income Fund and Kemper Emerging Markets Income Fund.
Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a 1%
contingent deferred sales charge if redeemed within one
year of purchase and a 0.50% contingent deferred sales
change if redeemed during the second year of purchase.
Class B Shares(1) Offered at net asset value without an initial sales
charge, but subject to a 0.75% Rule 12b-1
distribution fee and a contingent deferred sales charge
that declines from 4% to zero on certain redemptions made
within six years of purchase. Class B shares
automatically convert into Class A shares (which have
lower ongoing expenses) six years after purchase.
Class C Shares(1) Offered at net asset value without an initial sales
charge, but subject to a 0.75% Rule 12b-1 distribution fee
and a 1% contingent deferred sales charge on redemptions
made within one year of purchase. Class C shares do not
convert into another class.
- --------------------------------------------------------------------------------
(1) Class A, B and C shares of Growth Fund Of Spain are subject to a 2%
redemption fee on shares redeemed or exchanged within one year after
purchase, with limited exceptions.
When placing purchase orders, investors must specify whether the order is for
Class A, Class B or Class C shares. Each class of shares represents interests in
the same portfolio of investments of a fund.
The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors that
qualify for reduced sales charges might consider Class A shares. Investors who
prefer not to pay an initial sales charge and who plan to hold their investment
for more than six years might consider Class B shares. Investors who prefer not
to pay an initial sales charge but who plan to redeem their shares within six
years might consider Class C shares. For more information about these sales
arrangements, consult your financial representative or the Shareholder Service
Agent. Be aware that financial services firms may receive different compensation
depending upon which class of shares they sell.
68 About Your Investment
<PAGE>
Rule 12b-1 plan
Each fund has adopted a plan under Rule 12b-1 that provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by the
transfer agent to pay for distribution and other services provided to
shareholders of those classes. Because 12b-1 fees are paid out of fund assets on
an ongoing basis, they will, over time, increase the cost of investment and may
cost more than other types of sales charges. Long-term shareholders may pay more
than the economic equivalent of the maximum initial sales charges permitted by
the National Association of Securities Dealers, although Kemper Distributors,
Inc. believes that it is unlikely, in the case of Class B shares, because of the
automatic conversion feature of the shares.
SPECIAL FEATURES
Class A Shares -- Combined Purchases. Each fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of most Kemper
Funds.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
Kemper Distributors. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period.
Class A Shares -- Cumulative Discount. Class A shares of a fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a fund being purchased, the value of all Class A shares of
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 -- Large Order NAV Purchase Privilege. Class A shares of a fund
may be purchased at net asset value by any purchaser provided that the amount
invested in such fund or other Kemper Funds totals at least $1,000,000 including
purchases of Class A shares pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described above (the "Large Order NAV
Purchase Privilege").
Exchange Privilege -- General. Shareholders of Class A, Class B and Class C
shares may exchange their shares for shares of the corresponding class of Kemper
Mutual Funds. Currently, shares of a Kemper Fund with a value in excess of
$1,000,000 (except Kemper Cash Reserves Fund) acquired by exchange from another
Kemper Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15 Day Hold Policy"). Effective June 1,
1999, shares of a Kemper Fund with a value of $1,000,000 or less (except Kemper
Cash Reserves Fund) acquired by exchange from another Kemper Fund, or from a
Money Market Fund, may not
About Your Investment 69
<PAGE>
be exchanged thereafter until they have been owned for 15 days if, in the
investment manager's judgement, the exchange activity may have an adverse effect
on the fund. In particular, a pattern of exchanges that coincides with a "market
timing" strategy may be disruptive to the Fund and therefore may be subject to
the 15-Day Hold Policy. For purposes of determining whether the 15 Day Hold
Policy applies to a particular exchange, the value of the shares to be exchanged
shall be computed by aggregating the value of shares being exchanged for all
accounts under common control, direction or advice, including without limitation
accounts administered by a financial services firm offering market timing, asset
allocation or similar services.
For purposes of determining any contingent deferred sales charge that may be
imposed upon the redemption of the shares received on exchange, amounts
exchanged retain their original cost and purchase date.
Upon the exchange of any class of shares of the Growth Fund Of Spain 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 Fee" below). Redemptions for any one shareholder
during any 90-day period in excess of the lesser of $250,000 or 1% of the net
asset value of the fund 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 in the fund's Statement of Additional Information under
"Redemption-in-kind."
BUYING SHARES
You may purchase shares of a fund by contacting the securities dealer or other
financial services firm from whom you received this prospectus.
CLASS A SHARES -- All funds, except Kemper Global Income Fund and Kemper
Emerging Markets Income Fund
Public Offering Price. Including Sales Charge
Sales Charge
------------
As a % of As a % of
Amount of Purchase Offering Price Net Amount Invested*
- ------------------ -------------- --------------------
Less than $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50 4.71
$100,000 but less than $250,000 3.50 3.63
$250,000 but less than $500,000 2.60 2.67
$500,000 but less than $1 million 2.00 2.04
$1 million and over 0.00** 0.00**
- -----------
* Rounded to nearest one hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
and, in the case of Growth Fund Of Spain, a redemption fee, as discussed
below.
70 About Your Investment
<PAGE>
CLASS A SHARES -- Kemper Global Income Fund and Kemper Emerging Markets Income
Fund
Public Offering Price. Including Sales Charge
Sales Charge
------------
As a % of As a % of Net Amount
Amount of Purchase Offering Price Invested*
- ------------------ -------------- ---------
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50 3.63
$250,000 but less than $500,000 2.60 2.67
$500,000 but less than $1 million 2.00 2.04
$1 million and over 0.00** 0.00**
- -----------
* Rounded to nearest one hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
NAV Purchases
Class A shares of a fund may be purchased at net asset value by:
o shareholders in connection with the investment or reinvestment of income
and capital gain dividends;
o a participant-directed qualified retirement plan or a participant-directed
non-qualified deferred compensation plan or a participant-directed
qualified retirement plan which is not sponsored by a K-12 school
district, provided in each case that such plan has not less than 200
eligible employees;
o any purchaser with Kemper Funds investment totals of at least $1,000,000
o unitholders of unit investment trusts sponsored by Ranson & Associates,
Inc. or its predecessors through reinvestment programs described in the
prospectuses of such trusts that have such programs;
o officers, trustees, directors, employees (including retirees) and sales
representatives of a fund, its investment manager, its principal
underwriter or certain affiliated companies, for themselves or members of
their families, any trust, pension, profit-sharing or other benefit plan
for only such persons;
o persons who purchase shares through bank trust departments that process
such trades through an automated, integrated mutual fund clearing program
provided by a third party clearing firm;
o registered representatives and employees of broker-dealers having selling
group agreements with Kemper Distributors or any trust, pension,
profit-sharing or other benefit plan for only such persons;
o officers, directors, and employees of service agents of the funds;
o members of the plaintiff class in the proceeding known as Howard and
Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et. al.,
Case No. 93 C 5231 (N.D.IL);
About Your Investment 71
<PAGE>
o selected employees (including their spouses and dependent children) of
banks and other financial services firms that provide administrative
services related to the funds pursuant to an agreement with Kemper
Distributors or one of its affiliates;
o certain professionals who assist in the promotion of Kemper Funds pursuant
to personal services contracts with Kemper Distributors, for themselves or
members of their families;
o in connection with the acquisition of the assets of or merger or
consolidation with another investment company;
o shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on
September 8, 1995, and have continuously owned shares of KVS (or a Kemper
Fund acquired by exchange of KVS shares) since that date, for themselves
or members of their families, any trust, pension, profit-sharing or other
benefit plan for only such persons;
o persons who purchase shares of the fund through Kemper Distributors as
part of an automated billing and wage deduction program administered by
RewardsPlus of America;
o through certain investment advisers registered under the Investment
Advisers Act of 1940 and other financial services firms, acting solely as
agent for their clients, that adhere to certain standards established by
Kemper Distributors, including a requirement that such shares be purchased
for the benefit of their clients participating in an investment advisory
program under which such clients pay a fee to the investment advisor or
other firm for portfolio management or agency brokerage services.
Contingent Deferred Sales Charge
A contingent deferred sales charge may be imposed upon redemption of Class A
shares purchased under the Large Order NAV Purchase Privilege as follows: 1% if
they are redeemed within one year of purchase and 0.50% if redeemed during the
second year following purchase. The charge will not be imposed upon redemption
of reinvested dividends or share appreciation. The contingent deferred sales
charge will be waived in the event of:
o redemptions under a fund's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account;
o redemption of shares of a shareholder (including a registered joint owner)
who has died;
o redemption of shares of a shareholder (including a registered joint owner)
who after purchase of the shares being redeemed becomes totally disabled
(as evidenced by a determination by the federal Social Security
Administration);
72 About Your Investment
<PAGE>
o redemptions by a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan which is not sponsored by a
K-12 school district;
o redemptions by employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder
Service Agent or its affiliates;
o redemptions of shares whose dealer of record at the time of the investment
notifies Kemper Distributors that the dealer waives the commission
applicable to such Large Order NAV Purchase.
Rule 12b-1 Fee
None
Exchange Privilege
Class A shares may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and Kemper Cash Reserves Fund acquired by
purchase (not including shares acquired by dividend reinvestment) are subject to
the applicable sales charge on exchange.
Class A shares purchased under the Large Order NAV Purchase Privilege may be
exchanged for Class A shares of any Kemper Fund or a Money Market Fund without
paying any contingent deferred sales charge. If the Class A shares received on
exchange are redeemed thereafter, a contingent deferred sales charge may be
imposed.
Shares of Growth Fund Of Spain held for less than one year are subject to a 2%
redemption fee upon exchange.
Redemption fee
Upon the redemption of any class of shares of Growth Fund Of Spain 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.
CLASS B SHARES
Public Offering Price
Net asset value per share without any sales charge at the time of purchase.
Contingent Deferred Sales Charge
A contingent deferred sales charge may be imposed upon redemption of Class B
shares. There is no such charge upon redemption of any share appreciation or
reinvested dividends. The charge is computed at the following rates applied to
the value of the shares redeemed excluding amounts not subject to the charge.
- --------------------------------------------------------------------------------
Year of Redemption
After Purchase: First Second Third Fourth Fifth Sixth
- --------------------------------------------------------------------------------
Contingent Deferred
Sales Charge: 4% 3% 3% 2% 2% 1%
- --------------------------------------------------------------------------------
About Your Investment 73
<PAGE>
The contingent deferred sales charge will be waived:
o for redemptions to satisfy required minimum distributions after age 70 1/2
from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's Kemper IRA accounts);
o for redemptions made pursuant to any IRA systematic withdrawal based on
the shareholder's life expectancy including, but not limited to,
substantially equal periodic payments described in Code Section
72(t)(2)(A)(iv) prior to age 59 1/2;
o for redemptions made pursuant to a systematic withdrawal plan;
o in the event of the total disability (as evidenced by a determination by
the federal Social Security Administration) of the shareholder (including
a registered joint owner) occurring after the purchase of the shares being
redeemed;
o in the event of the death of the shareholder (including a registered joint
owner).
The contingent deferred sales charge will also be waived in connection with the
following redemptions of shares held by employer sponsored employee benefit
plans maintained on the subaccount record keeping system made available by
Kemper Service Company, the Shareholder Service Agent:
o redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent
deferred sales charge and the conversion privilege);
o redemptions in connection with retirement distributions (limited at any
one time to 10% of the total value of plan assets invested in a fund);
o redemptions in connection with distributions qualifying under the hardship
provisions of the Code;
o redemptions representing returns of excess contributions to such plans.
Rule 12b-1 Fee
0.75%
Conversion Feature
Class B shares of a fund will automatically convert to Class A shares of the
same fund six years after issuance on the basis of the relative net asset value
per share. Shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's fund
account will be converted to Class A shares on a pro rata basis.
Exchange Privilege
Class B shares of a fund and Class B shares of most Kemper Funds may be
exchanged for each other at their relative net asset values without paying any
contingent deferred sales charge. Shares of Growth Fund Of Spain held for less
than one year are subject to a 2% redemption fee upon exchange.
74 About Your Investment
<PAGE>
Redemption fee
Upon the redemption of any class of shares of Growth Fund Of Spain 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.
CLASS C SHARES
Public Offering Price
Net asset value per share without any sales charge at the time of purchase.
Contingent Deferred Sales Charge
A contingent deferred sales charge of 1% may be imposed upon redemption of Class
C shares redeemed within one year of purchase. The charge will not be imposed
upon redemption of reinvested dividends or share appreciation. The contingent
deferred sales charge will be waived in the event of:
o redemptions by a participant-directed qualified retirement plan described
in Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457;
o redemptions by employer sponsored employee benefit plans (or their
participants) using the subaccount record keeping system made available
through the Shareholder Service Agent or its affiliates;
o redemption of shares of a shareholder (including a registered joint owner)
who has died;
o redemption of shares of a shareholder (including a registered joint owner)
who after purchase of the shares being redeemed becomes totally disabled
(as evidenced by a determination by the federal Social Security
Administration);
o redemptions under a fund's systematic withdrawal plan at a maximum of 10%
per year of the net asset value of the account;
o redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has
waived the advance of the first year administrative service and
distribution fees applicable to such shares and agrees to receive such
fees quarterly;
o redemption of shares purchased through a dealer-sponsored asset allocation
program maintained on an omnibus record-keeping system provided the dealer
of record has waived the advance of the first year administrative services
and distribution fees applicable to such shares and has agreed to receive
such fees quarterly.
Rule 12b-1 Fee
0.75%
Conversion Feature
None
About Your Investment 75
<PAGE>
Exchange Privilege
Class C shares of a fund and Class C shares of most Kemper Funds may be
exchanged for each other at their relative net asset values without paying any
contingent deferred sales charge. Shares of Growth Fund Of Spain held for less
than one year are subject to a 2% redemption fee upon exchange.
Redemption fee
Upon the redemption of any class of shares of Growth Fund Of Spain 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.
SELLING AND EXCHANGING SHARES
General
Contact your securities dealer or other financial services firm to arrange for
share redemptions or exchanges.
Any shareholder may require a fund to redeem his or her shares. When shares are
held for the account of a shareholder by the funds' transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O.
Box 419557, Kansas City, Missouri 64141-6557.
An exchange of shares entails the sale of fund shares and subsequent purchase of
shares of another Kemper Mutual Fund.
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, 1996 will be eligible for the second year's charge if redeemed on or
after December 1, 1997. 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.
Share certificates
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Service Company, along with a duly endorsed stock power
and accompanied by a written request for redemption. Redemption requests and a
stock power must be endorsed by the account holder with signatures guaranteed.
The redemption request and stock power must be signed exactly as the account is
registered, including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
76 About Your Investment
<PAGE>
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions
Each fund normally distributes dividends of net investment income as follows:
annually for Kemper Asian Growth Fund, Kemper Emerging Markets Growth Fund,
Kemper Europe Fund, Kemper Global Blue Chip Fund, Global Discovery Fund, Growth
Fund Of Spain, Kemper International Fund, and Kemper Latin America Fund;
semi-annually for Kemper International Growth and Income Fund; monthly for
Kemper Emerging Markets Income Fund and Kemper Global Income Fund. Each fund
distributes any net realized short-term and long-term capital gains at least
annually.
Income and capital gains dividends, if any, of a fund will be credited to
shareholder accounts in full and fractional shares of the same class of that
fund at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, Kemper Service Company, a shareholder
may select one of the following options:
1. To receive income and short-term capital gains dividends in cash and
long-term capital gains dividends in shares of the same class at net asset
value; or
2. To receive income and capital gains dividends in cash.
Any dividends of a fund that are reinvested will normally be reinvested in
shares of the same class of that same fund. However, by writing to the
Shareholder Service Agent, you may choose to have dividends of a fund invested
in shares of the same class of another Kemper fund at the net asset value of
that class and fund. To use this privilege, you must maintain a minimum account
value of $1,000 in the fund distributing the dividends. The funds will reinvest
dividend checks (and future dividends) in shares of that same fund and class if
checks are returned as undeliverable. Dividends and other distributions in the
aggregate amount of $10 or less are automatically reinvested in shares of the
same fund unless you request that such policy not be applied to your account.
Distributions are generally taxable, whether received in cash or reinvested.
About Your Investment 77
<PAGE>
Taxes
Dividends representing net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxable to
individual shareholders as long-term capital gains, regardless of the length of
time shareholders have owned shares. Short-term capital gains and any other
taxable income distributions are taxable to you as ordinary income. A portion of
dividends from ordinary income may qualify for the dividends-received deduction
for corporations.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, is taxable to you.
A sale or exchange of your shares is a taxable event and may result in a capital
gain or loss which may be long-term or short-term, generally depending on how
long you owned the shares. Shareholders of a fund may be subject to state, local
and foreign taxes on fund distributions and dispositions of fund shares. You
should consult your tax advisor regarding the particular tax consequences of an
investment in a fund.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
are taxable to you as if paid on December 31 of the calendar year in which they
were declared.
Each fund sends you detailed tax information about the amount and type of its
distributions by January 31 of the following year. In certain years, you may be
able to claim a credit or deduction on your income tax return for your share of
foreign taxes paid by a fund.
Each fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to you if you fail to provide the fund with
your correct taxpayer identification number or to make required certifications,
or if you have been notified by the IRS that you are subject to backup
withholding. Any such withheld amounts may be credited against your U.S. federal
income tax liability.
TRANSACTION INFORMATION
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
the funds as of the close of regular trading on the New York Stock Exchange,
normally 4:00 p.m. eastern time, on each day the New York Stock Exchange is open
for trading. Market prices are used to determine the value of the funds' assets.
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation.
78 About Your Investment
<PAGE>
The net asset value per share of each fund is the value of one share and is
determined separately for each class by dividing the value of a fund's net
assets attributable to that class, less all liabilities of that class, by the
number of shares of that class outstanding. The per share net asset value of the
Class B and Class C shares of a fund will generally be lower than that of the
Class A shares of a fund because of the higher annual expenses borne by the
Class B and Class C shares.
To the extent that the funds invest in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the funds do not price
their shares. As a result, the net asset value per share of the funds may change
at a time when shareholders are not able to purchase or redeem their shares.
Redemption Fee
Upon the redemption or exchange of any class of shares of Growth Fund Of Spain
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
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 investment manager or its
subsidiaries, and does not benefit the investment manager 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, 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.
About Your Investment 79
<PAGE>
With respect to Growth Fund Of Spain, 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 which can be obtained by contacting
the Shareholder Service Agent. The form details, among other things, the
shareholder's valid custodial arrangements in Spain, Portugal and the U.S. No
redemptions requests subject to in-kind redemption may be made other than by a
written request accompanied by a properly completed redemption and certification
form.
Processing time
All requests to buy and sell shares that are received in good order by the
funds' transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of trading that day (subject to any applicable sales load or contingent deferred
sales charge). Orders received by dealers or other financial services firms
prior to the determination of net asset value and received by the funds'
transfer agent prior to the close of its business day will be confirmed at a
price based on the net asset value effective on that day. If an order is
accompanied by a check drawn on a foreign bank, funds must normally be collected
before shares will be purchased.
Payment for shares you sell will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
If you have share certificates, these must accompany your order in proper form
for transfer. When you place an order to sell shares for which the fund may not
yet have received good payment (i.e., purchases by check, EXPRESS-Transfer or
Bank Direct Deposit), the fund may delay transmittal of the proceeds until it
has determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by a fund of the purchase amount.
The redemption of shares within certain time periods may be subject to
contingent deferred sales charges, as noted above.
Signature guarantees
A signature guarantee is required unless you sell $50,000 or less worth of
shares (prior to the imposition of any contingent deferred sales charge) and the
proceeds are payable to the shareholder of record at the address of record. You
can obtain a guarantee from most brokerage houses and financial institutions,
although not from a notary public. The funds will normally send you the proceeds
within one business day following your request, but may take up to seven
business days (or longer in the case of shares recently purchased by check).
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
funds and their transfer agent each reserves the right to reject purchases of
fund shares (including exchanges) for any reason, including when there is
evidence of a pattern of frequent purchases and sales made in response to
short-term fluctuations in a fund's share price. Each fund reserves the right to
80 About Your Investment
<PAGE>
withdraw all or any part of the offering made by this prospectus and to reject
purchase orders. Also, from time to time, each fund may temporarily suspend the
offering of its shares or a class of its shares to new investors. During the
period of such suspension, persons who are already shareholders normally are
permitted to continue to purchase additional shares and to have dividends
reinvested.
Minimum balances
The minimum initial investment for each fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Because of the high cost of maintaining small accounts, the funds may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Third party transactions
If you buy and sell shares of a fund through a member of the National
Association of Securities Dealers, Inc. (other than the funds' distributor,
Kemper Distributors), that member may charge a fee for that service. This
prospectus should be read in connection with such firms' material regarding
their fees and services.
Redemption-in-kind
Each fund reserves the right to honor any request for redemption or repurchase
by making payment in whole or in part in readily marketable securities
("redemption in kind"). These securities will be chosen by the fund and valued
as they are for purposes of computing the fund's net asset value. A shareholder
may incur transaction expenses in converting these securities to cash.
It is the policy of Growth Fund Of Spain 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.
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, which expenses
are in addition to any applicable redemption fee or contingent deferred sales
charge (see the Statement of Additional Information about redemptions-in-kind).
About Your Investment 81
<PAGE>
With respect to Growth Fund Of Spain, 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 which can be obtained by contacting
the Shareholder Service Agent. The form details, among other things, the
shareholder's valid custodial arrangements in Spain, Portugal and the U.S. No
redemptions requests subject to in-kind redemption may be made other than by a
written request accompanied by a properly completed redemption and certification
form.
82 About Your Investment
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FINANCIAL HIGHLIGHTS
The financial highlights tables below are intended to help you understand the
funds' financial performance for the periods reflected below. Certain
information reflects the financial results for a single fund share. The total
return figures show what a shareholder in a fund would have earned (or lost)
assuming reinvestment of all distributions. This information, for all funds
except Global Discovery Fund, has been audited by Ernst & Young LLP. With
respect to Global Discovery Fund, this information has been audited by
Pricewaterhouse Coopers LLP. The reports of each of the auditors, along with the
funds' financial statements, are included in the funds' annual reports, which
are available upon request by calling Kemper at 1-800-621-1048.
Growth Fund Of Spain is the successor entity to The Growth Fund of Spain, Inc.,
a closed-end management investment company that had one class of shares. In
connection with the December 11, 1998 reorganization of The Growth Fund of
Spain, Inc. as Growth Fund Of Spain, an open-end series of Kemper
Global/International Series, Inc., the shares of The Growth Fund of Spain, Inc.
were exchanged on that date for Class A shares of the fund. Accordingly, the
following table shows financial information for Growth Fund Of Spain's Class A
shares expressed in terms of one share outstanding throughout the relevant
period, and reflects the operations of The Growth Fund of Spain, Inc. as a
closed-end investment company. Financial information is not available for the
fund's Class B and Class C shares since the reorganization took place after the
close of the fund's most recent fiscal year. Effective as of the fund's 1998
fiscal year, the fund's fiscal year end was changed to October 31.
Financial Highlights 83
<PAGE>
The Growth Fund of Spain, Inc.
<TABLE>
<CAPTION>
Eleven
months
ended
October
31, Year ended November 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <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
- ----------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .11 .24 .36 .37 .32
- ----------------------------------------------------------------------------------
Net realized and
unrealized gain 5.72 4.15 2.69 1.01 1.41
- ----------------------------------------------------------------------------------
Total from investment
operations 5.83 4.39 3.05 1.38 1.73
- ----------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .11 .17 .42 .45 --
- ----------------------------------------------------------------------------------
Distribution from net
realized gain 1.36 .83 .29 -- --
- ----------------------------------------------------------------------------------
Total dividends 1.47 1.00 .71 .45 --
- ----------------------------------------------------------------------------------
Net asset value, end of period $23.42 19.06 15.67 13.33 12.40
- ----------------------------------------------------------------------------------
Total return (not annualized) 32.90% 29.86 24.12 11.62 16.21
- ----------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 1.43% 1.22 1.25 1.22 1.23
- ----------------------------------------------------------------------------------
Net investment income .58% 1.29 2.46 2.89 2.57
- ----------------------------------------------------------------------------------
Supplemental data
Net assets at end of period
(in thousands) $387,126 315,059 263,935 227,997 213,972
- ----------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 10% 29 45 69 85
- ----------------------------------------------------------------------------------
</TABLE>
Note: Total return reflects reinvestment of dividends.
84 Financial Highlights
<PAGE>
Kemper Asian Growth Fund
October 21
Year ended to November
November 30, 30,
CLASS A 1998 1997 1996
- ------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $6.65 10.04 9.50
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income .11 .08 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.27) (3.47) .54
- ------------------------------------------------------------------------------
Total from investment operations (1.16) (3.39) .54
- ------------------------------------------------------------------------------
Less distribution from net investment income .08 -- --
- ------------------------------------------------------------------------------
Net asset value, end of period $5.41 6.65 10.04
- ------------------------------------------------------------------------------
Total return (not annualized) (17.66)% (33.76) 5.68
- ------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 1.80% 1.60 1.46
- ------------------------------------------------------------------------------
Net investment income 2.05% .97 .74
- ------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.65% 2.62 1.46
- ------------------------------------------------------------------------------
Net investment income (loss) 1.20% (.05) .74
- ------------------------------------------------------------------------------
October 21
Year ended to November
November 30, 30,
CLASS B 1998 1997 1996
- ------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $6.58 10.03 9.50
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income .06 -- --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.28) (3.45) .53
- --------------------------------------------------------------------------
Total from investment operations (1.22) (3.45) .53
- ------------------------------------------------------------------------------
Less distribution from net investment
income .02 -- --
- ------------------------------------------------------------------------------
Net asset value, end of period $5.34 6.58 10.03
- ------------------------------------------------------------------------------
Total return (not annualized) (18.65)% (34.40) 5.58
- ------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.78% 2.57 2.34
- ------------------------------------------------------------------------------
Net investment income (loss) 1.07% -- (.14)
- ------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 4.29% 3.51 2.34
- ------------------------------------------------------------------------------
Net investment loss (.44)% (.94) (.14)
- ------------------------------------------------------------------------------
Financial Highlights 85
<PAGE>
October 21
Year ended to November
November 30, 30,
CLASS C 1998 1997 1996
- ------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $6.60 10.03 9.50
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income .05 -- --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1.28) (3.43) .53
- ------------------------------------------------------------------------------
Total from investment operations (1.23) (3.43) .53
- ------------------------------------------------------------------------------
Less distribution from net investment
income .02 -- --
- ------------------------------------------------------------------------------
Net asset value, end of period $5.35 6.60 10.03
- ------------------------------------------------------------------------------
Total return (not annualized) (18.72)% (34.20) 5.58
- ------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.71% 2.54 2.34
- ------------------------------------------------------------------------------
Net investment income (loss) 1.14% .03 (.14)
- ------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 4.56% 3.55 2.34
- ------------------------------------------------------------------------------
Net investment loss (.71)% (.98) (.14)
- ------------------------------------------------------------------------------
October 21
Year ended to November
November 30, 30,
1998 1997 1996
- ------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $7,416,000 6,398,000 1,949,000
- ------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 131% 155 74
- ------------------------------------------------------------------------------
Notes: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. agreed to waive a portion of its management fee and
absorb certain operating expenses of the fund during the years ended November
30, 1998 and 1997. The Other Ratios to Average Net Assets are computed without
this expense waiver or absorption.
86 Financial Highlights
<PAGE>
Kemper Emerging Markets Growth Fund
For the period from January 9, 1998
(commencement of operations)
to October 31, 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .03 (.01) (.03)
- --------------------------------------------------------------------------------
Net realized and unrealized loss (1.73) (1.75) (1.71)
- --------------------------------------------------------------------------------
Total from investment operations (1.70) (1.76) (1.74)
- --------------------------------------------------------------------------------
Net asset value, end of period $7.80 7.74 7.76
- --------------------------------------------------------------------------------
Total return (not annualized) (17.89)% (18.53) (18.32)
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the fund 2.28% 3.18 3.15
- --------------------------------------------------------------------------------
Net investment income (loss) .40% (.50) (.47)
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 22.38% 24.06 24.03
- --------------------------------------------------------------------------------
Net investment loss (19.70)% (21.38) (21.35)
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $1,771,222
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 69%
- --------------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
Financial Highlights 87
<PAGE>
Kemper Emerging Markets Income Fund
For the period from December 31,
1997 (commencement of operations)
to October 31, 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .64 .53 .54
- --------------------------------------------------------------------------------
Net realized and unrealized loss (4.14) (4.09) (4.09)
- --------------------------------------------------------------------------------
Total from investment operations (3.50) (3.56) (3.55)
- --------------------------------------------------------------------------------
Less distribution from net investment
income .61 .56 .56
- --------------------------------------------------------------------------------
Net asset value, end of period $5.39 5.38 5.39
- --------------------------------------------------------------------------------
Total return (not annualized) (38.39)% (38.87) (38.75)
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the fund before
interest expense 1.68% 2.56 2.53
- --------------------------------------------------------------------------------
Expenses absorbed by the fund after
interest expense 2.46% 3.34 3.31
- --------------------------------------------------------------------------------
Net investment income 10.59% 9.71 9.74
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses before interest expense 5.12% 6.75 6.72
- --------------------------------------------------------------------------------
Expenses after interest expense 5.90% 7.53 7.50
- --------------------------------------------------------------------------------
Net investment income 7.15% 5.52 5.55
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $5,040,189
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 294%
- --------------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
88 Financial Highlights
<PAGE>
Kemper Europe Fund
Year ended May 1 to
November 30, November 30,
CLASS A 1998 1997 1996
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $12.43 11.02 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .04 .03 .01
- --------------------------------------------------------------------------------
Net realized and unrealized gain 2.07 1.51 1.51
- --------------------------------------------------------------------------------
Total from investment operations 2.11 1.54 1.52
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .05 -- --
- --------------------------------------------------------------------------------
Distribution from net realized gain .15 .13 --
- --------------------------------------------------------------------------------
Total dividends .20 .13 --
- --------------------------------------------------------------------------------
Net asset value, end of period $14.34 12.43 11.02
- --------------------------------------------------------------------------------
Total return (not annualized) 17.25% 14.18 16.00
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 1.53% 1.52 1.49
- --------------------------------------------------------------------------------
Net investment income .32% .34 .46
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.28% 1.75 4.74
- --------------------------------------------------------------------------------
Net investment income (loss) (.43)% .11 (2.79)
- --------------------------------------------------------------------------------
Year ended May 1 to
November 30, November 30,
CLASS B 1998 1997 1996
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $12.27 10.97 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (.05) (.05) (.02)
- --------------------------------------------------------------------------------
Net realized and unrealized gain 1.98 1.48 1.49
- --------------------------------------------------------------------------------
Total from investment operations 1.93 1.43 1.47
- --------------------------------------------------------------------------------
Less distribution from net realized gain .15 .13 --
- --------------------------------------------------------------------------------
Net asset value, end of period $14.05 12.27 10.97
- --------------------------------------------------------------------------------
Total return (not annualized) 15.92% 13.23 15.47
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.67% 2.45 2.44
- --------------------------------------------------------------------------------
Net investment loss (.82)% (.59) (.49)
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 4.42% 2.66 5.63
- --------------------------------------------------------------------------------
Net investment loss (2.57)% (.80) (3.68)
- --------------------------------------------------------------------------------
Financial Highlights 89
<PAGE>
Year ended May 1 to
November 30, November 30,
CLASS C 1998 1997 1996
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $12.28 10.97 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment loss -- (.05) (.01)
- --------------------------------------------------------------------------------
Net realized and unrealized gain 2.00 1.49 1.48
- --------------------------------------------------------------------------------
Total from investment operations 2.00 1.44 1.47
- --------------------------------------------------------------------------------
Less distribution from net realized gain .15 .13 --
- --------------------------------------------------------------------------------
Net asset value, end of period $14.13 12.28 10.97
- --------------------------------------------------------------------------------
Total return (not annualized) 16.48% 13.32 15.47
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses 2.08% 2.38 2.34
- --------------------------------------------------------------------------------
Net investment loss (.23)% (.52) (.39)
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 2.89% 2.59 5.50
- --------------------------------------------------------------------------------
Net investment loss (1.04)% (.73) (3.55)
- --------------------------------------------------------------------------------
Year ended May 1 to
November 30, November 30,
1998 1997 1996
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period (in
thousands) $67,308 23,910 3,856
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 132% 101 96
- --------------------------------------------------------------------------------
Notes: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive a portion of its
management fee and absorb certain operating expenses of the fund. The Other
Ratios to Average Net assets are computed without this expense waiver or
absorption.
90 Financial Highlights
<PAGE>
Kemper Global Blue Chip Fund
For the period from December 31,
1997 (commencement of operations)
to October 31, 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .05 -- --
- --------------------------------------------------------------------------------
Net realized and unrealized gain .66 .63 .64
- --------------------------------------------------------------------------------
Total from investment operations .71 .63 .64
- --------------------------------------------------------------------------------
Net asset value, end of period $10.21 10.13 10.14
- --------------------------------------------------------------------------------
Total return (not annualized) 7.47% 6.63 6.74
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the fund 1.80% 2.68 2.65
- --------------------------------------------------------------------------------
Net investment income .92% .04 .07
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 6.06% 7.69 7.66
- --------------------------------------------------------------------------------
Net investment loss (3.34)% (4.97) (4.94)
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $9,539,623
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 84%
- --------------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
Financial Highlights 91
<PAGE>
Global Discovery Fund
For the For the For the
Period Period Period
April 16, April 16, April 16,
1998 1998 1998
(commence- (commence- (commence-
ment sale ment sale ment sale
of Class A of Class B of Class C
shares) to shares) to shares) to
October 31, October October 31,
1998 31, 1998 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Net asset value, beginning of period $23.98 $23.98 $23.98
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) (.09) (.18) (.17)
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments transactions (4.11) (4.10) (4.11)
- --------------------------------------------------------------------------------
Total from investment operations (4.20) (4.28) (4.28)
- --------------------------------------------------------------------------------
Net asset value, end of period $19.78 $19.70 $19.70
- --------------------------------------------------------------------------------
Total return (%)(b)(c) (17.51)** (17.85)** (17.85)**
- --------------------------------------------------------------------------------
Ratios and Supplemental Data
Net assets, end of period ($ millions) 11 6 2
- --------------------------------------------------------------------------------
Ratio of operating expenses, net to
average daily
net assets (%) 1.95* 2.83* 2.80*
- --------------------------------------------------------------------------------
Ratio of operating expenses before expense
reductions, to average daily net assets (%) 2.20* 3.13* 3.23*
- --------------------------------------------------------------------------------
Ratio of net investment income (loss) to
average daily net assets (%) (1.00)* (1.87)* (1.88)*
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) 40.6 40.6 40.6
- --------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) Total return does not reflect the effect of any sales charges.
(c) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
92 Financial Highlights
<PAGE>
Kemper Global Income Fund
Year ended December 31,
CLASS A 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of year $8.58 8.97 9.05 8.55 9.29
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .37 .48 .52 .61 .60
- --------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) .50 (.33) (.02) 1.05 (.74)
- --------------------------------------------------------------------------------
Total from investment
operations .87 .15 .50 1.66 (.14)
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .40 .47 .58 1.16 .38
- --------------------------------------------------------------------------------
Tax return of capital
distribution .11 .07 -- -- .22
- --------------------------------------------------------------------------------
Total dividends .51 .54 .58 1.16 .60
- --------------------------------------------------------------------------------
Net asset value, end of
year $8.94 8.58 8.97 9.05 8.55
- --------------------------------------------------------------------------------
Total return 10.48% 1.80 5.87 19.89 (1.47)
- --------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.58% 1.32 1.48 1.34 1.53
- --------------------------------------------------------------------------------
Net investment income 4.31% 5.56 5.77 6.43 6.67
- --------------------------------------------------------------------------------
May 31 to
December
Year ended December 31, 31,
CLASS B 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period $8.60 9.00 9.09 8.56 8.70
- -------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .31 .41 .46 .56 .30
- -------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) .49 (.33) (.02) 1.05 (.14)
- -------------------------------------------------------------------------------
Total from investment
operations .80 .08 .44 1.61 .16
- -------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .34 .42 .53 1.08 .19
- -------------------------------------------------------------------------------
Tax return of capital
distribution .10 .06 -- -- .11
- -------------------------------------------------------------------------------
Total dividends .44 .48 .53 1.08 .30
- -------------------------------------------------------------------------------
Net asset value, end of
period $8.96 8.60 9.00 9.09 8.56
- -------------------------------------------------------------------------------
Total return (not
annualized) 9.56% 1.03 5.11 19.21 1.89
- -------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 2.32% 2.18 2.14 1.98 2.27
- -------------------------------------------------------------------------------
Net investment income 3.57% 4.70 5.11 5.79 5.89
- -------------------------------------------------------------------------------
Financial Highlights 93
<PAGE>
May 31 to
December
Year ended December 31, 31,
CLASS C 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period $8.62 9.02 9.09 8.56 8.70
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .32 .42 .48 .57 .30
- --------------------------------------------------------------------------------
Net realized and
unrealized gain (loss) .49 (.33) (.02) 1.05 (.14)
- --------------------------------------------------------------------------------
Total from investment
operations .81 .09 .46 1.62 .16
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .34 .43 .53 1.09 .19
- --------------------------------------------------------------------------------
Tax return of capital
distribution .10 .06 -- -- .11
- --------------------------------------------------------------------------------
Total dividends .44 .49 .53 1.09 .30
- --------------------------------------------------------------------------------
Net asset value, end of
period $8.99 8.62 9.02 9.09 8.56
- --------------------------------------------------------------------------------
Total return (not
annualized) 9.72% 1.09 5.31 19.26 1.91
- --------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 2.13% 2.11 2.06 2.06 2.23
- --------------------------------------------------------------------------------
Net investment income 3.76% 4.77 5.19 5.71 5.93
- --------------------------------------------------------------------------------
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of year
(in thousands) $84,795 99,054 131,761 152,959 170,700
- --------------------------------------------------------------------------------
Portfolio turnover rate 313% 283 276 220 378
- --------------------------------------------------------------------------------
Notes: Total return does not reflect the effect of any sales charges. Per share
data for 1998, 1997 and 1996 were determined based on average shares
outstanding.
94 Financial Highlights
<PAGE>
Kemper International Fund
Year ended October 31,
CLASS A 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of year $12.68 11.96 10.59 11.13 10.56
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .04 -- .04 .07 --
- --------------------------------------------------------------------------------
Net realized and
unrealized gain .01 1.52 1.50 .05 .86
- --------------------------------------------------------------------------------
Total from investment
operations .05 1.52 1.54 .12 .86
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income .08 .12 .12 -- --
- --------------------------------------------------------------------------------
Distribution from net
realized gain .55 .68 .05 .66 .29
- --------------------------------------------------------------------------------
Total dividends .63 .80 .17 .66 .29
- --------------------------------------------------------------------------------
Net asset value, end of
year $12.10 12.68 11.96 10.59 11.13
- --------------------------------------------------------------------------------
Total return .45% 13.49 14.70 1.69 8.32
- --------------------------------------------------------------------------------
Ratios to average net assets
Expenses 1.64% 1.57 1.64 1.57 1.54
- --------------------------------------------------------------------------------
Net investment income .36% .16 .34 .83 .02
- --------------------------------------------------------------------------------
May 31 to
October
Year ended October 31, 31,
CLASS B 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period $12.50 11.81 10.46 11.09 10.58
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment loss (.08) (.12) (.06) (.02) (.04)
- --------------------------------------------------------------------------------
Net realized and
unrealized gain .03 1.51 1.47 .05 .55
- --------------------------------------------------------------------------------
Total from investment
operations (.05) 1.39 1.41 .03 .51
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income -- .02 .01 -- --
- --------------------------------------------------------------------------------
Distribution from net
realized gain .55 .68 .05 .66 --
- --------------------------------------------------------------------------------
Total dividends .55 .70 .06 .66 --
- --------------------------------------------------------------------------------
Net asset value, end of
period $11.90 12.50 11.81 10.46 11.09
- --------------------------------------------------------------------------------
Total return (not
annualized) (.37)% 12.32 13.59 .84 4.82
- --------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 2.62% 2.57 2.53 2.50 2.58
- --------------------------------------------------------------------------------
Net investment loss (.62)% (.84) (.55) (.10) (.97)
- --------------------------------------------------------------------------------
Financial Highlights 95
<PAGE>
May 31 to
October
Year ended October 31, 31,
CLASS C 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning
of period $12.51 11.81 10.46 11.09 10.58
- --------------------------------------------------------------------------------
Income from investment
operations:
Net investment loss (.08) (.09) (.06) (.02) (.04)
- --------------------------------------------------------------------------------
Net realized and
unrealized gain .03 1.49 1.47 .05 .55
- --------------------------------------------------------------------------------
Total from investment
operations (.05) 1.40 1.41 .03 .51
- --------------------------------------------------------------------------------
Less dividends:
Distribution from net
investment income -- .02 .01 -- --
- --------------------------------------------------------------------------------
Distribution from net
realized gain .55 .68 .05 .66 --
- --------------------------------------------------------------------------------
Total dividends .55 .70 .06 .66 --
- --------------------------------------------------------------------------------
Net asset value, end of
period $11.91 12.51 11.81 10.46 11.09
- --------------------------------------------------------------------------------
Total return (not
annualized) (.37)% 12.45 13.59 .84 4.82
- --------------------------------------------------------------------------------
Ratios to average net assets
(annualized)
Expenses 2.55% 2.49 2.50 2.50 2.52
- --------------------------------------------------------------------------------
Net investment loss (.55)% (.76) (.52) (.10) (.91)
- --------------------------------------------------------------------------------
Year ended October 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of year
(in thousands) $604,684 588,069 472,243 364,708 418,282
- --------------------------------------------------------------------------------
Portfolio turnover rate 105% 76 104 114 103
- --------------------------------------------------------------------------------
Notes: Total return does not reflect the effect of any sales charges. Per share
data were determined based on average shares outstanding for the years ended
1995, 1996 and 1998, respectively.
96 Financial Highlights
<PAGE>
Kemper International Growth and Income Fund
For the period from December 31,
1997 (commencement of operations)
to October 31, 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .13 .04 .05
- --------------------------------------------------------------------------------
Net realized and unrealized gain .20 .22 .21
- --------------------------------------------------------------------------------
Total from investment operations .33 .26 .26
- --------------------------------------------------------------------------------
Less distribution from net investment
income .10 .05 .05
- --------------------------------------------------------------------------------
Net asset value, end of period $9.73 9.71 9.71
- --------------------------------------------------------------------------------
Total return (not annualized) 3.31% 2.64 2.65
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the fund 1.81% 2.69 2.66
- --------------------------------------------------------------------------------
Net investment income 1.54% .66 .69
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 13.58% 15.21 15.18
- --------------------------------------------------------------------------------
Net investment loss (10.23)% (11.86) (11.83)
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $4,270,979
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 97%
- --------------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
Financial Highlights 97
<PAGE>
Kemper Latin America Fund
For the period from December 31,
1997 (commencement of operations)
to October 31, 1998
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Per share operating performance
Net asset value, beginning of period $9.50 9.50 9.50
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .06 .04 .04
- --------------------------------------------------------------------------------
Net realized and unrealized loss (2.25) (2.28) (2.28)
- --------------------------------------------------------------------------------
Total from investment operations (2.19) (2.24) (2.24)
- --------------------------------------------------------------------------------
Net asset value, end of period $7.31 7.26 7.26
- --------------------------------------------------------------------------------
Total return (not annualized) (23.05)% (23.58) (23.58)
- --------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses absorbed by the fund 2.21% 3.09 3.06
- --------------------------------------------------------------------------------
Net investment income 1.38% .50 .53
- --------------------------------------------------------------------------------
Other ratios to average net assets
(annualized)
Expenses 12.75% 14.38 14.34
- --------------------------------------------------------------------------------
Net investment loss (9.16)% (10.79) (10.75)
- --------------------------------------------------------------------------------
Supplemental data for all classes
Net assets at end of period $1,460,498
- --------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 55%
- --------------------------------------------------------------------------------
Note: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive its management fee and
absorb certain operating expenses of the Fund. The Other Ratios to Average Net
Assets are computed without this expense waiver or absorption.
98 Financial Highlights
<PAGE>
This Page
intentionally
left blank.
<PAGE>
This Page
intentionally
left blank.
<PAGE>
1
Additional information about each fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free telephone
number listed below. The Statement of Additional Information contains more
detailed information on fund investments and operations. The Shareholder
Services Guide contains more information about purchases and sales of fund
shares. The semiannual and annual shareholder reports contain a discussion of
the market conditions and the investment strategies that significantly affected
the funds' performance during the last fiscal year, as well as a listing of
portfolio holdings and financial statements. These and other fund documents may
be obtained without charge from the following sources:
- --------------------------------------------------------------------------------
By Telephone Call the Kemper Funds at: 1-800-621-1048
- --------------------------------------------------------------------------------
By Mail Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section,
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330
for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
- --------------------------------------------------------------------------------
For each of the funds, the respective Statement of Additional Information dated
March 1, 1999 is incorporated by reference into this prospectus (is legally a
part of this prospectus).
Investment Company Act file numbers:
Growth Fund Of Spain 811-08395
Kemper Asian Growth Fund 811-7731
Kemper Emerging Markets Growth Fund 811-08395
Kemper Emerging Markets Income Fund 811-08395
Kemper Europe Fund 811-7479
Kemper Global Blue Chip Fund 811-08395
Global Discovery Fund 811-4670
Kemper Global Income Fund 811-5829
Kemper International Fund 811-3136
Kemper International Growth and Income Fund 811-08395
Kemper Latin America Fund 811-08395
<PAGE>
KEMPER GLOBAL DISCOVERY FUND
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
Kemper Global Discovery Fund
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 Class A, B and C Shares (the "Shares" or
"Kemper Shares") of Global Discovery Fund (the "Fund"). This Statement of
Additional Information should be read in conjunction with the combined
prospectus of the Shares dated March 1, 1999. The prospectus may be obtained
without charge from the Fund at the address or telephone number on this cover or
the firm from which this Statement of Additional Information was received and is
also available along with other related materials at the SEC's Internet web site
(http://www.sec.gov).
---------
TABLE OF CONTENTS
Page
----
Investment Restrictions........................................... 2
Investment Policies and Techniques................................ 3
Dividends, Distributions and Taxes................................ 25
Investment Adviser and Underwriter................................ 31
Portfolio Transactions............................................ 38
Purchase and Redemption of Shares................................. 40
Performance....................................................... 54
Officers and Directors............................................ 57
Shareholder Rights................................................ 61
Appendix.......................................................... A-1
The financial statements appearing in the Fund's 1998 Annual Report to
Shareholders is incorporated herein by reference. The Annual Report for the Fund
accompanies this document. Scudder Kemper Investments, Inc. (the "Adviser")
serves as the Fund's investment adviser.
KGDF-13 3/99 (RECYCLED LOGO)
printed on recycled paper
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 (1) 67% of the Fund's shares present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy; or (2)
more than 50% of the Fund's outstanding shares.
Any investment restrictions herein which involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after and is caused by an acquisition or
encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an
open-end investment company.
The Fund may not, as a fundamental policy:
1. borrow money, except as permitted under the 1940 Act, as amended,
and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
2. issue senior securities, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
3. purchase physical commodities or contracts relating to physical
commodities;
4. concentrate its investments in a particular industry, as that term
is used in the 1940 Act, as amended, and as interpreted or modified
by regulatory authority having jurisdiction, from time to time;
5. engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
6. purchase or sell real estate, which term does not include securities
or companies which deal in real estate or interests therein, except
that the Fund reserves freedom of action to hold and to sell real
estate acquired as a result of the Fund's ownership of securities;
or
7. make loans to other persons except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
Other Investment Policies
The Directors of the Corporation have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Directors based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Directors without requiring prior notice to, or
approval of, shareholders.
As a matter of non-fundamental policy, the Fund currently does not intend
to:
(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, dollar rolls, or other investments
or transactions described in the Fund's registration statement which
may be deemed to be borrowings;
2
(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 or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with futures
contracts, options or other permitted investments, (iv) that
transactions in futures contracts and options shall not be deemed to
constitute selling securities short, and (v) 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;
(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); and
(7) lend portfolio securities in an amount greater than 5% of its total
assets.
In addition, other non-fundamental policies may be established from time
to time by the Fund's Directors and would not require the approval of
shareholders.
Master/feeder fund structure. The Corporation's Board of Directors has the
discretion to retain the current distribution arrangement for the Fund while
investing in a master fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
INVESTMENT POLICIES AND TECHNIQUES
General. Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Fund may engage (such
as short selling, hedging, etc.) or a financial instrument which the Fund may
purchase (such as options, forward foreign currency contracts, etc.) are meant
to describe the spectrum of investments that Scudder Kemper Investments, Inc.
(the "Adviser"), in its discretion, might, but is not required to, use in
managing the Fund's portfolio assets. The Adviser may, in its descretion, at any
time employ such practice, technique or instrument for one or more funds but not
for all funds advised by it. Furthermore, it is possible that
3
certain types of financial instruments or investment techniques described herein
may not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques, or instruments
may not be principal activities of a Fund but, to the extent employed, could
from time to time have a material impact on the Fund's performance.
Global Discovery Fund is a diversified series of Global/International
Fund, Inc. (the "Corporation"), an open-end management investment company. The
Fund's investment objective is to seek above-average capital appreciation over
the long term by investing primarily in the equity securities of small companies
located throughout the world. The Fund's investment objective is non-fundamental
and may be changed without a vote of shareholders. The Fund is designed for
investors looking for above-average appreciation potential (when compared with
the overall domestic stock market as reflected by Standard & Poor's Corporation
500 Composite Price Index) and the benefits of investing globally, but who are
willing to accept above-average stock market risk, the impact of currency
fluctuation and little or no current income.
In pursuit of its objective, the Fund generally invests in small, rapidly
growing companies which offer the potential for above-average returns relative
to larger companies, yet are frequently overlooked and thus undervalued by the
market. The Fund has the flexibility to invest in any region of the world. It
can invest in companies based in emerging markets, typically in the Far East,
Latin America and Eastern Europe, as well as in firms operating in developed
economies, such as those of the United States, Japan and Western Europe.
The Fund's investment adviser, Scudder Kemper Investments, Inc. (the
"Adviser"), invests the Fund's assets in companies it believes offer
above-average earnings, cash flow or asset growth potential. It also invests in
companies which may receive greater market recognition over time. The Adviser
believes that these factors offer significant opportunity for long-term capital
appreciation. The Adviser evaluates investments for the Fund from both a
macroeconomic and microeconomic perspective, using fundamental analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible investments. When evaluating an individual company, the
Adviser takes into consideration numerous factors, including the depth and
quality of management; a company's product line, business strategy and
competitive position; research and development efforts; financial strength,
including degree of leverage; cost structure; revenue and earnings growth
potential; price-earnings ratios and other stock valuation measures.
Secondarily, the Adviser weighs the attractiveness of the country and region in
which a company is located.
While the Adviser believes that smaller, lesser-known companies can offer
greater growth potential than larger, more established firms, the former also
involve greater risk and price volatility. To help reduce risk, the Fund
expects, under usual market conditions, to diversify its portfolio widely by
company, industry and country. Under normal circumstances, the Fund invests at
least 65% of its total assets in the equity securities of small companies. The
Fund intends to allocate investments among at least three countries at all
times, one of which may be the United States.
The Fund invests primarily in companies whose individual equity market
capitalization would place them in the same size range as companies in
approximately the lowest 20% of world market capitalization as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small-, medium- and large-sized companies based in 22 markets
around the globe. Based on this policy, the companies represented in the Fund's
portfolio typically will have individual equity market capitalizations of
between approximately $50 million and $2 billion, although the Fund will be free
to invest in smaller capitalization issues. Furthermore, the median market
capitalization of the companies in which the Fund invests will not exceed $750
million.
The equity securities in which the Fund may invest consist of common
stocks, preferred stocks (either convertible or nonconvertible), rights and
warrants. These securities may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter. For capital appreciation purposes, the
Fund may purchase notes, bonds, debentures, government securities and zero
coupon bonds (any of which may be convertible or nonconvertible). The Fund may
invest in foreign securities and American Depositary Receipts which may be
sponsored or unsponsored.
4
The Fund may also invest in closed-end investment companies holding foreign
securities, enter into repurchase agreements and reverse repurchase agreements,
invest in illiquid securities, purchase securities on a when-issued or forward
delivery basis, and engage in strategic transactions, including derivatives. For
temporary defensive purposes, the Fund may, during periods in which conditions
in securities markets warrant, invest without limit in cash and cash
equivalents. It is impossible to accurately predict how long such alternative
strategies will be utilized.
Common Stocks. Under normal circumstances, the Fund invests primarily 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
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.
Small Company Risk. The Adviser believes that smaller companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of smaller companies may be thinly
traded (and therefore have to be sold at a discount from current market prices
or sold in small lots over an extended period of time). Transaction costs in
smaller company stocks may be higher than those of larger companies.
Foreign Securities. The Fund is intended to provide individual and institutional
investors with an opportunity to invest a portion of their assets in a
diversified portfolio of securities of U.S. and foreign companies located
worldwide and is designed for long-term investors who can accept international
investment risk. The Fund is designed for investors who can accept currency and
other forms of international investment risk. The Adviser believes that
allocation of the Fund's assets on a global basis decreases the degree to which
events in any one country, including the U.S., will affect an investor's entire
investment holdings. In the period since World War II, many leading foreign
economies have grown more rapidly than the U.S. economy and from time to time
have had interest rate levels that had a higher real return than the U.S. bond
market. Consequently, the securities of foreign issuers have provided attractive
returns relative to the returns provided by the securities of U.S. issuers,
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 affect the
Fund's performance favorably or unfavorably. 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 stock markets, while growing
in volume of trading activity, have substantially less volume than that of the
New York Stock Exchange, 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 that in the U.S. market 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. Fixed commissions on some foreign
securities exchanges are generally higher than negotiated
5
commissions on U.S. exchanges, although the Adviser will endeavor to achieve the
most favorable net results on the Fund's portfolio transactions. Further, the
Fund may encounter difficulties or be unable to pursue legal remedies and obtain
judgment in foreign courts. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers and
listed companies than in the U.S. It may be more difficult for the Fund's agents
to keep currently informed about corporate actions such as stock dividends or
other matters 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 confiscatory or withholding
taxation, political, social or economic instability, or diplomatic developments
which could affect U.S. 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. The Adviser seeks to mitigate the risks to the
Fund associated with the foregoing considerations through investment variation
and continuous professional management.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union. The Fund may invest up to 5% of its
total assets in the securities of issuers domiciled in Eastern European
countries.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Fund could lose a substantial portion of any investments it
has made in the affected countries. Further, no accounting standards exist in
East European countries. Finally, even though certain East European currencies
may be convertible into U.S. dollars, the conversion rates may be artificial to
the actual market values and may be adverse to the Fund's shareholders.
Foreign Currencies. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, the Fund may temporarily hold funds
in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency contracts, foreign currency
futures contracts and options on such contracts. Because of these factors, the
value of the assets of a 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's custodian values
each Fund's assets daily in terms of U.S. dollars, the Fund does not intend to
convert its holdings of foreign currencies into U.S. dollars on a daily basis.
The Fund 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
forward or futures contracts to purchase or sell foreign currencies.
6
Because the Fund normally will be invested in both U.S. and 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. The Fund invests in many securities markets
around the world in an attempt to take advantage of opportunities wherever they
may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the U.S.
Emerging markets also 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. Delays in settlement
could result in temporary periods when a portion of the assets of a Fund is
uninvested and no cash 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 could result either 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. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of the Fund. Certain emerging
markets require prior governmental approval of investments by foreign persons,
limit the amount of investment by foreign persons in a particular company, limit
the investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain emerging markets may also restrict investment
opportunities in issuers in industries deemed important to national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
In the course of investment in emerging market debt obligations, the Fund
will be exposed to the direct or indirect consequences of political, social and
economic changes in one or more emerging markets. Political changes in emerging
market countries may affect the willingness of an emerging market country
governmental issuer to make or provide for timely payments of its obligations.
The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
also affects its ability to honor its obligations. While the Fund manages its
assets in a manner that will seek to minimize the exposure to such risks, and
will further reduce risk by owning the bonds of many issuers, there can be no
assurance that adverse political, social or economic changes will not cause the
Fund to suffer a loss of value in respect of the securities in the Fund's
portfolio.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Fund's securities in such
7
markets may not be readily available. The Corporation may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly if the Fund believes
that appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from
the Fund's identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Corporation's Board of
Directors.
Volume and liquidity in most foreign bond markets are less than in the
U.S. and securities of many foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Fund endeavors to achieve the most favorable net results
on its portfolio transactions. There is generally less government supervision
and regulation of business and industry practices, securities exchanges,
brokers, dealers and listed companies than in the U.S. Mail service between the
U.S. and foreign countries may be slower or 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 emerging markets, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect the Fund's investments in those countries.
Moreover, individual emerging market 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. The chart below sets forth the risk ratings of
selected emerging market countries' sovereign debt securities.
Sovereign Risk Ratings for Selected Emerging Market Countries as of February,
1999:
Country Moody's* Standard & Poor's**
------- -------- -------------------
Chile Baa1 A-
Turkey B1 B
Mexico Ba2 BB
Czech Republic Baa1 A-
Hungary Baa2 BBB
Colombia Baa3 BBB-
Venezuela B2 B+
Morocco Ba1 BB
Argentina Ba3 BB
Brazil B2 B+
Poland Baa3 BBB-
Ivory Coast NR NR
* As of February 24, 1999. Source: Moody's Investors Service.
** As of February 19, 1999. Source: Standard & Poor's.
The Fund may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by the Fund defaults, the Fund may incur additional expenses to
seek recovery. Debt obligations issued by emerging market country governments
differ from debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on private debt,
must be pursued in the courts of the defaulting party itself. The Fund's ability
to enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt may not contest payments to the holders
of debt obligations in the event of default under
8
commercial bank loan agreements.
Income from securities held by the Fund could be reduced by a withholding
tax on the source or other taxes imposed by the emerging market countries in
which the Fund makes its investments. The Fund's net asset value may also be
affected by changes in the rates or methods of taxation applicable to the Fund
or to entities in which the Fund has invested. The Adviser will consider the
cost of any taxes in determining whether to acquire any particular investments,
but can provide no assurance that the taxes will not be subject to change.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in the
Fund's portfolio. Expropriation, confiscatory taxation, nationalization,
political, economic or social instability or other similar developments have
occurred frequently over the history of certain emerging markets and could
adversely affect the Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the
9
potential political and economic instability of certain Latin American countries
and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment and on repatriation of capital invested.
In the event of expropriation, nationalization or other confiscation by any
country, the Fund could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The Fund may invest a portion of its assets in securities denominated in
currencies of Latin American countries. Accordingly, changes in the value of
these currencies against the U.S. dollar may result in corresponding changes in
the U.S. dollar value of the Fund's assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. 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.
The economies of individual Latin American countries may differ favorably
or unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to a Fund
at a higher rate than those imposed by other foreign countries. This may reduce
a Fund's investment income available for distribution to shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign governments.
At times, certain Latin American countries have declared moratoria on the
payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock and agriculture. The region
has a large population (roughly 300 million) representing a large domestic
market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in gross domestic product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions, and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect
10
on economic conditions which may adversely affect prices of certain portfolio
securities. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments, such as military
coups, have occurred in the past and could also adversely affect a Fund's
investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
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, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in which
each Fund may participate, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country or the Fund's investment in the debt of that
country.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.
Investing in Europe. Most Eastern European nations, including Hungary, Poland,
Czech Republic, Slovak Republic, and Romania have had centrally planned,
socialist economies since shortly after World War II. A number of their
governments, including those of Hungary, the Czech Republic, and Poland are
currently implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning, and move toward free market economies.
The conditions that have given rise to these developments are changeable,
and there is no assurance that reforms will continue or that their goals will be
achieved.
11
Portugal is a genuinely emerging market which has experienced rapid growth
since the mid-1980s, except for a brief period of stagnation over 1990-91.
Portugal's government remains committed to privatization of the financial system
away from one dependent upon the banking system to a more balanced structure
appropriate for the requirements of a modern economy.
Economic reforms launched in the 1980s continue to benefit Turkey in the
1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Fund's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, the general decline in oil prices has had an adverse impact on many
economies.
Debt Securities. If the Adviser determines that the capital appreciation on debt
securities is likely to exceed that of
12
common stocks, the Fund may invest in debt securities of foreign and U.S.
issuers. Portfolio debt investments will be selected on the basis of capital
appreciation potential, by evaluating, among other things, potential yield, if
any, credit quality, and the fundamental outlooks for currency and interest rate
trends in different parts of the world, taking into account the ability to hedge
a degree of currency or local bond price risk. The Fund may purchase
"investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by Moody's or
AAA, AA, A or BBB by 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. The Fund may also invest up to 5%
of its net assets in debt securities which are rated below investment-grade,
that is, rated below Baa by Moody's or below BBB by S&P (commonly referred to as
"junk bonds") and in unrated securities of equivalent quality.
High Yield/High Risk Securities. Below investment-grade securities (commonly
referred to as "junk bonds") (rated Ba and lower by Moody's and BB and lower by
S&P) or unrated securities of equivalent quality, in which the Fund may invest
up to 5% of its net assets, carry a high degree of risk (including the
possibility of default or bankruptcy of the issuers of such securities),
generally involve greater volatility of price and risk of principal and income,
and may be less liquid, than securities in the higher rating categories and are
considered speculative. The lower the ratings of such debt securities, the
greater their risks render them like equity securities. See the Appendix to this
Statement of Additional Information for a more complete description of the
ratings assigned by ratings organizations and their respective characteristics.
Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have a greater adverse impact on the value of such
obligations than on comparable higher quality debt securities. During an
economic downturn or period of rising interest rates, highly leveraged issues
may experience financial stress which could adversely affect their ability to
service their principal and interest payment obligations. Prices and yields of
high yield securities will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely affect the Fund's
net asset value. In addition, investments in high yield zero coupon or
pay-in-kind bonds, rather than income-bearing high yield securities, may be more
speculative and may be subject to greater fluctuations in value due to changes
in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Fund to accurately value high yield securities in the Fund's portfolio and to
dispose of those securities. Adverse publicity and investor perceptions may
decrease the values and liquidity of high yield securities. These securities may
also involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type. For
more information regarding tax issues related to high yield securities, see
"Taxes" hereafter.
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can
13
provide an opportunity for capital appreciation and/or income through interest
and dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest are either 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
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.
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" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933 (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 investments. Disposing of illiquid investments 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
14
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 unrestricted securities.
Generally speaking, restricted securities may be sold 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.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System, with any domestic or foreign broker/dealer
which is recognized as a reporting government securities dealer, any foreign
bank, if the repurchase agreement is fully secured by government securities of
the particular foreign jurisdiction, 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, or to be at least equal to that of
issuers of commercial paper rated within the two highest grades assigned by
Moody's or S&P.
A repurchase agreement provides a means for the Fund to earn income on
assets for periods as short as overnight. It is an arrangement under which the
Fund acquires a security ("Obligation") and the seller agrees, at the time of
sale, to repurchase the Obligation at a specified time and price. Obligations
subject to a repurchase agreement are held in a segregated account and the value
of such securities 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
upon repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Obligation itself. Obligations will be held by the
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 that Fund's investment restriction
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 a 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, a Fund may encounter delay 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. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase 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. To protect against such
potential loss, if the market value (including interest) 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 (including interest) 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 impose on the seller a contractual obligation to deliver additional
securities. A repurchase agreement with foreign banks may be available with
respect to government securities of the particular foreign jurisdiction, and
such repurchase agreements involve risks similar to repurchase agreements with
U.S. entities.
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
15
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 a 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
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.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Under present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the SEC, such loans
may be made to member firms of the New York Stock Exchange (the "Exchange"), and
would be required to be secured continuously by collateral in cash or liquid
assets maintained on a current basis at an amount at least equal to the market
value and accrued interest of the securities loaned. The Fund would have the
right to call a loan and obtain the securities loaned on no more than five days'
notice. During the existence of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the securities loaned and would
also receive compensation based on investment of the collateral. As with other
extensions of credit there are risks of delay in recovery or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, the loans would be made only to firms deemed by the Adviser to be of
good standing, and when, in the judgment of the Adviser, the consideration which
can be earned currently from securities loans of this type justifies the
attendant risk. If the Fund determines to make securities loans, the value of
the securities loaned will not exceed 5% of the value of the Fund's total assets
at the time any loan is made.
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 follows 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 Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act.
16
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 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," hereafter).
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date. The prices of certain CMOs, depending on their
structure and the rate of pre-payments, can be volatile. Some CMOs may not be as
liquid as other securities.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Directors do not currently intend for the Fund to borrow for investment
leverage purposes, if such a strategy were implemented in the future it would
increase the Fund's volatility and the risk of loss in a declining market.
Borrowing by the Fund will involve special risk considerations. Although the
principal of the Fund's borrowings will be fixed, the Fund's assets may change
in value during the time a borrowing is outstanding, thus increasing exposure to
capital risk.
17
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio or enhancing 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.
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 instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, Strategic Transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. 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 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 will not be used
to alter the fundamental investment purposes and characteristics of the Fund and
the Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of the Fund.
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 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
18
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
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
19
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 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 no more than 10% of its assets 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, 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 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, and for duration
management, risk management, and return enhancement 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 instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and 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.
20
The Fund's use of 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 for bona fide hedging, risk management (including duration management) or
other portfolio management and return enhancement 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
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, primarily in order to hedge, or manage the risk of, 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 generally
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
21
positions denominated or generally quoted in that currency.
The Fund will generally 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, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
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 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, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund
22
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 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
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 the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, 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.
Warrants. The Fund may invest in warrants up to 5% of the value of its net
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer
23
no rights other than a purchase option. Thus, if a warrant held by a Fund were
not exercised by the date of its expiration, the Fund would lose the entire
purchase price of the warrant.
Use of Segregated and Other Special Accounts. Many Strategic 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 to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities 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
securities 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
daily basis and will segregate an amount of cash or liquid securities 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
24
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.
Depository Receipts. The Fund may also invest in Standard and Poor's Depository
Receipts ("SPDRs") and DIAMONDS. SPDRs and DIAMONDS should typically trade like
a share of common stock and provide investment results that generally correspond
to the price and yield performance of the component common stocks of the S&P 500
Index and Dow Jones Industrial Average, respectively. There can be no assurance,
however, that this can be accomplished as it may not be possible for the SPDRs
or DIAMONDS, as applicable, portfolio to replicate the composition and relative
weightings of the securities of the respective indices. SPDRs and DIAMONDS are
subject to the risks of an investment in a broadly based portfolio of
large-capitalization common stocks, including the risk that the general level of
stock prices may decline, thereby adversely affecting the value of such
investment. SPDRs and DIAMONDS are also subject to risks other than those
associated with an investment in such a broadly based portfolio in that the
selection of the stocks included in the SPDRs or DIAMONDS, as applicable,
portfolio may affect trading in SPDRs and DIAMONDS, as compared with trading in
a broadly based portfolio of common stocks. In addition, there can be no
assurance that that SPDRs and DIAMONDS will experience similar trading patterns
nor that an active trading market for DIAMONDS will develop.
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 the interest of shareholders to distribute less than the required amount.
(See "Taxes" hereafter.)
The Fund intends to distribute investment company taxable income, and any
net realized capital gains in December each year. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such month and paid during the following January will be treated by shareholders
for federal income tax purposes as if received on December 31 of the calendar
year declared. Additional distributions 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 same class 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, the Fund 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 over net long-term capital losses).
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 the
Fund to distribute to shareholders during a calendar year an amount equal to at
least 98% of the Fund's ordinary income for the calendar year, at least 98% of
the excess of its capital
25
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 generally includes dividends, interest,
net short-term capital gains in excess of net long-term capital losses, and
certain foreign currency gains, if any, less expenses and certain foreign
currency losses, if any. Net realized capital gains for a fiscal year are
computed by taking into account any capital loss carryforward of the Fund.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income981543813.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a 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 entitled to increase the adjusted tax basis on Fund
shares by the difference between such reported gains and the individual tax
credit.
Dividends from domestic corporations are expected to comprise some portion
of the Fund's gross income. To the extent that such dividends constitute any of
the Fund's gross income, a portion of the income distributions of the Fund will
be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares, with respect
to which dividends are received are treated as debt-financed under federal
income tax law and is eliminated if either those shares or the shares of the
Fund are deemed to have been held by the Fund or the shareholders, as the case
may be, for less than 46 days during the 90 day period beginning 45 days before
the shares become ex-dividend.
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 a 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 from the date of their
purchase 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.
An individual may make a deductible IRA contribution for any taxable year
only if (i) the individual is not an active participant in an employer's
retirement plan, or (ii) if the individual is an active participant of an
employee
26
retirement plan, the individual has an adjusted gross income below a certain
level ($50,000 for married individuals filing a joint return, with a phase-out
of the deduction for adjusted gross income between $50,000 and $60,000; $30,000
for a single individual, with a phase-out for adjusted gross income between
$30,000 and $40,000). An individual is not considered an active participant in
an employer's retirement plan if the individual's spouse is an active
participant in such a plan. However, in the case of a joint return, the amount
of the deductible contribution by the individual who is not an active
participant (but whose spouse is) is phased out for adjusted gross income
between $150,000 and $160,000. However, an individual not permitted to make a
deductible contribution to an IRA for any such taxable year may nonetheless make
nondeductible contributions up to $2,000 to an IRA (up to $2,000 per individual
for married couples if only one spouse has earned income) for that year. 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
not be taxable. Also, annual contributions may be made to a spousal IRA even if
the spouse has earnings in a given year if the spouse elects to be treated as
having no earnings (for IRA contribution purposes) for the year.
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 generally do
not impose taxes on capital gains in respect of investments by foreign
investors.
The Fund intends to qualify for and may 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 returns for, and
will 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 relate 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
in 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 shareholders 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 shareholder, 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-dividend981543814. 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.
27
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 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 put or 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 a 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, certain
forward foreign currency contracts, and all listed nonequity options written or
purchased by the Fund (including options on debt securities, options on futures
contracts, options on securities indices and options on broad-based stock
indices) 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 generally will be treated as 60% long-term and 40% short-term
capital gain or loss, 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 capital
gain 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. Under Section 988 of
the Code, discussed below, foreign currency gains or loss from foreign currency
related forward contracts, certain futures 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
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.
28
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 contract 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 level of the Fund. In addition, if the Fund invests in certain
high yield original issue discount obligations issued by corporations, a portion
of 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
Portfolio 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
investment company 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 investment company 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 sale or exchange of shares is a taxable event that may result in gain or
loss that will be a capital gain or loss held by the shareholder as a capital
asset, and may be long-term or short-term depending upon the shareholder's
29
holding period for the shares. A shareholder who has redeemed shares of the Fund
or any other Kemper Mutual Fund listed herein 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 herein 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 another fund within 30 days before or after
the redemption or exchange, the transactions may be subject to the wash sale
rules resulting in a postponement of the recognition of such loss for federal
income tax purposes. An exchange of 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.
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 will be
provided after the end of the calendar year. Shareholders are encouraged to
retain copies of their account confirmation statements or year-end statements
for tax reporting purposes. However, those who have incomplete records may
obtain historical account transaction information at a reasonable fee.
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. In January of each year the Corporation
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.
Shareholders of the Fund may be subject to state, local and foreign taxes
on Fund distributions and disposition of Fund shares.
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.
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
make a 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 70
1/2. The contribution will be fully deductible if neither the individual nor his
or her spouse is an active participant in an employer's retirement plan. If an
individual is (or has a spouse who is) an active participant in an
employer-sponsored retirement plan,
30
the amount, if any, of IRA contributions that are deductible by such an
individual is determined by the individual's (or, if married and filing jointly,
the couple's) 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. A higher-earning spouse
also may contribute up to $2,000 per year to the lower-earning spouse's own IRA,
whether or not the lower-earning spouse has earned income of less than $2,000,
as long as the spouses' joint earned income is at least equal to the combined
amount of the spouses' IRA contributions for the year. 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 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 non-deductible 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
adjusted gross income for the year is less than $95,000 for single individuals
or, if married and filing jointly, the couple's adjusted gross income is less
than $150,000. 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 educational 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.
Qualified Retirement Plans. Fund shares also may be held in profit
sharing, money purchase pension, and 401(k) plan accounts. An employer, whether
a corporation, partnership or other kind of business entity, generally may
maintain one or more qualified retirement plans for its employees. These plans,
which are qualified plans under Code Section 401(a), are subject to numerous
rules relating to such matters as the maximum contribution that can be allocated
to participant's accounts, nondiscrimination, and distributions from the plan,
as well as being subject in many cases to the fiduciary duty and other
provisions of the Employee Retirement Income Securities Act of 1974, as amended.
Businesses considering adopting a qualified retirment plan are encouraged to
seek competent professional advice before adopting one of these plans.
403(b) Plan Accounts. Fund shares also may be purchased as an investment
for Code Section 403(b)(7) custodial accounts. In general, employees of
tax-exempt organizations described in Code Section 501(c)(3) and of public
school systems are eligible to participate in 403(b) accounts. These
arrangements may permit employer
31
contributions and/or employee salary reduction contributions, and are subject to
rules relating to such matters as the maximum contribution than can be made to a
participant's account, nondiscrimination, and distributions from the account.
General Information. Please call the Fund to obtain information regarding
the establishment of IRAs or other retirement plans. 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 described in this statement of additional information
in light of their particular tax situations.
INVESTMENT ADVISER AND UNDERWRITER
Investment Adviser. Scudder Kemper Investments, Inc. (the "Adviser"), an
investment counsel firm, 345 Park Avenue, New York, New York, 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 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. In 1928 it introduced the first no-load mutual fund to the
public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the United States investing internationally in
securities of issuers in several foreign countries. The predecessor firm
reorganized from a partnership to a corporation on June 28, 1985. On June 26,
1997, Scudder entered into an agreement with Zurich Insurance Company ("Zurich")
pursuant to which Scudder and Zurich agreed to form an alliance.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
Pursuant to an investment management agreement with the Fund, the Adviser
acts as the Fund's investment adviser, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits any of its officers or employees to
serve without compensation as directors or officers of the Fund if elected to
such positions.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
and statistical compilations from issuers and other sources, as well as analyses
from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world researching hundreds of companies.
In selecting securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
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
32
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 transaction between Scudder and Zurich resulted in the assignment of
the Fund's investment management agreement with Scudder, that agreement was
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, a new investment management agreement
between the Fund and the Adviser was approved by the Corporation's Directors. At
the special meeting of the Fund's shareholders held on October 27, 1997, the
shareholders also approved the proposed new investment management agreement. The
new investment management agreement (the "Agreement") became effective as of
December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the dates of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved at a shareholder
meeting held in December, 1998.
The Agreement dated September 7, 1998 was approved by the Directors of the
Fund on August 6, 1998. The Agreement will continue in effect until September
30, 1999 and from year to year thereafter only if its continuance is approved
annually by the vote of a majority of those Directors who are not parties to the
Agreement or interested persons of the Adviser or the Corporation, cast in
person at a meeting called for the purpose of voting on such approval, and
either by a vote of the Directors or of a majority of the outstanding voting
securities of the respective 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 objectives, 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 Corporation's Articles
of Incorporation and By-Laws, the 1940 Act and the Code and to the Fund's
investment objectives, 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.
Under the Agreement, the Adviser 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 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
33
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 (except those for attending
Board and Committee meetings outside New York, New York; Boston, Massachusetts
and Chicago, Illinois) 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.
For these services, the Fund pays the Adviser an annual fee equal to 1.10%
of the average daily net assets of the Fund. For the fiscal year ended October
31, 1996, the management fee amounted to $3,201,957. For the fiscal year ended
October 31, 1997, the management fee amounted to $3,960,949. For the fiscal year
ended October 31, 1998, the management fee amounted to $3,960,160, of which
$326,115 was unpaid at October 31, 1998.
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; fees and expenses of the Fund's
accounting agent; brokers' commissions; legal, auditing and accounting expenses;
the fees and expenses of the Transfer Agent; and any other expenses of issue,
sale, underwriting, distribution, 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 of shareholder meetings, the cost of
responding to shareholders' inquiries, and 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.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Corporation, with respect to the Fund, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Corporation's investment products
and services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Directors who are not "interested
persons" of the Adviser are represented by independent counsel at the Fund's
expense.
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.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Fund that may have different distribution
arrangements or expenses, which may affect performance.
34
None of the officers or Directors of the Corporation may have dealings
with the Fund as principals in the purchase or sale of securities, except as
individual subscribers or holders of shares of the Fund.
Personal Investments by Employees of the Adviser. 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 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.
Principal Underwriter. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, an affiliate of the
Adviser, is the principal underwriter and distributor for the Class A, B and C
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, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of Shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
The distribution agreements continue 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 Corporation, including the Directors who are not
interested persons of the Corporation and who have no direct or indirect
financial interest in the agreement. The agreements automatically terminate in
the event of their 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 or a majority of the Directors who are not interested persons of the
Corporation and who have no direct or indirect financial interest in the
distribution agreement or a "majority of the outstanding voting securities" of
such class of the Fund, as defined under the 1940 Act. The distribution
agreements may not be amended for a class to increase the fee to be paid by the
Fund with respect to such class without approval by a majority of the
outstanding voting securities of such class of the Fund, and all material
amendments must in any event be approved by the Board of Directors in the manner
described above with respect to the continuation of the distribution agreement.
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 agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of Class A 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.
The following information concerns the underwriting commissions paid in
connection with the Fund's Class A shares for the fiscal year ended September
30, 1998.
Commissions Commissions Commissions
Retained KDI Paid Paid to KDI
Year by KDI to All Firms Affiliated Firms
---- ------ ------------ ----------------
1998* 0 $133,868 0
35
* From April 16, 1998 (inception of Class) through September 30, 1998.
Rule 12b-1 Plan. The Fund has adopted, 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. Since the Rule 12b-1 Plan provides for fees payable
as an expense of each of the Class B shares and the Class C shares that are used
by KDI to pay for distribution services for those classes, each agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"), which regulates the manner in which an investment company may,
directly or indirectly, bear the expenses of distributing its shares. Because
12b-1 fees are paid out of fund assets on an ongoing basis they will, over time,
increase the cost of the investment and may cost more than other types of sales
charges.
Class B shares. For its services under the Rule 12b-1Plan, 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 received on redemptions of Class B shares. See "Redemption or
Repurchase of Shares--Contingent Deferred Sales Charge--Class B Shares." KDI
currently compensates firms for sales of Class B shares at a commission rate of
3.75%.
Class C shares. For its services under the Rule 12b-1 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."
If a Rule 12b-1 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.)
Expenses of the Fund and of KDI, in connection with the Rule 12b-1 Plans
for the Class B and Class C shares for the fiscal year ended September 30, 1998
are set forth below. A portion of the marketing, sales and operating expenses
shown below could be considered overhead expenses.
36
<TABLE>
<CAPTION>
Other Distribution Expenses paid by KDI
---------------------------------------
Contingent Total Distribution
Distribution Deferred Distribution Paid by KDI to Advertising Marketing Misc.
Fiscal Fees Paid by Sales Charges Fees Paid by KDI Affiliated and Prospectus and Sales Operating Interest
Year Fund to KDI Paid to KDI KDI to Firms Firms Literature Printing Expenses Expenses Expenses
---- ----------- ----------- ------------ ----- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class B
Shares 1998* $11,000 -- $237,000 -- $6,000 $1,000 $17,000 $3,000 $7,000
Class C
Shares 1998* $5,000 -- $3,000 -- $2,000 -- $5,000 $1,000 --
</TABLE>
* From April 16, 1998 (inception of class) through September 30, 1998.
Administrative Services. Administrative services are provided to the Shares
under an administrative services agreement ("administrative agreement") with
KDI. KDI bears all of its expenses of providing services pursuant to the
administrative agreement between KDI and the Fund, including the payment of
service fees. 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 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.
The following information concerns the administrative service fee paid by the
Fund for the fiscal year ended October 31, 1998:
<TABLE>
<CAPTION>
Administrative
Service Fees Paid by Total Service Fees Service Fees Paid by KDI to
Class Year the Fund Paid by KDI to Firms KDI-Affiliated Firms
<S> <C> <C> <C> <C>
Class A 1998 $0* $0* $0
Class B 1998 $0* $0* $0
Class C 1998 $0* $0* $0
</TABLE>
* After waiver.
KDI also may provide some of the above services and may retain any
portion of the fee under the
37
administrative agreement not paid to firms to compensate itself for
administrative functions performed for Class A, B and C Shares of 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 a firm of
record provides administrative services. The Board of Directors of the
Corporation, in its discretion, may approve basing the fee to KDI on all Fund
assets in the future.
Certain directors or officers of the Corporation are also directors or
officers of the Adviser or KDI, as indicated under "OFFICERS AND DIRECTORS."
Fund Accounting Agent. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts, 02210-4103, a subsidiary of the Adviser, computes
net asset value for the Fund.
The Fund pays Scudder Fund Accounting Corporation an annual fee equal to
0.065% of the first $150 million of average daily net assets, 0.040% of such
assets in excess of $150 million, 0.020% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. Before the multiclassing
of the Fund on April 16, 1998, Scudder Fund Accounting Corporation charged the
Fund an aggregate fee of $207,838, $189,560 and $63,829 for the fiscal years
ended October 31, 1997, 1996 and 1995, respectively. For the fiscal year ended
October 31, 1998, the amount charged to the Fund aggregated $302,281, of which
$57,863 is unpaid at October 31, 1998.
Custodian, Transfer Agent and Shareholder Service Agent. Brown Brothers Harriman
& Co. (the "Custodian"), 40 Water Street, Boston, MA, 02109, as custodian, has
custody of all securities and cash of the Fund held outside the United States.
The Custodian attends to the collection of principal and income, and payment for
and collection of proceeds of securities bought and sold by the Fund. Kemper
Service Company ("KSvC"), 811 Main Street, Kansas City, Missouri, 64105-2005, an
affiliate of the Adviser, is the transfer agent, dividend- paying agent and
shareholder service agent for the Fund's Class A, B and C Shares. KSvC receives
as transfer agent the following: prior to January 1, 1999, annual account fees
at a maximum rate of $6 per account plus account set up, transaction and
maintenance charges, annual fees associated with the contingent deferred sales
charge (Class B Shares only) and out-of-pocket expense reimbursement, and
effective January 1, 1999, annual account fees of $10.00 ($18.00 for retirement
accounts) plus set up charges, annual fees associated with the contingent
deferred sales charges (Class B only), an asset-based fee of 0.08% and
out-of-pocket reimbursement. For the period beginning April 16, 1998 (inception
of Classes A, B and C shares) through October 31, 1998, the amount charged to
Classes A, B, and C by KSvC aggregated $11,105, $7,785, and $3,086,
respectively, of which $8,648 is unpaid at October 31, 1998.
Independent Auditors and Reports to Shareholders. The Fund's independent
auditors, PricewaterhouseCoopers, One Post Office Square, Boston, Massachusetts
02109, LLP, audit and report on the Fund's annual financial statements, review
certain regulatory reports and the Fund's federal income 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.
PORTFOLIO TRANSACTIONS
Brokerage. Allocation of brokerage is supervised 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 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
the familiarity of the Distributor 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
38
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 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 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 on account of execution of services and 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 or other funds managed by the
Adviser.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through Scudder Investor Services, Inc.
("SIS"), a corporation registered as a broker-dealer and a subsidiary of the
Adviser. SIS will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. SIS will not receive any commission, fee or other
remuneration from the Fund for this service.
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 of 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.
During the fiscal years ended October 31, 1998, 1997 and 1996, the Fund
paid brokerage commissions of $526,742, $722,757, and $759,086, respectively.
During the fiscal year ended October 31, 1998, the Fund paid brokerage
commissions of $378,833 (72% of the total brokerage commissions), resulting from
orders placed consistent with the policy to obtain the most favorable net
results, for transactions placed with brokers and dealers who provided
supplementary research, market and statistical information to the Corporation or
the Adviser. The balance of such brokerage was not allocated to any particular
broker or dealer with regard to the above-mentioned or any other special
factors.
Portfolio Turnover. The Fund's average annual portfolio turnover rates (defined
by the SEC as the ratio of the lesser of sales or purchases to the monthly
average value of such securities owned during the year, excluding all securities
with maturities at the time of acquisition of one year or less) for the fiscal
years ended October 31, 1998, 1997 and 1996, was 40.6%, 60.5% and 63.0%,
respectively. Higher levels of activity by the Fund
39
result in higher transaction costs and may also result in taxes on realized
capital gains to be borne by the Fund's shareholders. Purchases and sales are
made for the Fund whenever necessary, in management's opinion, to meet the
Fund's objective. Purchases and sales are made for the Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objective.
NET ASSET VALUE
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,
Dr. Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. The net asset value per share of each class of the Fund is
computed by dividing the value of the total assets attributable to a specific
class, less all liabilities attributable to those shares, by the total number of
outstanding shares of that class.
An exchange-traded equity security is valued at its most recent sale price
on the exchange it is traded as of the Value Time. 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") on such exchange as
of the Value Time. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") System will be
valued at its most recent sale price. Lacking any sales, the security will be
valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq System, 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 quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation, the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by each Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
at amortized cost, which the Board believes approximates market value. If it is
not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the 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 Corporation's Valuation Committee, 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.
40
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.
PURCHASE AND REDEMPTION OF SHARES
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. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of 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. 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
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge
5.75% of the public offering price waived or reduced for
certain purchases (1)
Class B Maximum contingent deferred sales 0.75% Shares convert to
charge of 4% of redemption Class A shares six
proceeds; declines to zero after years after issuance
six years
Class C Contingent deferred sales charge of 0.75% No conversion feature
1% of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
- -------------------
(1) Class A shares purchased at net asset value under the "Large Order NAV
Purchase Privilege" may be subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase and a 0.50% contingent deferred sales
charge if redeemed within the second year of purchase.
The minimum initial investment for each of class A, B and C 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
41
certificates have been issued. A lost or destroyed certificate is difficult to
replace and can be expensive to the shareholder (a bond worth 2% or more of the
certificate value is normally required).
INITIAL SALES CHARGE ALTERNATIVE--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to Dealers
As a Percentage of As a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value* Offering Price
------------------ -------------- ---------------- --------------
<S> <C> <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 to dealers up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such re-allowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is re-allowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser, provided that the amount invested in such Fund or other Kemper Fund
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 the purchase of shares
purchased under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege."
KDI may 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 recordkeeping system made available
through Kemper Service Company. For purposes of determining the appropriate
commission percentage to be applied to a particular sale,
42
KDI will consider the cumulative amount invested by the purchaser in the Fund
and other Kemper Fund 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 also applies.
Class A shares of the Fund or of 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.
Class A shares of a Fund may be purchased at net asset value by persons
who purchase such Shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of 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 of a Fund may be purchased at net asset value by persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a)
officers, 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) any trust,
pension, profit-sharing or other benefit plan for only such persons; (d) 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 (e) 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
43
Ranson & Associates, Inc. or its predecessors may purchase the Fund's Class A
shares at net asset value through reinvestment programs of such trusts that have
such programs. Class A shares of the Fund may be sold at net asset value through
certain investment advisors registered under the 1940 Act and other financial
services firms that adhere to certain standards established by KDI, including a
requirement that such Shares be sold for the benefit of their clients
participating in an investment advisory program under which such clients pay a
fee to the investment advisor or other firm for portfolio management and other
services. Such Shares are sold for investment purposes and on the condition that
they will not be resold except through redemption or repurchase by the 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 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 they
have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund account will be
converted to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of
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 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."
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.
44
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 acknowledgment of
their dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from
time to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell Shares of the Fund. In some
instances, such discounts, commissions or other incentives will be offered only
to certain firms that sell during specified time periods certain minimum amounts
of shares of the Fund, or other Fund underwritten by KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price
based on the net asset value per share 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 per Share 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,
Redemption and Repurchase of Shares" herein.
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 statement of additional information should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering
made by this statement of additional information 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 such Fund
normally are permitted to continue to purchase additional shares of such class
and to have dividends reinvested.
45
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 applicable 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 statement of additional information.
As described herein, Fund shares are sold at their public offering price,
which is the net asset value per such Shares 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 of Class A, B and C is $1,000
and the minimum subsequent investment is $100 but such minimum amounts may be
changed at any time. The Fund may waive the minimum for purchases by trustees,
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 Fund as described herein.
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 herein are provided because
of anticipated economies of scale in sales and sales-related efforts.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require the Fund to redeem his or her Shares. When
Shares are held for the account of a shareholder by the Kemper Shares' 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.
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. 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
46
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. The redemption within two
years of Class A shares purchased at net asset value under the Large Order NAV
Purchase Privilege may be subject to a contingent deferred sales charge (see
"Purchase of Shares--Initial Sales Charge Alternative--Class A Shares"), the
redemption of Class B shares within six years may be subject to a contingent
deferred sales charge (see "Contingent Deferred Sales Charge--Class B Shares"
below), and the redemption of Class C shares within the first year following
purchase may be subject to a contingent deferred sales charge (see "Contingent
Deferred Sales Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts, 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 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 and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 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. The
repurchase price will be the net asset value per Share 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
per Share (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. 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.
47
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 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 per Share of the
Fund effective on that day and normally the proceeds will be sent to the
designated account the following business day. Delivery of the proceeds of a
wire redemption of $250,000 or more may be delayed by the Fund for up to seven
days if the Fund or the Shareholder Service Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
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, although investors can still
redeem by mail. 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 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.
48
Contingent
Deferred
Year of Redemption After Purchase Sales Charge
--------------------------------- ------------
First............................. 4%
Second............................ 3%
Third............................. 3%
Fourth............................ 2%
Fifth............................. 2%
Sixth............................. 1%
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 Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in the Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the Shares redeemed, excluding amounts not subject to the
charge. The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer-sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent, (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 has
agreed to receive such fees quarterly, and (h) redemption of shares purchased
through a dealer-sponsored asset allocation program maintained on an omnibus
record-keeping system provided the dealer of record has waived the advance of
the first year and administrative services and distribution fees applicable to
such shares and has agreed to receive such fees quarterly.
CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of 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
49
$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 May 1998 will be eligible for the second year's charge if redeemed on or
after May 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.
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 per Share 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 Funds 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 per Share 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. 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 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. The reinvestment privilege may be
terminated or modified at any time.
REDEMPTION IN KIND. Although it is the Fund's present policy to redeem in cash,
if the Board of Directors determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the Securities and Exchange Commission, taking such
securities at the same value used to determine net asset value, and selecting
the securities in such manner as the Board of Directors may deem fair and
equitable. If such a distribution occurred, shareholders receiving securities
and selling them could receive less than the redemption value of such securities
and in addition would incur certain transaction costs. Such a redemption would
not be as liquid as a redemption entirely in cash. The Corporation has elected,
however, to be governed by Rule 18f-1 under the 1940 Act, as a result of which
the Fund is obligated to redeem 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 a Share at the beginning of the period.
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
50
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 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 Series,
Inc., Kemper Value+Growth Fund, Kemper Horizon Fund, Kemper Europe Fund, Kemper
Asian Growth Fund, Kemper Global/International Series, Inc., Kemper Equity
Trust, Kemper Securities Trust, Kemper Aggressive Growth Fund, Kemper Value
Fund, Kemper Funds Trust, Kemper Income Trust, Kemper Global Discovery Fund, and
Kemper Classic Growth Fund ("Kemper Funds"). Except as noted below, there is no
combined purchase credit for direct purchases of shares of Zurich Money Funds,
Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account
Trust, Investor's Municipal Cash Fund or Investors Cash Trust ("Money Market
Funds"), which are not considered a "Kemper Fund" 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 this statement of additional information, 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 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 for 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.
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. 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
51
series as described in this statement of additional information. Cash Equivalent
Fund, Tax-Exempt California Money Market Fund, Cash Account Trust, Investors
Municipal Cash Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with KDI.
Class A shares of 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. 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. Class C
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, such Shares received by exchange 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 will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other Funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to Kemper 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.
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
52
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 Securities and Exchange Commission may by
order permit for the protection of the Fund's shareholders.
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.
Although it is the Fund's present policy to redeem in cash, if the Board
of Directors determines that a material adverse effect would be experienced by
the remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the SEC, taking such securities at the same value used to determine net asset
value, and selecting the securities in such manner as the Board of Directors may
deem fair and equitable. If such a distribution occurred, shareholders receiving
securities and selling them could receive less than the redemption value of such
securities and in addition would incur certain transaction costs. Such a
redemption would not be so liquid as a redemption entirely in cash.
The conversion of Class B Shares to Class A Shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to 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 Internal Revenue Code, and (b) that the
conversion of Class B Shares to Class A Shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B Shares to Class
A Shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B Shares would occur, and Shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described herein.
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. 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 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
53
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 ("Bank Direct Deposit"), 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. A 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 per such Share plus, in the case
of Class A shares, the initial sales charge) may provide for the payment from
the owner's account of any requested dollar amount to be paid to the owner or a
designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional Shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the Shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic
withdrawal plan will ordinarily be disadvantageous to the investor because the
investor will be paying a sales charge on the purchase of shares at the same
time that the investor is redeeming shares upon which a sales charge may have
already been paid. Therefore, 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:
o Traditional, Roth and Education Individual Retirement Accounts ("IRAs").
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
o 403(b)(7) Custodial Accounts. This type of plan is available to employees
of most non-profit organizations.
54
o Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, simple 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. Investors should consult with their own tax advisors before
establishing a retirement plan.
PERFORMANCE
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.
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 each of 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. A Fund
with fees or expenses being waived or absorbed by the Advisor may also advertise
performance information before and after the effect of the fee waiver or expense
absorption.
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 shares of a class 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. Such quotations for Class B Shares 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 for the periods ended October 31, 1998
One Year Five Year Life of Class* Life of Fund**
Class A (4.77) 7.35 -22.26 9.80
Class B (2.39) 8.31 -20.31 10.66
Class C 0.63 8.54 -18.68 10.66
*Classes A, B and C shares commenced operations on April 16, 1998. Prior to that
date, the fund consisted of one class of shares which, on that date, were
re-designated as Class S shares of the fund. Returns shown for Class A, B, and C
shares for the periods prior to their inception are derived from the historical
performance of Class S shares of Classic Growth Fund during the period and have
been adjusted to reflect the current maximum 5.75% initial sales charge for
Class A shares or the maximum CDSC, if any, currently applicable to Class B and
C shares. **Since September 10, 1991.
55
Calculation of the Fund's total return is not subject to a standardized
formula, except when calculated for 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 or not adjusting to
deduct the maximum sales charge (in the case of Class A Shares), and computing
the "ending value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and expressing
the result as a percentage. The ending value in the case of Class B Shares 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 Class A Shares or the contingent
deferred sales charge for Class B and Class C Shares would be reduced if such
charges were included.
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
Class B Shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
each year thereafter and becomes zero after six years. Redemption of Class C
Shares may be subject to a 1% contingent deferred sales charge in the first year
following the purchase. Average annual total return figures do, and total return
figures may, include the effect of the contingent deferred sales charge for the
Class B shares and Class C shares that may be imposed at the end of the period
in question. Performance figures for the Class B shares and Class C shares not
including the effect of the applicable contingent deferred sales charge would be
reduced if it were included. Returns and net asset value will fluctuate. Factors
affecting 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.
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 Financial Services Index, the Standard
& Poor's 500 Composite Stock Price 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, the
Standard & Poor's/Barra Growth Index, the Russell 1000(R) Value Index, the
Europe/Australia/Far East Index, International Finance Corporation's Latin
America Investable Return 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.
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
Corporation 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 Shares 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 subject to a penalty.
56
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 Shares 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 Shares 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, Financial Data Inc.'s Money Fund
Averages(R) (All Taxable). As reported by Financial Data Inc., 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.
On April 16, 1998, the Fund was divided into multiple classes of shares,
including the Kemper Class A, B and C Shares described herein. Prior to that
date, the Fund consisted of only one class of shares; the shares of the Fund
outstanding as of April 16, 1998, were redesignated as Scudder Shares of the
Fund, which class has no sales charges or Rule 12b-1 fees. The performance
figures shown below reflect the performance of the Fund prior to the creation of
multiple classes, restated to reflect the sales charges of the Kemper Class A
Shares of the Fund. The performance figures have not been restated to reflect
Rule 12b-1 fees, which are included only from the date of inception of the
Fund's Rule 12b-1 plans on April 16, 1998. The Rule 12b-1 fees applicable to the
Kemper Class A, B and C Shares of the Fund will affect subsequent performance.
57
OFFICERS AND DIRECTORS
The officers and directors of the Corporation, their ages, their principal
occupations and other affiliations, if any, with the Adviser, and Kemper
Distributors, Inc. are as follows:
[To be updated]
<TABLE>
<CAPTION>
Position with
Position with Underwriter, Kemper
Name, Address and Age Corporation Principal Occupation** Distributors Inc.
- --------------------- ----------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Daniel Pierce*] (64) Chairman of the Board Chairman of the Board and Chairman and Director
and Director Managing Director of
Scudder Kemper
Investments, Inc.
Paul Bancroft III (69) Director Venture Capitalist and
79 Pine Lane Consultant; Retired,
Box 6639 President, Chief Executive
Snowmass Village, CO 81615 Officer and Director,
Bessemer Securities
Corporation
Sheryle J. Bolton (52) Director Chief Executive Officer
1995 University Avenue and Director, Scientific
Suite 400 Learning Corporation
Berkeley, CA 94704
William T. Burgin (55) Director General Partner, Bessemer
83 Walnut Street Venture Partners
Wellesley, MA 02181-2101
Thomas J. Devine (72) Honorary Director Consultant
450 Park Avenue
New York, NY 10022
Keith R. Fox (44) Director President, Exeter Capital
10 East 53rd Street Management Corporation.
New York, New York 10022
William H. Gleysteen, Jr. (72) Honorary Director Consultant; Guest Scholar,
4937 Crescent Street Brookings Institution.
Bethesda, MD 20816
William H. Luers (68) Director Chairman and President,
993 Fifth Avenue U.N. Association of the
New York, NY 10028 U.S.A.
58
Position with
Position with Underwriter, Kemper
Name, Address and Age Corporation Principal Occupation** Distributors Inc.
- --------------------- ----------- ---------------------- -----------------
Kathryn L. Quirk*]] (47) Director, Vice Managing Director of Secretary, Chief
President and Scudder Kemper Legal Officer, Vice
Assistant Secretary Investments, Inc. President and Director
Robert G. Stone, Jr. (75) Honorary Director Chairman Emeritus &
405 Lexington Avenue Director, Kirby
39th Floor Corporation (inland and
New York, NY 10174 offshore marine
transportation and diesel
repairs)
Susan E. Dahl] (33) Vice President Managing Director of
Scudder Kemper
Investments, Inc.
Ann M. McCreary]] (42) Vice President Managing Director of
Scudder Kemper
Investments, Inc.
Nicholas Bratt]]@ (50) President, Global Managing Director of
Discovery Fund Scudder Kemper
Investments, Inc.
Gary P. Johnson (45) Vice President Senior Vice President,
Scudder Kemper
Investments, Inc.
Thomas W. Joseph] (59) Vice President Senior Vice President,
Scudder Kemper
Investments, Inc.
Thomas F. McDonough] (52) Vice President and Senior Vice President,
Secretary Scudder Kemper
Investments, Inc.
Gerald J. Moran]] (59) Vice President Senior Vice President,
Scudder Kemper
Investments, Inc.
M. Isabel Saltzman] (44) Vice President Managing Director of
Scudder Kemper
Investments, Inc.
John R. Hebble] (40) Treasurer Senior Vice President,
Scudder Kemper
Investments, Inc.
Caroline Pearson] (36) Assistant Secretary Vice President,
Scudder Kemper
Investments, Inc.;
formerly, associate
attorney, Dechert Price &
Rhoads
</TABLE>
59
- -----------
* Mr. Pierce and Ms. Quirk are considered by the Corporation and its counsel
to be persons who are "interested persons" of the Adviser or of the
Corporation (within the meaning of the 1940 Act).
** Unless otherwise stated, all the Directors and officers have been
associated with their respective companies for more than five years, but
not necessarily in the same capacity.
# Mr. Pierce and Ms. Quirk are members of the Executive Committee, which may
exercise powers of the Directors when they are not in session.
@ The President of a series shall have the status of Vice President of the
Corporation.
] Address: Two International Place, Boston, Massachusetts 02110
]] Address: 345 Park Avenue, New York, New York 10154
To the knowledge of the Corporation, as of January 29, 1999 all
Directors and officers as a group owned beneficially (as the term is defined in
Section 13(d) under the Securities Exchange Act of 1934) less than 1% of the
shares of the Fund outstanding on such date.
To the knowledge of the Corporation, as of January 29, 1999, no person
owned beneficially more than 5% of the Fund's outstanding shares, except as
stated below.
<TABLE>
<CAPTION>
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
Donaldson Lufkin Jenrette A 9.33
1 Pershin Plaza
Jersey City, NJ 07399
National Financial Svcs Corp., B 9.18
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 14.50
1 Pershin Plaza
Jersey City, NJ 07399
National Financial Svcs Corp., C 6.47
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette C 13.35
1 Pershin Plaza
Jersey City, NJ 07399
60
MLPF&S for the sole Benefit of ITS C 6.91
Customers
Attn: Fund Administration
4800 Deer Lake Dr. East, 2nd Floor
Jacksonville, FL 32246
Sterling Trust Co. C 14.21
LM Kohn & Company
9810 Montgomery Road
Cincinnati, OH 45242
</TABLE>
The Directors and officers of the Corporation also serve in similar
capacities with respect to other funds advised by the Adviser.
REMUNERATION
Responsibilities of the Board-Board and Committee Meetings
The Board of Directors is responsible for the general oversight of each Fund's
business. A majority of the Board's members are not affiliated with the Adviser.
These "Independent Directors" have primary responsibility for assuring that each
Fund is managed in the best interests of its shareholders.
The Board of Directors meets at least quarterly to review the investment
performance of each Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Directors review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive
Several of the officers and Directors of the Corporation may be officers
or employees of the Adviser, or of the Distributor, the Transfer Agent, Scudder
Trust Company or Scudder Fund Accounting Corporation from whom they receive
compensation, as a result of which they may be deemed to participate in the fees
paid by the Corporation. The Corporation pays no direct remuneration to any
officer of the Corporation. However, each of the Directors who is not affiliated
with the Adviser will be compensated for all expenses relating to corporation
business (specifically including travel expenses relating to Corporation
business). Each of these unaffiliated Directors receives an annual Director's
fee of $4,000 from a Fund plus $400 for attending each Directors' meeting, audit
committee meeting or meeting held for the purpose of considering arrangements
between the Corporation on behalf of a Fund and the Adviser or any of its
affiliates. Each unaffiliated Director also receives $150 per committee meeting
attended other than those set forth above. For the fiscal year ended October 31,
1998, Directors' fees and expenses amounted to $288,000 for the Fund.
Effective July 1, 1998, each unaffiliated Director will receive an Annual
Director's fee of $3,500 from the Fund plus $325 for attending each Director's
meeting, audit committee meeting or meeting held for the purpose of considering
arrangements between the Corporation on behalf of a Fund and the Adviser or any
of its affiliates. Each unaffiliated Director will also receive $100 per
committee meeting attended other than those set forth above.
The following table shows the aggregate compensation received by each
unaffiliated Director during 1998 from the Registrant and from all funds advised
by the Adviser as a group.
61
<TABLE>
<CAPTION>
Name Global/International Fund, Inc.* Fund Complex
---- -------------------------------- ------------
<S> <C> <C>
Paul Bancroft III,
Director........................... $40,625 $183,125
Sheryle J. Bolton,
Director........................... $38,500 $149,050
William T. Burgin,
Director........................... $40,625 $159,875
Thomas J. Devine,
Trustee............................ $40,625 $171,375
Keith R. Fox,
Director........................... $41,875 $165,725
William H. Gleysteen, Jr.,
Director........................... $40,625 $127,875**
William H. Luers,
Director........................... $36,875 $165,975
Joan E. Spero,
Director .......................... $8,340 $29,736
</TABLE>
- -----------
* Global/International Fund, Inc. consists of five funds: Scudder Global
Fund, Scudder International Bond Fund, Scudder Global Bond Fund, Global
Discovery Fund and Scudder Emerging Markets Income Fund.
** This amount does not reflect $6,208 in retirement benefits accrued as part
of Fund Complex expenses, and $3,000 in estimated annual benefits payable
upon retirement. Retirement benefits accrued and proposed are to be paid to
Mr. Gleysteen as additional compensation for serving on the Board of The
Japan Fund, Inc.
SHAREHOLDER RIGHTS
The Fund is a diversified series of Global/International Fund, Inc., a Maryland
corporation, and was organized on May 15, 1986, as Scudder Global Fund, Inc., an
open-end management company. The Corporation changed its name from Scudder
Global Fund, Inc. on May 28, 1998. On December 6, 1995, shareholders of Scudder
Short Term Global Income Fund approved the change in name and investment
objective and policies. On March 5, 1996, directors of Scudder Global Small
Company Fund approved the change in name to Scudder Global Discovery Fund, and
on April 16, 1998 the Fund changed its name to Global Discovery Fund.
The Board of Directors has subdivided the shares of the Fund into four
classes, namely, the Scudder Shares, Kemper Global Discovery Fund Class A, B and
C shares. Although shareholders of different classes of a series have an
interest in the same portfolio of assets, shareholders of different classes may
bear different expenses in connection with different methods of distribution.
The authorized capital stock of the Corporation consists of 800 million
shares with $.01 par value, 100 million shares of which are allocated to the
Fund, 300 million shares of which are allocated to Scudder Global Bond Fund and
100 million shares of which are allocated to Scudder Emerging Markets Income
Fund. Each share of each series of the Corporation has equal voting rights as to
each other share of that series as to voting for Directors, redemption,
dividends and liquidation. Shareholders have one vote for each share held. All
shares issued and outstanding are fully paid and non-assessable, transferable,
and redeemable at net asset value at the option of the shareholder. Shares have
no pre-emptive or conversion rights.
Shares of the Corporation entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
62
The shares of the Corporation have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so, and, in such
event, the holders of the remaining less than 50% of the shares voting for the
election of Directors will not be able to elect any person or persons to the
Board of Directors.
The Directors, in their discretion, may authorize the division of shares
of a series into different classes permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes of
a series would have an interest in the same portfolio of assets, shareholders of
any subsequently created classes may bear different expenses in connection with
different methods of distribution of their classes.
The Fund's activities are supervised by the Corporation's Board of
Directors. Maryland corporate law provides that a Director of the Corporation
shall not be liable for actions taken in good faith, in a manner he or she
reasonably believes to be in the best interests of the Corporation and with the
care that an ordinarily prudent person in a like position would use under
similar circumstances. In so acting, a Director shall be fully protected in
relying in good faith upon the records of the Corporation and upon reports made
to the Corporation by persons selected in good faith by the Directors as
qualified to make such reports.
The Articles of Amendment and Restatement provide that the Directors of
the Corporation, to the fullest extent permitted by Maryland General Corporation
Law and the 1940 Act shall not be liable to the Corporation or its shareholders
for damages. As a result, Directors of the Corporation may be immune from
liability in certain instances in which they could otherwise be held liable. The
Articles and the By-Laws provide that the Corporation will indemnify its
Directors, officers, employees or agents against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Corporation to the fullest extent permitted by applicable
law. Nothing in the Articles or the By-Laws protects or indemnifies a Director,
officer, employee or agent against any liability to which he or she would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
No series of the Corporation shall be liable for the obligations of any
other series.
ADDITIONAL INFORMATION
Other Information
The CUSIP number of each class of the Fund is Class A, 378947-60-0; Class B,
378947-70-9; and Class C, 378947-80-8.
The Fund has a fiscal year ending 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 objectives and
policies, its other portfolio holdings and tax considerations, and should not be
construed as recommendations for similar action by other investors.
Portfolio securities of the Fund are held separately pursuant to a
custodian agreement, by the Fund's custodian, Brown Brothers Harriman & Co., 40
Water Street, Boston, Massachusetts 02109.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
63
The Shares' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Corporation has filed with the SEC under the Securities Act of 1933
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.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of the Fund,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of the
Fund dated October 31, 1998 are incorporated herein by reference and are hereby
deemed to be a part of this Statement of Additional Information.
Effective April 16, 1998, the Corporation's Board of Directors has
approved a name change of the Fund from Scudder Global Discovery Fund to Global
Discovery Fund. In addition, the Board of Directors has subdivided the Fund's
shares into classes. Shares of the Fund outstanding on such date are
redesignated as Scudder Shares of the Fund. The financial statements
incorporated herein reflect the investment performance of the Fund prior to the
aforementioned reclassification of shares.
KGDF-13 3/99 printed on recycled paper
64
APPENDIX
The following is a description of the ratings given by Moody's and S&P to
corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
S&P:
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. 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. 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.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
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. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa
65
securities. 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.
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. 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 other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. 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.
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. 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. 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.
66
<PAGE>
SCUDDER
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income
Fund
Prospectus
March 1, 1999
These funds pursue a variety of income-oriented objectives by investing in
bonds.
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
- ---------------------------
No Sales Charges
- ---------------------------
NO-LOAD
- ---------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
1 Global Investing
- --------------------------------------------------------------------------------
1 Investment approach
2 About the Funds
- --------------------------------------------------------------------------------
2 Scudder Global Bond Fund
6 Scudder International Bond Fund
10 Scudder Emerging Markets Income Fund
16 A message from the President
17 Investment adviser
19 Distributions
20 Taxes
21 Financial highlights
24 About Your Investment
- --------------------------------------------------------------------------------
24 Transaction information
25 Buying and selling shares
26 Purchases
27 Exchanges and redemptions
28 Investment products and services
<PAGE>
Global Investing
Investment approach
These funds seek current income by investing primarily in bonds of issuers
located worldwide. Although the U.S. bond market is the single largest in the
world, the global bond market is three times as large. Each fund has its own
objectives, investment strategy and risk profile.
Each fund will normally invest at least 65% of its total assets in debt
securities, and distributes income, if any, to shareholders monthly or
quarterly. The performance of each fund is most affected by changes in interest
rates. When interest rates rise, bond prices usually fall, and bonds with long
maturities suffer the most.
Duration, a measurement based on the estimated pay-back period or duration of a
bond (or portfolio of bonds), is the most widely used gauge of sensitivity to
interest rate change. Like maturity, duration is expressed in years. The longer
a fund's duration, the more sharply its share price is likely to rise or fall
when interest rates change.
Foreign markets follow their own economic cycles, so foreign investments can
serve to diversify your investment portfolio. However, foreign markets have been
more volatile than the U.S. market. Foreign investments carry additional risks,
including potentially unfavorable currency exchange rates, conversion
difficulties, political disturbances, the possibility that bonds may be
downgraded or go into default and incomplete or inaccurate accounting
information on companies.
Unless otherwise indicated, each fund's investment objectives and strategies may
be changed without a vote of shareholders.
Are global income funds right for you?
A global income fund may be a good choice for you if:
o you have a well balanced portfolio of domestic investments and would like
to gain some exposure to foreign markets
o you are building an asset allocation portfolio with an income component
o you can invest in a fund for at least three years
o you can handle some ups and downs in investment performance
Each fund may be appropriate to gain foreign exposure in an investor's
portfolio. Each fund is considered an income fund and should not be viewed as a
complete investment program.
1
<PAGE>
About the Funds
Scudder Global Bond Fund
Investment objectives
The fund seeks to provide total return with an emphasis on current income.
Capital appreciation is a secondary objective.
Main investment strategies
The fund seeks to achieve its investment objectives by investing at least 65% of
its total assets in high-quality bonds which are rated in one of the three
highest categories by a national recognized rating association, or, if unrated,
determined to be of equivalent quality by the Adviser.
The fund will principally invest in high quality intermediate- and long-term
bonds of issuers from around the world, including the United States. Generally,
intermediate-term bonds have maturities between three and eight years, and
long-term bonds have maturities greater than eight years. In selecting
securities, the portfolio management team considers, among other things, yields,
credit quality, and the fundamental outlooks for currency and interest rate
trends in different parts of the globe, taking into account the ability to hedge
currency or local bond price risk.
The portfolio management team typically looks for bonds with attractive yields
(interest rates) relative to market alternatives; from countries and/or
companies with stable or improving fundamentals; and denominated in stable or
appreciating currencies.
The portfolio management team typically sells a bond when yields decline below
market averages; when the credit fundamentals appear to be deteriorating; or
when the underlying currency might depreciate.
The fund's investments may include:
o Bonds issued or guaranteed by the U.S. government, its agencies or
instrumentalities;
o Bonds issued or guaranteed by a foreign national government, its agencies
and instrumentalities or political subdivisions;
o Bonds issued or guaranteed by supranational organizations such as the
European Investment Bank, Inter-American Development Bank or the World
Bank;
o Corporate debt securities;
o Bank or bank holding company debt securities;
o Other debt securities, including those convertible into common stock.
2
<PAGE>
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that, by following these investment
strategies, the fund will achieve its objectives.
Other investments
To a more limited extent the fund may, but is not required to, invest in the
following:
The fund invests at least 15% of its total assets in U.S. dollar-denominated
securities issued domestically or abroad.
The fund also may invest up to 15% of its net assets in bonds rated below
investment-grade but may not invest in any securities rated "B" or lower by a
nationally recognized rating association. Securities rated below
investment-grade, that is, lower than Baa/BBB (commonly referred to as "junk
bonds"), entail greater risks than investment-grade bonds.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).
Risk management strategies
The fund manages its exposure to credit risk by investing at least 65% of its
total assets in investment-grade debt securities. The fund manages exchange rate
and interest rate risk through active portfolio management.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in U.S. debt
securities, including short-term money market securities. In such a case, the
fund would not be pursuing, and may not achieve, its investment objectives.
Main risks
As with most bond funds, the most significant factor affecting this fund's
performance is interest rates. When interest rates rise, the price of bonds (and
bond mutual funds) typically falls in proportion to their duration. It is also
possible that bonds in the fund's portfolio could be downgraded in credit rating
or go into default.
3
<PAGE>
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates. In
addition, the portfolio management team's choice of countries, market sectors or
specific investments may not perform as well as expected.
Because the fund is non-diversified, it may invest a relatively high percentage
of its assets in a limited number of issuers. Accordingly, the fund's investment
returns are more likely to be impacted by changes in the market value and
returns of any one portfolio holding.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce fund performance.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following information was depicted as a bar chart in the printed material.]
5.49% 6.74% -1.13% 7.74% 3.11% 0.37% 11.45%
1992 1993 1994 1995 1996 1997 1998
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 5.23% (the third quarter of 1998), and the fund's lowest
return for a calendar quarter was -4.19% (the first quarter of 1997).
4
<PAGE>
Average annual total returns
Salomon Brothers World
For periods Scudder Global Government
ended December 31, 1998 Bond Fund* Bond Index
- --------------------------------------------------------------------------------
One Year 11.45% 15.31%
Five Years 4.21% 7.85%
Since Inception (3/1/91) 5.43% 9.66%**
- -------------------------------------------------------------------------------
* Prior to December 27, 1995, the Salomon Brothers Currency-Hedged World
Government Bond Index (1-3 years) was used as a comparative index.
** Index comparisons begin March 31, 1991.
The Salomon Brothers World Government Bond Index is an unmanaged index
consisting of worldwide fixed-rate government bonds with remaining maturities of
greater than one year. Index returns assume reinvestment of dividends and,
unlike fund returns, do not reflect any fees or expenses. On December 27, 1995,
the fund adopted its current name and objectives. Prior to that date, the fund
was known as Scudder Short Term Global Income Fund and its investment objective
was to provide high current income through short-term instruments.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases
(as % of offering price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.73%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 1.48%**
- --------------------------------------------------------------------------------
Expense reimbursement 0.23%
- --------------------------------------------------------------------------------
Net expenses 1.25%**
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
** Until February 28, 1999 expenses had been contractually maintained at
1.00%. Effective March 1, 1999 until February 29, 2000 total fund
operating expenses are contractually maintained at 1.25%. Expenses have
been restated to reflect the maintenance of expenses at 1.25%.
5
<PAGE>
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
- --------------------------------------------------------------------------------
One Year $ 151
- --------------------------------------------------------------------------------
Three Years $ 468
- --------------------------------------------------------------------------------
Five Years $ 808
- --------------------------------------------------------------------------------
Ten Years $ 1,768
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
Scudder International Bond Fund
Investment objectives
The fund's primary objective is income. As a secondary objective, the fund seeks
protection and possible enhancement of principal.
Main investment strategies
The fund pursues its investment objectives by investing at least 65% of its
total assets in high-quality bonds denominated in foreign currencies with credit
ratings within the three highest rating categories of one or more nationally
recognized rating associations, or, if unrated, considered to be of comparable
quality by the Adviser.
The portfolio management team will select investments on the basis of, among
other things, yields, credit quality, and the fundamental outlooks for currency
and interest rate trends in different parts of the globe, taking into account
the ability to hedge a degree of currency or local bond price risk. The fund is
not limited in its average portfolio maturity or the maturity of any portfolio
security.
The portfolio management team typically looks for bonds with attractive yields
(interest rates) relative to market alternatives; from countries and/or
companies with stable or improving fundamentals; and denominated in stable or
appreciating currencies.
The portfolio management team typically sells a bond when yields decline below
market averages; when the credit fundamentals appear to be deteriorating; or
when the underlying currency might depreciate.
6
<PAGE>
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that, by following these investment
strategies, the fund will achieve its objectives.
Other investments
To a more limited extent the fund may, but is not required to, invest in the
following:
The fund may invest up to 15% of its net assets in bonds rated below
investment-grade. Securities rated below investment-grade (commonly referred to
as "junk bonds"), entail greater risks than investment-grade bonds.
The fund also may invest up to 35% of the value of its total assets in
investment-grade U.S. debt securities.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities or that are based on indices).
Risk management strategies
The fund manages its exposure to credit risk by investing at least 65% of its
total assets in investment-grade debt securities. The fund manages exchange rate
and interest rate risk through active portfolio management. The portfolio
management team's techniques include management of currency, bond market and
maturity exposure and security selection.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in U.S. debt
securities, including short-term money market securities. In such a case, the
fund would not be pursuing, and may not achieve, its investment objectives.
Main risks
As with most bond funds, the most significant factor affecting this fund's
performance is interest rates. When interest rates rise, the price of bonds (and
bond mutual funds) typically falls in proportion to their duration. It is also
possible that bonds in the fund's portfolio could be downgraded in credit rating
or go into default.
7
<PAGE>
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates. In
addition, the portfolio management team's choice of countries, market sectors or
specific investments may not perform as well as expected.
Because the fund is non-diversified, it may invest a relatively high percentage
of its assets in a limited number of issuers. Accordingly, the fund's investment
returns are more likely to be impacted by changes in the market value and
returns of any one portfolio holding.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce fund performance.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed and comparing this
information to a broad measure of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following information was depicted as a bar chart in the printed material.]
7.23% 21.11% 22.23% 7.62% 15.83% -8.61% 8.50% 3.54% -4.10% 12.63%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 11.14% (the third quarter of 1991), and the fund's lowest
return for a calendar quarter was -5.83% (the first quarter of 1997).
8
<PAGE>
Average annual total returns
Salomon Brothers Non-U.S.
For periods ended Scudder International Dollar World Government
December 31, 1998 Bond Fund Bond Index
- --------------------------------------------------------------------------------
One Year 12.63% 17.79%
Five Years 2.09% 8.26%
Ten Years 8.18% 8.79%
- --------------------------------------------------------------------------------
The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an unmanaged
measure of worldwide fixed-rate government bonds with remaining maturities of
greater than one year. Index returns assume reinvestment of dividends and,
unlike fund returns, do not reflect any fees or expenses.
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases
(as % of offering price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 0.85%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.73%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 1.58%**
- --------------------------------------------------------------------------------
Expense reimbursement 0.08%
- --------------------------------------------------------------------------------
Net expenses 1.50%**
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
** On September 15, 1998, the Fund changed its fiscal year end from June 30
to October 31. Total fund operating expenses are annualized for the
four-month fiscal period ended October 31, 1998. Total fund operating
expenses are contractually maintained at 1.50% until February 29, 2000.
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
9
<PAGE>
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
- --------------------------------------------------------------------------------
One Year $ 161
- --------------------------------------------------------------------------------
Three Years $ 499
- --------------------------------------------------------------------------------
Five Years $ 860
- --------------------------------------------------------------------------------
Ten Years $ 1,878
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
Scudder Emerging Markets Income Fund
Investment objectives
The fund's primary investment objective is to provide investors with high
current income. As a secondary investment objective, the fund seeks long-term
capital appreciation.
Main investment strategies
In pursuing its investment objectives, the fund invests at least 65% of its
total assets in high-yielding debt securities issued by governments and
corporations in emerging markets or the return on which is derived from emerging
markets.
The fund can invest entirely in high yield/high risk bonds. The fund invests in
lower quality securities of emerging market issuers, some of which may have in
the past defaulted on certain of their financial obligations. These securities
are commonly referred to as "junk bonds," and are rated below BBB or Baa by a
nationally recognized rating association, or if unrated, determined to be of
equivalent quality by the Adviser. Investments of this type are subject to a
greater risk of loss of principal and interest than investments in higher rated
securities. The fund will invest in at least three countries and will not invest
more than 40% of its total assets in issuers of one country. Fund investments
will be actively managed in terms of geographic industry and currency
allocation. The fund is not limited in its average portfolio maturity or the
maturity of any individual portfolio security.
The portfolio management team will select investments based on, among other
things, factors such as credit quality of issuers, changes in and levels of
interest rates, projected economic growth rates, capital flows, debt levels,
trends in inflation, anticipated movements in foreign currencies and government
initiatives.
10
<PAGE>
The portfolio management team typically sells a bond when yields decline below
market averages; when the credit fundamentals appear to be deteriorating; or
when the underlying currency might depreciate.
The fund considers "emerging markets" to include any country that is defined as
an emerging or developing economy by: the International Bank for Reconstruction
and Development (i.e., the World Bank), the International Finance Corporation or
the United Nations or its authorities.
The fund deems an issuer to be located in an emerging market if:
o the issuer is organized under the laws of an emerging market country;
o the issuer's principal securities trading market is in an emerging market;
or
o at least 50% of the issuer's non-current assets, capitalization, gross
revenue or profit in any one of the two most recent fiscal years is
derived (directly or indirectly from subsidiaries) from assets or
activities located in emerging markets.
The portfolio management team currently weights its investments more heavily
toward countries in Latin America. However, the portfolio management team may
pursue investment opportunities in Asia, Africa, the Middle East and the
developing countries of Europe, primarily in Eastern Europe.
Because the fund may engage in active and frequent trading of portfolio
securities, the fund may have higher transaction costs which would lower the
fund's performance over time. In addition, shareholders may incur taxes on any
realized capital gains.
Of course, there can be no guarantee that, by following these investment
strategies, the fund will achieve its objectives.
Other investments
To a more limited extent the fund may, but is not required to, invest in the
following:
The fund may invest up to 35% of its total assets in securities other than
emerging markets debt obligations. These holdings include debt securities and
money market instruments issued by corporations and governments based in
developed markets, of which up to 20% of the Fund's total assets may be invested
in U.S. fixed income securities. The fund may also invest up to 5% of its net
assets in securities whose quality is comparable to securities rated as low as D
by Standard & Poor's Corporation or C by Moody's Investors Service, Inc.
The fund may utilize other investments and investment techniques that may impact
fund performance, including, but not limited to,
11
<PAGE>
options, futures and other derivatives (financial instruments that derive their
value from other securities or commodities or that are based on indices).
Risk management strategies
The fund manages risk by allocating its investments in terms of geography,
industry and currency. The fund will invest in at least three countries and will
not invest more than 40% of its total assets in issuers of one country. In
addition, to reduce currency risk the fund invests at least 65% of its total
assets in U.S. dollar-denominated debt securities. Accordingly, no more than 35%
of its total assets will be invested in debt securities denominated in foreign
currencies.
The fund may, but is not required to, use certain derivatives in an attempt to
manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the fund may invest without limit in U.S. debt
securities, including short-term money market securities. In such a case, the
fund would not be pursuing, and may not achieve, its investment objectives.
Main risks
The primary factor affecting this Fund's performance is its investment in
below-investment grade high yield high risk debt obligations. The fund involves
above-average bond fund risk. These bonds are predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
their terms and generally involve a greater risk of default and more volatility
in price than higher rated securities. In addition, lower grade securities are
generally less liquid and the fund may have difficulty disposing of these
securities. Moreover, low-rated bonds are particularly subject to adverse
changes in economic conditions, the financial condition of the issuers and
interest rates.
As with most bond funds, another significant factor affecting this fund's
performance is interest rates. When interest rates rise, the price of bonds (and
bond mutual funds) typically falls in proportion to their duration. It is also
possible that bonds in the fund's portfolio could be downgraded in credit rating
or go into default.
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
The portfolio management team's choice of countries, market sectors or specific
investments may not perform as well as expected.
The fund invests in emerging markets, which may have substantially less trading
volume and are subject to less government supervision
12
<PAGE>
than U.S. securities markets. Securities of many issuers in emerging markets may
be less liquid and more volatile than securities of comparable domestic issuers.
In addition, there is less regulation of securities exchanges, securities
dealers, and listed and unlisted companies in emerging markets in the U.S.
Emerging markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have not kept pace with
the volume of securities transactions. Certain emerging markets require prior
governmental approval of the type and or/amount of investments by foreign
persons.
Because the fund is non-diversified, it may invest a relatively high percentage
of its assets in a limited number of issuers. Accordingly, the fund's investment
returns are more likely to be impacted by changes in the market value and
returns of any one portfolio holding.
The fund expects to trade securities actively. This strategy could increase
transaction costs and reduce fund performance.
There are market and investment risks with any security and the value of an
investment in the fund will fluctuate over time and it is possible to lose money
invested in the fund.
Past performance
The chart and table below provide some indication of the risks of investing in
the fund by illustrating how the fund has performed and comparing this
information to two broad measures of market performance. Of course, past
performance is not necessarily an indication of future performance.
Total returns for years ended December 31
[The following information was depicted as a bar chart in the printed material.]
-8.06% 19.48% 34.55% 13.12% -30.30%
1994 1995 1996 1997 1998
13
<PAGE>
For the periods included in the bar chart, the fund's highest return for a
calendar quarter was 14.64% (the second quarter of 1995), and the fund's lowest
return for a calendar quarter was -33.73% (the third quarter of 1998).
Average annual total returns
Scudder Emerging J.P. Morgan J.P. Morgan
Markets Emerging Markets Composite Emerging
For periods ended Income Bond Index Markets Bond/Latin
December 31, 1998 Fund Plus Eurobond Index
- --------------------------------------------------------------------------------
One Year -30.30% -14.35% -9.34%
Five Years 3.11% 6.74% 7.51%
Since Inception
(12/31/93) 3.11% 6.74% 7.51%
- --------------------------------------------------------------------------------
The J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) is an unmanaged index
of total returns for traded external debt instruments in the emerging markets.
Included in the index are U.S. dollar and other external-currency-denominated
Brady bonds, loans, Eurobonds, and local market instruments.
The unmanaged J.P. Morgan Composite Emerging Markets Bond/Latin Eurobond Index
(EMBI/LEI) tracks the performance of U.S. dollar-denominated sovereign
restructured bonds (mostly Brady bonds) and Latin-issued Eurobonds. The
composite includes debt issues from five countries in Latin America, plus
Bulgaria, Nigeria, the Philippines and Poland.
The fund has adopted the EMBI+ for its primary securities market index over the
J.P. Morgan Composite Emerging Markets Bond/Latin Eurobond Index, as the EMBI+
better represents the securities and markets in which the fund typically
invests. Index returns assume reinvestment of dividends and, unlike fund
returns, do not reflect any fees or expenses.
14
<PAGE>
Fee and expense information
The following information is designed to help you understand the fees and
expenses that you may pay if you buy and hold shares of the fund.
- --------------------------------------------------------------------------------
Shareholder fees: Fees paid directly from your investment.
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases
(as % of offering price) NONE
- --------------------------------------------------------------------------------
Maximum deferred sales charge (load) NONE
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on reinvested
dividends/distributions NONE
- --------------------------------------------------------------------------------
Redemption fee (as % of amount redeemed, if applicable) NONE*
- --------------------------------------------------------------------------------
Exchange fee NONE
- --------------------------------------------------------------------------------
Annual fund operating expenses (expenses that are deducted from fund assets):
- --------------------------------------------------------------------------------
Management fee 1.00%
- --------------------------------------------------------------------------------
Distribution (12b-1) fees NONE
- --------------------------------------------------------------------------------
Other expenses 0.56%
- --------------------------------------------------------------------------------
Total annual fund operating expenses 1.56%
- --------------------------------------------------------------------------------
* If you wish to receive your redemption proceeds via wire, there is a $5
wire service fee. For additional information, please refer to "About Your
Investment -- Exchanges and redemptions."
Example
This example is to help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
This example illustrates the impact of the above fees and expenses on an account
with an initial investment of $10,000, based on the expenses shown above. It
assumes a 5% annual return, the reinvestment of all dividends and distributions
and "annual fund operating expenses" remaining the same each year. The expenses
would be the same whether you sold your shares at the end of each period or
continued to hold them.
- --------------------------------------------------------------------------------
One Year $ 159
- --------------------------------------------------------------------------------
Three Years $ 493
- --------------------------------------------------------------------------------
Five Years $ 850
- --------------------------------------------------------------------------------
Ten Years $ 1,856
- --------------------------------------------------------------------------------
Actual fund expenses and return vary from year to year, and may be higher or
lower than those shown.
15
<PAGE>
A message from the President
[PHOTO OMITTED]
Edmond D. Villani, President
and CEO, Scudder Kemper
Investments, Inc.
Scudder Kemper Investments, Inc., investment adviser to the Scudder Family of
Funds, is one of the largest and most experienced investment management
organizations worldwide, managing more than $280 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients, and private family and individual accounts.
We offered America's first no-load mutual fund in 1928, and today the Scudder
Family of Funds includes over 50 no-load mutual fund portfolios or classes of
shares. We also manage mutual funds in a special program for the American
Association of Retired Persons, as well as the fund options available through
Scudder Horizon Plan, a tax-advantaged variable annuity. We also advise The
Japan Fund and numerous other open- and closed-end funds that invest in this
country and other countries around the world.
The Scudder Family of Funds is designed to make investing easy and less costly.
It includes money market, tax free, income and growth funds: IRAs, 401(k)s,
Keoghs and other retirement plans are also available.
Services available to shareholders include toll-free access to professional
representatives, easy exchange among the Scudder Family of Funds, shareholder
reports, informative newsletters and the walk-in convenience of Scudder Investor
Centers.
The Scudder Family of Funds is offered without commissions to purchase or redeem
shares or to exchange from one fund to another. There are no distribution
(12b-1) fees either, which many other funds now charge to support their
marketing efforts. All of your investment goes to work for you. We look forward
to welcoming you as a shareholder.
/s/ Edmond D. Villani
16
<PAGE>
Investment adviser
Each fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), 345 Park Avenue, New York, NY, to manage each fund's daily
investment and business affairs subject to the policies established by each
fund's Board. The Adviser actively manages each fund's investments. Professional
management can be an important advantage for investors who do not have the time
or expertise to invest directly in individual securities.
Scudder Global Bond Fund
The Adviser agreed to maintain the annualized expenses of the fund at no more
than 1.00% of the average daily net assets of the fund until February 28, 1999.
As a result, the Adviser received an investment management fee of 0.27% of the
fund's average daily net assets on an annual basis for the fiscal year ended
October 31, 1998. Effective March 1, 1999 until February 29, 2000 total fund
operating expenses are maintained at 1.25%.
Scudder International Bond Fund
The Adviser has agreed to maintain the annualized expenses of the fund at no
more than 1.50% of the average daily net assets of the fund from January 1, 1998
until February 28, 1999. As a result, the Adviser received an investment
management fee of 0.79% of the fund's average daily net assets on an annual
basis for the fiscal year ended June 30, 1998. For the fiscal period July 1,
1998 until October 31, 1998 the Adviser received an annualized investment
management fee of 0.77% of the fund's average daily net assets. Until February
29, 2000 total fund operating expenses are maintained at 1.50%.
Scudder Emerging Markets Income Fund
For the fiscal year ended October 31, 1998, the Adviser received an investment
management fee of 1.00% of the fund's average daily net assets on an annual
basis.
Portfolio management
Each fund is managed by a team of investment professionals, who each plays an
important role in the funds' management process. Team members work together to
develop investment strategies and select securities for the funds' portfolios.
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.
17
<PAGE>
The following investment professionals are associated with each fund as
indicated:
Name and Title Joined the Fund Responsibilities and Background
- --------------------------------------------------------------------------------
M. Isabel Saltzman 1998 Joined the Adviser in 1990 as a
Lead Manager -- portfolio manager. Ms. Saltzman is
Global Bond Fund the Product Leader and a Senior
and International Portfolio Manager for the Emerging
Bond Fund Markets Bond Group. She began her
Manager-- investment career in 1981.
Emerging Markets
Income Fund
Adam M. Greshin 1991 Joined the Adviser in 1986 as an
Manager -- international bond analyst. Mr.
Global Bond Fund Greshin joined the funds as a
and International portfolio manager in 1991 and
Bond Fund specializes in global and
international fixed-income
investments. He began his
investment career in 1986.
Susan E. Dahl 1994 Joined the Adviser in 1987 as head
Lead Manager -- of fixed income trading. Ms. Dahl
Emerging Markets is the Capital Markets Strategist
Income Fund and a Senior Portfolio Manager for
the Emerging Markets Bond Group.
She began her investment career in
1987.
- --------------------------------------------------------------------------------
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
funds could be adversely affected if computer systems on which the funds rely,
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. The 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 funds' business and
operations, such as problems with calculating net asset value and difficulties
in implementing a fund's purchase and redemption procedures. The Adviser has
commenced a review of the Year 2000 issue as it may affect the funds and is
taking steps it believes are reasonably designed to address the Year 2000 issue,
although there can be no assurances that these steps will be sufficient. In
addition, there can be no assurances that the Year 2000 issue will not have an
adverse effect on the issuers whose securities are held by the funds or on
global markets or economies generally.
18
<PAGE>
Euro conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operation of the funds. The Euro
was introduced on January 1, 1999 by eleven member countries of the European
Economic and Monetary Union (EMU). The introduction of the Euro requires the
redenomination of other European debt and equity securities over a period of
time, which may result in various accounting differences and/or tax treatments.
Additional questions are raised by the fact that certain other European
community members, including the United Kingdom, did not officially implement
the Euro on January 1, 1999.
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 fund's holdings is negative, it could hurt
the funds' performance.
Distributions
Scudder Global Bond Fund and Scudder International Bond Fund each intend to
distribute dividends from its net investment income monthly.
Scudder Emerging Markets Income Fund intends to distribute dividends from its
net investment income quarterly in March, June, September and December.
Each fund intends to distribute net realized capital gains after utilization of
capital loss carryforwards, if any, in December. An additional distribution may
be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar year declared.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a fund. If an investment is in the form of a
retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among funds are also taxable
events.
19
<PAGE>
Taxes
Generally, dividends from net investment income are taxable to shareholders as
ordinary income. Long-term capital gains distributions, if any, are taxNO
TAGable to shareholders as long-term capital gains, regardless of the length of
time shareholders have owned shares. Short-term capital gains and any other
taxable income distributions are taxable as ordinary income. A portion of
dividends from ordinary income may qualify for the dividend-received deduction
for corporations.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution, because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
you owned the shares.
Each fund sends detailed tax information to its shareholders about the amount
and type of its distributions by January 31 of the following year. In certain
years, you may be able to claim a credit or a deduction on your income tax
return for your share of foreign taxes paid by a fund.
Each fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
funds with their correct taxpayer identification number, or who have been
notified by the IRS that they are subject to backup withholding. Any such
withheld amounts may be credited against the shareholder's U.S. federal income
tax liability.
Shareholders may be subject to state, local and foreign taxes on fund
distributions and dispositions of fund shares. You should consult your tax
advisor regarding the particular consequences of an investment in a fund.
20
<PAGE>
Financial highlights
The financial highlights table for each fund is intended to help you understand
each fund's financial performance for the fiscal periods indicated. Certain
information reflects financial results for a single fund share. The total return
figures represent the rate that shareholders would have earned (or lost) on an
investment in a fund assuming reinvestment of all dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP whose report,
along with each fund's financial statements, is included in the annual report,
which is available upon request by calling Scudder Investor Relations at
1-800-225-2470 or, for existing shareholders, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890.
Scudder Global Bond Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Years Ended October 31,
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ... $9.71 $10.25 $10.53 $10.78 $11.68
-----------------------------------------------------
Income (loss) from investment
operations:
Net investment income (loss) ........... .62 .59 .67 .80 .87
Net realized and unrealized gain (loss)
on investment transactions ........... .21 (.54) (.28) (.25) (.90)
-----------------------------------------------------
Total from investment operations ....... .83 .05 .39 .55 (.03)
-----------------------------------------------------
Less distributions from:
Net investment income .................. (.60) (.14) (.42) (.36) (.02)
Tax return of capital .................. (.02) (.45) (.25) (.44) (.85)
-----------------------------------------------------
Total distributions .................... (.62) (.59) (.67) (.80) (.87)
-----------------------------------------------------
-----------------------------------------------------
Net asset value, end of period ......... $9.92 $9.71 $10.25 $10.53 $10.78
- -----------------------------------------------------------------------------------------------
Total Return (%) (a) ................... 8.91 0.66 3.97 5.43 (.25)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 108 135 217 357 560
Ratio of operating expenses, net to
average daily net assets (%) ......... 1.00 1.00 1.00 1.00 1.00
Ratio of operating expenses before
expense reductions, to average daily
net assets (%) ....................... 1.48 1.39 1.28 1.20 1.15
Ratio of net investment income to
average daily net assets (%) ......... 6.43 6.00 6.67 7.73 7.76
Portfolio turnover rate (%) ............ 218.3 256.5 335.7 182.8 272.4
</TABLE>
(a) Total returns would have been lower had certain expenses not been reduced.
On December 27, 1995, the fund adopted its current name and objectives.
Prior to that date, the fund was known as the Scudder Short Term Global
Income Fund and its investment objective was to provide high current
income through short-term instruments. Financial information prior to
December 27, 1995 should not be considered representative of the present
fund.
- --------------------------------------------------------------------------------
21
<PAGE>
Scudder International Bond Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
For the
Four
Months
Ended
October 31, Years Ended June 30,
1998(b)(c) 1998(b) 1997(b) 1996(b) 1995(b)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ......................... $9.92 $10.52 $10.98 $11.43 $11.97
Income from investment
operations:
Net investment income ............ .18 .61 .58 .73 .98
Net realized and unrealized gain
(loss) on investment
transactions ................... .78 (.60) (.46) (.45) (.54)
Total from investment --------------------------------------------------------------------
operations ..................... .96 .01 .12 .28 .44
--------------------------------------------------------------------
Less distributions:
From net investment income ....... -- -- (.58) (.12) --
Tax return of capital ............ (.18) (.61) -- (.61) (.98)
--------------------------------------------------------------------
Total distributions .............. (.18) (.61) (.58) (.73) (.98)
--------------------------------------------------------------------
--------------------------------------------------------------------
Net asset value, end of period ... $10.70 $9.92 $10.52 $10.98 $11.43
- -----------------------------------------------------------------------------------------------------------
Total Return (%) ................. 9.76(a)** .10(a) .94 2.59 3.92
Ratios and Supplemental Data
Net assets, end of period
($ millions) ................... 150 146 236 515 910
Ratio of operating expenses, net
to average daily net assets (%) 1.50* 1.56 1.36 1.26 1.30
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ........... 1.58* 1.62 1.36 1.26 1.30
Ratio of net investment income
to average daily net assets (%) 5.20* 5.91 5.28 6.50 8.52
Portfolio turnover rate (%) ...... 303.5* 190.1 298.2 275.7 318.5
</TABLE>
(a) Total returns for certain periods would have been lower had certain
expenses not been reduced.
(b) Based on monthly average of shares outstanding during the period.
(c) On September 15, 1998, the Board of Directors changed the fiscal year end
from June 30 to October 31.
* Annualized
** Not annualized
- --------------------------------------------------------------------------------
22
<PAGE>
Scudder Emerging Markets Income Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
For the
Period
December 31,
1993
(commence-
ment of
operations)
to October
Years Ended October 31, 31,
1998(a) 1997(a) 1996(a) 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ..................... $12.22 $12.98 $10.26 $11.05 $12.00
------------------------------------------------------------------
Income from investment
operations:
Net investment income ........ 1.04 1.06 1.20 1.14 0.60
Net realized and unrealized
gain (loss) on investments . (3.71) .46 2.71 (.82) (1.04)
Total from investment ------------------------------------------------------------------
operations ................. (2.67) 1.52 3.91 .32 (.44)
------------------------------------------------------------------
Less distributions from:
Net investment income ........ (1.01) (1.10) (1.19) (1.11) (.51)
Net realized gain on
investment transactions .... (1.50) (1.18) -- -- --
------------------------------------------------------------------
Total distributions .......... (2.51) (2.28) (1.19) (1.11) (.51)
------------------------------------------------------------------
------------------------------------------------------------------
Net asset value, end of period $7.04 $12.22 $12.98 $10.26 $11.05
- -----------------------------------------------------------------------------------------------------
Total Return (%) ............. (27.60) 12.34 39.78(b) 3.46(b) (3.54)(b)**
Ratios and Supplemental Data
Net assets, end of period
($ millions) ............... 214 324 305 169 95
Ratio of operating expenses,
net, to average daily net
assets (%) ................. 1.56 1.49 1.44 1.50 1.50*
Ratio of operating expenses,
before expense reductions,
to average daily net
assets (%) ................. 1.56 1.49 1.45 1.68 2.23*
Ratio of net investment
income to average daily net
assets (%) ................. 9.97 8.03 10.05 12.83 9.17*
Portfolio turnover rate (%) .. 239.7 409.5 430.0 302.2 180.6*
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total returns are higher due to maintenance of fund expenses.
* Annualized
** Not annualized
- --------------------------------------------------------------------------------
23
<PAGE>
About Your Investment
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
each fund as of the close of regular trading on the New York Stock Exchange,
normally 4 p.m. eastern time, on each day the New York Stock Exchange is open
for trading.
Net asset value per share is calculated by dividing the value of total fund
assets, less all liabilities, by the total number of shares outstanding. Market
prices are used to determine the value of the funds' assets. If market prices
are not readily available for a security or if a security's price is not
considered to be market indicative that security may be valued by another method
that the Board or its delegate believes accurately reflects fair value. In those
circumstances where a security's price is not considered to be market
indicative, the security's valuation may differ from an available market
quotation.
To the extent that the funds invest in foreign securities, these securities may
be listed on foreign exchanges that trade on days when the funds do not price
their shares. As a result, the net asset value per share of the funds may change
at a time when shareholders are not able to purchase or redeem their shares.
Processing time
All purchase and redemption requests received in good order at the funds'
transfer agent by the close of regular trading on the New York Stock Exchange
are executed at the net asset value calculated at the close of trading that day.
All other requests that are in good order will be executed the following
business day.
Signature guarantees
A signature guarantee is required when you sell more than $100,000 worth of
shares. You can obtain a guarantee from most brokerage houses and financial
institutions, although not from a notary public. Each fund will normally send
redemption proceeds within one business day following the redemption request,
but may take up to seven business days (or longer in the case of shares recently
purchased by check). For more information, please call 1-800-225-5163.
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
funds and Scudder Investor Services, Inc. each reserves the right to reject
purchases of fund shares (including exchanges) for any reason, including when
there is evidence of a pattern of frequent purchases and sales made in response
to short-term fluctuations in a fund's share price.
24
<PAGE>
Minimum balances
Generally, shareholders who maintain a non-fiduciary account balance of less
than $2,500 in each fund and have not established an automatic investment plan
will be assessed an annual $10.00 per fund charge; this fee is paid to each
fund. Each fund reserves the right, following 60 days written notice to
shareholders, to redeem all shares in accounts that have a value below $1,000
where such a reduction in value has occurred due to a redemption, exchange or
transfer out of the account.
Third party transactions
If you buy and sell shares of the funds through a member of the National
Association of Securities Dealers, Inc. (other than Scudder Investor Services,
Inc.), that member may charge a fee for that service.
Other policies
Each fund reserves the right to redeem in kind. That is it may honor redemption
requests with readily marketable fund securities instead of cash. There may be
transaction costs associated with converting these securities to cash.
Buying and selling shares
Please refer to the following charts for information on how to buy and sell fund
shares. Additional information, including special investment features, may be
found in the Shareholder Services Guide. For information about No-Fee IRAs, Roth
IRAs and other retirement options, call Scudder Investor Relations at
1-800-225-2470. For information on establishing 401(k) and 403(b) plans, call
Scudder Defined Contribution Services at 1-800-323-6105.
25
<PAGE>
Purchases
To open an account
The minimum initial investment is $2,500; $1,000 for IRAs. Group retirement
plans (401(k), 403(b), etc.) have similar or lower minimums -- see appropriate
plan literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send your completed and signed application and check
by regular mail to: The Scudder Funds
P.O. Box 2291
Boston, MA 02107-2291
or by express, The Scudder Funds
registered, or certified 66 Brooks Drive
mail to: Braintree, MA 02184
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to complete your
application with the help of a Scudder representative.
Investor Centers are located in Boca Raton, Boston, Chicago,
New York and San Francisco.
- --------------------------------------------------------------------------------
To buy additional shares
The minimum additional investment is $100; $50 for IRAs. Group retirement plans
(401(k), 403(b), etc.) have similar or lower minimums -- see appropriate plan
literature. Make checks payable to "The Scudder Funds."
- --------------------------------------------------------------------------------
By Mail Send a check with a Scudder investment slip, or with a
letter of instruction including your account number and the
complete fund name, to the appropriate address listed above.
- --------------------------------------------------------------------------------
By Wire Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
In Person Visit one of our Investor Centers to make an additional
investment in your Scudder fund account. Investor Center
locations are listed above.
- --------------------------------------------------------------------------------
By Telephone Call 1-800-225-5163 for instructions.
- --------------------------------------------------------------------------------
By Automatic You may arrange to make investments of $50 or more on a
Investment Plan regular basis through automatic deductions from your bank
checking account. Please call 1-800-225-5163 for more
information and an enrollment form.
- --------------------------------------------------------------------------------
26
<PAGE>
Exchanges and redemptions
To exchange shares
The minimum investments are $2,500 to establish a new account and $100 to
exchange among existing accounts.
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163
Telephone from 8 a.m. to 8 p.m. eastern time. To access SAIL(TM), the
Scudder Automated Information Line, call 1-800-343-2890
(24 hours a day).
- --------------------------------------------------------------------------------
By Mail Print or type your instructions and include:
or Fax - the name of the fund and class and the account number
you are exchanging from;
- your name(s) and address as they appear on your
account;
- the dollar amount or number of shares you wish to
exchange;
- the name of the fund and class you are exchanging into;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
Send your instructions The Scudder Funds
by regular mail to: P.O. Box 2291
Boston, MA 02107-2291
or by express, registered, The Scudder Funds
or certified mail to: 66 Brooks Drive
Braintree, MA 02184
or by fax to: 1-800-821-6234
- --------------------------------------------------------------------------------
To sell shares
- --------------------------------------------------------------------------------
By To speak with a service representative, call 1-800-225-5163 from 8
Telephone a.m. to 8 p.m. eastern time. To access SAIL(TM), the Scudder
Automated Information Line, call 1-800-343-2890 (24 hours a day).
You may have redemption proceeds sent to your predesignated bank
account, or redemption proceeds of up to $100,000 sent to your
address of record.
- --------------------------------------------------------------------------------
By Mail Send your instructions for redemption to the appropriate address
or Fax or fax number above and include:
- the name of the fund and class and account number you are
redeeming from;
- your name(s) and address as they appear on your account;
- the dollar amount or number of shares you wish to redeem;
- your signature(s) as it appears on your account; and
- a daytime telephone number.
- --------------------------------------------------------------------------------
By You may arrange to receive automatic cash payments periodically.
Automatic Call 1-800-225-5163 for more information and an enrollment form.
Withdrawal
Plan
- --------------------------------------------------------------------------------
27
<PAGE>
Investment products and services
The Scudder Family of Funds[
- --------------------------------------------------------------------------------
Money Market
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market
Series -- Managed Shares*
Tax Free Money Market+
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series --
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small Company Fund
28
<PAGE>
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs Education Accounts
- ------------------- ------------------
Traditional IRA Education IRA
Roth IRA UGMA/UTMA
SEP-IRA
Keogh Plan
401(k), 403(b) Plans
Variable Annuities
Scudder Horizon Plan**[[
Scudder Horizon Advantage**[[[
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc. Scudder Global High Income Fund, Inc.
The Brazil Fund, Inc. Scudder New Asia Fund, Inc.
The Korea Fund, Inc. Scudder New Europe Fund, Inc.
Montgomery Street Income
Securities, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money.
- -----------
[ Funds within categories are listed in order from expected least risk to
most risk. Certain Scudder funds or classes thereof may not be available
for purchase or exchange.
+ A portion of the income from the tax-free funds may be subject to federal,
state, and local taxes.
* A class of shares of the fund.
** Not available in all states.
*** Only the Scudder Shares of the fund are part of the Scudder Family of
Funds.
++ Only the International Shares of the fund are part of the Scudder Family
of Funds.
[[ A no-load variable annuity contract provided by Charter National Life
Insurance Company and its affiliate, offered by Scudder's insurance
agencies, 1-800-225-2470.
[[[ A no-load variable annuity contract issued by Glenbrook Life and Annuity
Company and underwritten by Allstate Financial Services, Inc., sold by
Scudder's insurance agencies, 1-800-225-2470.
# These funds, advised by Scudder Kemper Investments, Inc., are traded on
the New York Stock Exchange and, in some cases, on various other stock
exchanges.
29
<PAGE>
Additional information about each fund may be found in the Statement of
Additional Information, the Shareholder Services Guide and in shareholder
reports. Shareholder inquiries may be made by calling the toll-free number
listed below. The Statement of Additional Information contains more information
on fund investments and operations. The Shareholder Services Guide contains more
information about purchases and sales of fund shares. The semiannual and annual
shareholder reports contain a discussion of the market conditions and the
investment strategies that significantly affected a fund's performance during
the last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other fund documents may be obtained without charge from
the following sources:
- --------------------------------------------------------------------------------
By Telephone Call Scudder Investor Relations at 1-800-225-2470
Or
For existing Scudder investors, call the Scudder Automated
Information Line (SAIL) at 1-800-343-2890 (24 hours a day).
- --------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
Or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-4670
[PRINTED WITH SOY INK LOGO] [RECYCLE LOGO] Printed on recycled paper
GI-2-39
PR0018399
<PAGE>
SCUDDER GLOBAL BOND FUND
A series of Global/International Fund, Inc.
A Non-Diversified Mutual Fund Series
which Seeks Total Return with an Emphasis on Current Income
by Investing Principally in High-Grade Bonds Denominated
in Foreign Currencies and the U.S. Dollar
and, Secondarily, Capital Appreciation
and
SCUDDER INTERNATIONAL BOND FUND
A series of Global/International Fund, Inc.
A Non-Diversified Mutual Fund Series which Seeks Income
Primarily by Investing in High-Grade International Bonds.
As a Secondary Objective, the Fund
Seeks Protection and Possible Enhancement of Principal
Value by Actively Managing Currency, Bond Market and
Maturity Exposure and by Security Selection.
and
SCUDDER EMERGING MARKETS INCOME FUND
A series of Global/International Fund, Inc.
A Non-Diversified Mutual Fund Series which Seeks
High Current Income and, Secondarily,
Long-Term Capital Appreciation through Investment
Primarily in High-Yielding Debt Securities
Issued in Emerging Markets
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the combined prospectus of Scudder Global
Bond Fund, Scudder International Bond Fund and Scudder Emerging Markets Income
Fund dated March 1, 1999, as amended from time to time, copies of which may be
obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
Each Annual Report to Shareholders for Scudder Global Bond Fund,
Scudder International Bond Fund and Scudder Emerging Markets Income Fund, each
dated October 31, 1998, is incorporated by reference and is hereby deemed to be
part of this Statement of Additional Information.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
THE FUNDS'INVESTMENT OBJECTIVES AND POLICIES..........................................................................1
General Investment Objective and Policies of Global Bond Fund................................................1
General Investment Objectives and Policies of International Bond Fund........................................2
General Investment Objectives and Policies of Scudder Emerging Markets Income Fund...........................2
Master/feeder structure......................................................................................4
Special Investment Considerations of the Funds...............................................................4
Investments and Investment Techniques........................................................................5
Special Investment Considerations of Scudder Emerging Markets Income Fund...................................12
Investment Restrictions.....................................................................................29
PURCHASES............................................................................................................31
Additional Information About Opening An Account.............................................................31
Minimum balances............................................................................................31
Additional Information About Making Subsequent Investments by Telephone Order...............................31
Additional Information About Making Subsequent Investments by QuickBuy......................................32
Checks......................................................................................................32
Wire Transfer of Federal Funds..............................................................................32
Share Price.................................................................................................33
Share Certificates..........................................................................................33
Other Information...........................................................................................33
EXCHANGES AND REDEMPTIONS............................................................................................33
Exchanges...................................................................................................33
Redemption by Telephone.....................................................................................34
Redemption by QuickSell.....................................................................................35
Redemption by Mail or Fax...................................................................................35
Redemption-in-Kind..........................................................................................36
Other Information...........................................................................................36
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................37
The No- LoadConcept........................................................................................37
Internet access.............................................................................................37
Dividends and Capital Gains Distribution Options............................................................38
Scudder Investor Centers....................................................................................39
Reports to Shareholders.....................................................................................39
Transaction Summaries.......................................................................................39
THE SCUDDER FAMILY OF FUNDS..........................................................................................39
SPECIAL PLAN ACCOUNTS................................................................................................44
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations and
Self-Employed Individuals..............................................................................44
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........44
Scudder IRA: Individual Retirement Account.................................................................45
Scudder Roth IRA: Individual Retirement Account............................................................45
Scudder 403(b) Plan.........................................................................................46
Automatic Withdrawal Plan...................................................................................46
Group or Salary Deduction Plan..............................................................................46
Automatic Investment Plan...................................................................................47
Uniform Transfers/Gifts to Minors Act.......................................................................47
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................47
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
PERFORMANCE INFORMATION..............................................................................................48
Average Annual Total Return.................................................................................48
Cumulative Total Return.....................................................................................49
Total Return................................................................................................49
Yield of International Bond Fund............................................................................49
Comparison of Fund Performance..............................................................................50
Taking a Global Approach....................................................................................53
ORGANIZATION OF THE FUNDS............................................................................................54
INVESTMENT ADVISER...................................................................................................55
Personal Investments by Employees of the Adviser............................................................58
DIRECTORS AND OFFICERS...............................................................................................58
REMUNERATION.........................................................................................................61
Responsibilities of the Board --Board and Committee Meetings................................................61
Compensation of Officers and Directors......................................................................61
DISTRIBUTOR..........................................................................................................62
TAXES................................................................................................................63
PORTFOLIO TRANSACTIONS...............................................................................................67
Brokerage Commissions.......................................................................................67
Portfolio Turnover..........................................................................................68
NET ASSET VALUE......................................................................................................68
ADDITIONAL INFORMATION...............................................................................................69
Experts.....................................................................................................69
Other Information...........................................................................................69
FINANCIAL STATEMENTS.................................................................................................71
Global Bond Fund............................................................................................71
International Bond Fund.....................................................................................71
Emerging Markets Income Fund................................................................................71
APPENDIX
</TABLE>
ii
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
(See FUND DESCRIPTION in the Funds' combined prospectus.)
On May 28, 1998, the name "Scudder Global Fund, Inc." was changed to
"Global/International Fund, Inc." Global/International Fund, Inc., a Maryland
corporation of which Scudder Global Bond Fund ("Global Bond Fund"), Scudder
International Bond Fund ("International Bond Fund") and Scudder Emerging Markets
Income Fund ("Emerging Markets Income Fund") are no-load, non-diversified
series, is referred to herein as the "Corporation." These series sometimes are
jointly referred to herein as the "Funds." The Corporation is an open-end,
management investment company, which continuously offers and redeems its shares.
The Corporation is a company of the type commonly known as a mutual fund.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a Fund may engage (such as
short selling, hedging, etc.) or a financial instrument which a Fund may
purchase (such as options, forward foreign currency contracts, etc.) are meant
to describe the spectrum of investments that Scudder Kemper Investments, Inc.
(the "Adviser"), in its discretion, might, but is not required to, use in
managing each Fund's portfolio assets. The Adviser may, in its discretion, at
any time employ such practice, technique or instrument for one or more funds but
not for all funds advised by it. Furthermore, it is possible that certain types
of financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques, or instruments may not
be principal activities of a Fund but, to the extent employed, could from time
to time have a material impact on the Fund's performance.
Except as otherwise indicated, each Fund's objectives and policies are
not fundamental and may be changed without a shareholder vote. There can be no
assurance that a Fund will achieve its objectives.
Changes in portfolio securities are made on the basis of investment
considerations, and it is against the policy of management to make changes for
trading purposes.
General Investment Objective and Policies of Global Bond Fund
Global Bond Fund may provide investors with a convenient way to invest
in a managed portfolio of debt securities denominated in foreign currencies and
the U.S. dollar. The Fund's objective is to provide total return with an
emphasis on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary objective,
the Fund will seek capital appreciation.
To achieve its objectives, the Fund will invest principally in a
managed portfolio of high-grade intermediate- and long-term bonds denominated in
the U.S. dollar and foreign currencies, including bonds denominated in the
European Currency Unit (ECU). (Intermediate-term bonds generally have maturities
between three and eight years and long-term bonds generally have maturities of
greater than eight years.) Portfolio investments will be selected on the basis
of, among other things, yields, credit quality, and the fundamental outlooks for
currency and interest rate trends in different parts of the globe, taking into
account the ability to hedge a degree of currency or local bond price risk.
At least 65% of the Fund's total assets will consist of high-grade debt
securities, which are those rated in one of the three highest rating categories
of one of the major U.S. rating services or, if unrated, considered to be of
equivalent quality in local currency terms as determined by the Adviser. These
securities are rated AAA, AA or A by Standard & Poor's Corporation ("S&P") or
Aaa, Aa, or A by Moody's Investor Services, Inc. ("Moody's").
The Fund may also invest up to 15% of its net assets in debt securities
rated BBB by S&P or Baa by Moody's and lower, or unrated securities considered
to be of equivalent quality by the Adviser. The Fund will not invest in any
securities rated B or lower. (See "Specialized Investment Techniques of the
Funds.")
The Fund's investments may include:
<PAGE>
o Debt securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities
o Debt securities issued or guaranteed by a foreign national
government, its agencies, instrumentalities or political
subdivisions
o Debt securities issued or guaranteed by supranational
organizations (e.g., European Investment Bank, Inter-American
Development Bank or the World Bank)
o Corporate debt securities
o Bank or bank holding company debt securities
o Other debt securities, including those convertible into common
stock
The Fund may invest in zero coupon securities, indexed securities,
mortgage and asset-backed securities and may engage in strategic transactions.
The Fund may purchase securities which are not publicly offered. If such
securities are purchased, they may be subject to restrictions which may make
them illiquid. See "Investment Restrictions."
The Fund intends to select its investments from a number of country and
market sectors. It may invest substantially in the issuers of one or more
countries and will have investments in debt securities of issuers from a minimum
of three different countries.
Under normal conditions, the Fund will invest at least 15% of its total
assets in U.S. dollar-denominated securities, issued domestically or abroad. For
temporary defensive or emergency purposes, however, the Fund may invest without
limit in U.S. debt securities, including short-term money market securities. It
is impossible to predict for how long such alternative strategies will be
utilized.
General Investment Objectives and Policies of International Bond Fund
International Bond Fund may offer investors a convenient way to invest
in a managed portfolio of debt securities denominated in foreign currencies
("international securities"). The Fund's objective is to provide income
primarily by investing in a managed portfolio of high-grade international bonds.
As a secondary objective, the Fund seeks protection and possible enhancement of
principal value by actively managing currency, bond market and maturity exposure
and by security selection. To achieve its objectives, the Fund will primarily
invest in international bonds that are denominated in foreign currencies,
including bonds denominated in the European Currency Unit (ECU). The Fund's
investments may include debt securities issued or guaranteed by a foreign
national government, its agencies, instrumentalities or political subdivisions,
debt securities issued or guaranteed by supranational organizations, corporate
debt securities, bank or bank holding company debt securities and other debt
securities including those convertible into common stock. In addition, for
temporary defensive purposes, the Fund may vary from its investment policies
during periods when the Adviser determines that it is advisable to do so because
of conditions in the securities markets or other economic or political
conditions. During such periods, the Fund may hold without limit cash and cash
equivalents. It is impossible to accurately predict for how long such
alternative strategies may be utilized. The Fund will invest no more than 15% of
its total assets in debt securities that are rated below BBB by S&P or below Baa
by Moody's, but rated no lower than B by S&P or Moody's, respectively. (See
"Risk factors" in the Fund's prospectus.) The Fund may also invest in zero
coupon securities that pay no cash income and are issued 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.
General Investment Objectives and Policies of Scudder Emerging Markets Income
Fund
Emerging Markets Income Fund's primary investment objective is to
provide investors with high current income. As a secondary objective, the Fund
seeks long-term capital appreciation. In pursuing these goals, the Fund invests
primarily in high-yielding debt securities issued by governments and
corporations in emerging markets. Many nations in developing regions of the
world have undertaken sweeping political and economic changes that favor
increased business activity and demand for capital. In the opinion of the
Adviser, these changes present attractive investment opportunities, both in
terms of income and appreciation potential, for long-term investors.
The Fund involves above-average bond fund risk and can invest entirely
in high yield/high risk bonds. It is designed as a long-term investment and not
for short-term trading purposes, and should not be considered a complete
investment program. While designed to provide a high level of current income,
the Fund may not be appropriate for all income investors. The Fund should not be
viewed as a substitute for a money market or short-term bond fund. The Fund
invests in lower quality securities of emerging market issuers, some of which
have in the past defaulted on certain
2
<PAGE>
of their financial obligations. Investments in emerging markets can be volatile.
The Fund's share price and yield can fluctuate daily in response to political
events, changes in the perceived creditworthiness of emerging nations,
fluctuations in interest rates and, to a certain extent, movements in foreign
currencies. The securities in which the Fund may invest are further described
below .
In seeking high current income and, secondarily, long-term capital
appreciation, the Fund invests, under normal market conditions, at least 65% of
its total assets in debt securities issued by governments, government-related
entities and corporations in emerging markets, or the return on which is derived
primarily from emerging markets. The Fund considers "emerging markets" to
include any country that is defined as an emerging or developing economy by any
one of the following: the International Bank for Reconstruction and Development
(i.e., the World Bank), the International Finance Corporation or the United
Nations or its authorities.
While the Fund takes a global approach to portfolio management, the
Adviser currently weights its investments toward countries in Latin America,
specifically Argentina, Brazil, Mexico and Venezuela. Latin America, and these
four countries in particular, offers the largest and most liquid debt markets of
the emerging nations around the globe in the past few years. In addition to
Latin America, the Adviser may pursue investment opportunities in Asia, Africa,
the Middle East and the developing countries of Europe, primarily in Eastern
Europe. The Fund deems an issuer to be located in an emerging market if (i) the
issuer is organized under the laws of an emerging market country; (ii) the
issuer's principal securities trading market is in an emerging market; or (iii)
at least 50% of the issuer's non-current assets, capitalization, gross revenue
or profit in any one of the two most recent fiscal years is derived from
(directly or indirectly from subsidiaries) assets or activities located in
emerging markets.
Although the Fund may invest in a wide variety of high-yielding debt
obligations, under normal conditions it must invest at least 50% of its assets
in sovereign debt securities issued or guaranteed by governments,
government-related entities and central banks based in emerging markets
(including participations in and assignments of portions of loans between
governments and financial institutions); government owned, controlled or
sponsored entities located in emerging markets; entities organized and operated
for the purpose of restructuring investment characteristics of instruments
issued by government or government-related entities in emerging markets; and
debt obligations issued by supranational organizations such as the Asian
Development Bank and the Inter-American Development Bank, among others.
The Fund may also consider for purchase any debt securities issued by
commercial banks and companies in emerging markets. The Fund may invest in both
fixed- and floating-rate issues. Debt instruments held by the Fund take the form
of bonds, notes, bills, debentures, convertible securities, warrants, bank
obligations, short-term paper, loan participations, loan assignments and trust
interests. The Fund may invest regularly in "Brady Bonds," which are debt
securities issued under the framework of the Brady Plan as a mechanism for
debtor countries to restructure their outstanding bank loans. Most "Brady Bonds"
have their principal collateralized by zero coupon U.S. Treasury bonds.
To reduce currency risk, the Fund invests at least 65% of its assets in
U.S. dollar-denominated debt securities. Therefore, no more than 35% of the
Fund's total assets may be invested in debt securities denominated in foreign
currencies.
The Fund is not restricted by limits on weighted average portfolio
maturity or the maturity of an individual issue. The weighted average maturity
of the Fund's portfolio is actively managed and may vary from period to period
based upon the Adviser's assessment of economic and market conditions, taking
into account the Fund's investment objectives.
In addition to maturity, the Fund's investments are actively managed in
terms of geographic, industry and currency allocation. In managing the Fund's
portfolio, the Adviser takes into account such factors as the credit quality of
issuers, changes in and levels of interest rates, projected economic growth
rates, capital flows, debt levels, trends in inflation, anticipated movements in
foreign currencies, and government initiatives.
While the Fund is not "diversified" for purposes of the Investment
Company Act of 1940 (the "1940 Act"), it intends to invest in a minimum of three
countries at any one time and will not commit more than 40% of its total assets
to issuers in a single country.
By focusing on fixed-income instruments issued in emerging markets, the
Fund invests predominantly in debt securities that are rated below
investment-grade, or unrated but equivalent to those rated below
investment-grade by internationally recognized rating agencies such as S&P or
Moody's. Debt securities rated below BBB by S&P or below
3
<PAGE>
Baa by Moody's are considered to be below investment-grade. These types of high
yield/high risk debt obligations (commonly referred to as "junk bonds") are
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with their terms and generally involve a greater risk of
default and more volatility in price than securities in higher rating
categories, such as investment-grade U.S. bonds. On occasion, the Fund may
invest up to 5% of its net assets in non-performing securities whose quality is
comparable to securities rated as low as D by S&P or C by Moody's. A large
portion of the Fund's bond holdings may trade at substantial discounts from face
value.
The Fund may invest up to 35% of its total assets in securities other
than debt obligations issued in emerging markets. These holdings include debt
securities and money market instruments issued by corporations and governments
based in developed markets including up to 20% of total assets in U.S.
fixed-income instruments. However, for temporary, defensive or emergency
purposes, the Fund may invest without limit in U.S. debt securities, including
short-term money market securities. It is impossible to predict for how long
such alternative strategies will be utilized. In addition, the Fund may engage
in strategic transactions for hedging purposes and to enhance potential gain.
The Fund may also acquire shares of closed-end investment companies that invest
primarily in emerging market debt securities. To the extent the Fund invests in
such closed-end investment companies, shareholders will incur certain
duplicative fees and expenses, including investment advisory fees.
Master/feeder structure
The Board of Directors has the discretion to retain the current
distribution arrangement for each Fund while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Special Investment Considerations of the Funds
The Funds are intended to provide individual and institutional
investors with an opportunity to invest a portion of their assets in globally
and/or internationally oriented portfolios, according to the Funds' respective
objectives and policies, and are designed for long-term investors who can accept
international investment risk. Management of the Funds believes that allocation
of assets on a global or 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 the period since World War II, many leading foreign
economies have grown more rapidly than the U.S. economy, thus providing
investment opportunities; although there can be no assurance that this will be
true in the future. As with any long-term investment, the value of the Funds'
shares when sold may be higher or lower than when purchased.
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 Funds' performances. As foreign companies
are not generally subject to uniform standards, practices and requirements, with
respect to accounting, auditing and financial reporting, as are 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 a Fund are
uninvested and no return is earned thereon. The inability of a 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 a 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. Fixed commissions on some foreign securities
exchanges and bid to asked spreads in foreign bond markets
4
<PAGE>
are generally higher than negotiated commissions on U.S. exchanges and bid to
asked spreads in the U.S. bond market, although the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions. Further,
the Funds may encounter difficulties or be unable to pursue legal remedies and
obtain judgments in foreign courts. There is generally less governmental
supervision and regulation of business and industry practices, securities
exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Funds' agents to keep currently informed about corporate
actions such as stock dividends or other matters 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. Payment for securities without delivery may be required in certain
foreign markets. In addition, with respect to certain foreign countries, there
is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments, which could affect U.S.
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. The management of the Funds seeks to mitigate the risks
associated with the foregoing considerations through continuous professional
management.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance may be greater in these countries than in developed
countries. Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
Investments in foreign securities usually will involve currencies of
foreign countries. Because of the considerations discussed above, the value of
the assets of the Funds 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 Funds may incur costs in connection with conversions
between various currencies. Although the Funds value their assets daily in terms
of U.S. dollars, they do not intend to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. They 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 a Fund at one rate, while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer. The
Funds will conduct their 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 strategic transactions involving currencies
(see "Strategic Transactions and Derivatives").
Because the Funds may be invested in both U.S. and foreign securities
markets, changes in a Fund's share price may have a low correlation with
movements in the U.S. markets. Each 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
each Fund's investment performance. Foreign securities such as those purchased
by a Fund may be subject to foreign governmental taxes which could reduce the
yield on such securities, although a shareholder of the Fund may, subject to
certain limitations, be entitled to claim a credit or deduction for U.S. federal
income tax purposes for his or her proportionate share of such foreign taxes
paid by the Fund (see "TAXES"). 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. The Funds invest in many securities markets
around the world in an attempt to take advantage of opportunities wherever they
may arise.
Because of the Funds' investment considerations discussed above and the
investment policies, investment in shares of a Fund is not intended to provide a
complete investment program for an investor.
Neither Fund can guarantee a gain or eliminate the risk of loss. The
net asset value of each Fund's shares will increase or decrease with changes in
the market price of the Fund's investments, and there is no assurance that each
Fund's objectives will be achieved.
Investments and Investment Techniques
Foreign Securities. Each Fund is designed for investors who can accept currency
and other forms of international investment risk. The Adviser believes that
allocation of each Fund's assets on a global basis decreases the degree to which
events in any one country, including the U.S., will affect an investor's entire
investment holdings. In the period since World War II, many leading foreign
economies have grown more rapidly than the U.S. economy and from time to
5
<PAGE>
time have had interest rate levels that had a higher real return than the U.S.
bond market. Consequently, the securities of foreign issuers have provided
attractive returns relative to the returns provided by the securities of U.S.
issuers, 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
affect a Fund's performance favorably or unfavorably. 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 stock markets, while growing
in volume of trading activity, have substantially less volume than that of the
New York Stock Exchange, Inc. (the "Exchange"), 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 that
in the U.S. market 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 a Fund are uninvested and no return is earned thereon.
The inability of a 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 a Fund due to subsequent declines in value of the
portfolio security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although the Adviser will endeavor to achieve the
most favorable net results on each Fund's portfolio transactions. Further, a
Fund may encounter difficulties or be unable to pursue legal remedies and obtain
judgment in foreign courts. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers and
listed companies than in the U.S. It may be more difficult for a Fund's agents
to keep currently informed about corporate actions such as stock dividends or
other matters that 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 confiscatory or withholding taxation,
political, social or economic instability, or diplomatic developments that could
affect U.S. 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. The Adviser seeks to mitigate the risks to each Fund
associated with the foregoing considerations through investment variation and
continuous professional management.
For Emerging Markets Income Fund, these considerations generally are
more of a concern in developing countries. For example, the possibility of
revolution and the dependence on foreign economic assistance may be greater in
these countries than in developed countries. The Fund managers seek to mitigate
the risks associated with these considerations through active professional
management.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, a Fund could lose a substantial portion of any investments it has
made in the affected countries. Further, no accounting standards exist in East
European countries. Finally, even though certain East European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial to the
actual market values and may be adverse to a Fund's shareholders.
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<PAGE>
Foreign Currencies. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, a Fund may temporarily hold funds in
bank deposits in foreign currencies during the completion of investment programs
and may purchase forward foreign currency contracts, foreign currency futures
contracts and options on such contracts. Because of these factors, the value of
the assets of a 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 a Fund may incur costs in connection with conversions between
various currencies. Although the Funds' custodian values each Fund's assets
daily in terms of U.S. dollars, none of the Funds intends to convert its
holdings of foreign currencies into U.S. dollars on a daily basis. A Fund 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 a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. A Fund will conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or
futures contracts to purchase or sell foreign currencies.
Because a Fund normally will be invested in both U.S. and foreign
securities markets, changes in the Fund's share price may have a low correlation
with movements in the U.S. markets. A 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. The Funds invest in many securities markets
around the world in an attempt to take advantage of opportunities wherever they
may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the U.S.
Emerging markets also 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. Delays in
settlement could result in temporary periods when a portion of the assets of a
Fund is uninvested and no cash is earned thereon. The inability of a 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 could result either 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. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of a Fund. Certain emerging
markets require prior governmental approval of investments by foreign persons,
limit the amount of investment by foreign persons in a particular company, limit
the investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain emerging markets may also restrict investment
opportunities in issuers in industries deemed important to national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
In the course of investment in emerging market debt obligations, a Fund
will be exposed to the direct or indirect consequences of political, social and
economic changes in one or more emerging markets. Political changes in emerging
market countries may affect the willingness of an emerging market country
governmental issuer to make or provide for timely payments of its obligations.
The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
also affects its ability to honor its obligations. While the Fund manages its
assets in a manner that will seek to minimize the exposure to such risks, and
will further reduce risk by
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owning the bonds of many issuers, there can be no assurance that adverse
political, social or economic changes will not cause a Fund to suffer a loss of
value in respect of the securities in the Fund's portfolio.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for a Fund's securities in such
markets may not be readily available. The Corporation may suspend redemption of
its shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly if a Fund believes
that appropriate circumstances exist, it will promptly apply to the SEC for a
determination that an emergency is present. During the period commencing from a
Fund's identification of such condition until the date of the SEC action, the
Fund's securities in the affected markets will be valued at fair value
determined in good faith by or under the direction of the Corporation's Board of
Directors.
Volume and liquidity in most foreign bond markets are less than in the
U.S. and securities of many foreign companies are less liquid and more volatile
than securities of comparable U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of business and industry practices, securities
exchanges, brokers, dealers and listed companies than in the U.S. Mail service
between the U.S. and foreign countries may be slower or 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 emerging markets, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments, which could affect the Fund's investments in those countries.
Moreover, individual emerging market 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, and resource self-sufficiency
and balance of payments position. The chart below sets forth the risk ratings of
selected emerging market countries' sovereign debt securities.
<TABLE>
<CAPTION>
Sovereign Risk Ratings for Selected Emerging Market Countries as of 12/31/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Investors Service Standard & Poor's Corporation
------- ------------------------- -----------------------------
<S> <C> <C>
Chile Baa1 A-
Turkey Ba3 B+
Mexico Ba2 BB
Czech Republic Baa1 A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B
Morocco NR NR
Argentina B1 BB-
Brazil B1 B+
Poland Baa3 BBB-
Ivory Coast NR NR
</TABLE>
A Fund may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by a Fund defaults, the Fund may incur additional expenses to
seek recovery. Debt obligations issued by emerging market country governments
differ from debt obligations of private entities; remedies from defaults on debt
obligations issued by emerging market governments, unlike those on private debt,
must be pursued in the courts of the defaulting party itself. A Fund's ability
to enforce its rights against private issuers may be limited. The ability to
attach assets to enforce a judgment may be limited. Legal recourse is therefore
somewhat diminished. Bankruptcy, moratorium and other similar laws applicable to
private issuers of debt obligations may be substantially different from those of
other countries. The political context, expressed as an emerging market
governmental issuer's willingness to meet the terms of the debt obligation, for
example, is of considerable importance. In addition, no assurance can be given
that the holders of commercial bank debt may not contest payments to the holders
of debt obligations in the event of default under commercial bank loan
agreements. With four exceptions, (Panama, Cuba, Costa Rica and Yugoslavia), no
sovereign emerging markets borrower has defaulted on an external bond issue
since World War II.
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<PAGE>
Income from securities held by a Fund could be reduced by a withholding
tax on the source or other taxes imposed by the emerging market countries in
which the Fund makes its investments. A Fund's net asset value may also be
affected by changes in the rates or methods of taxation applicable to the Fund
or to entities in which the Fund has invested. The Adviser will consider the
cost of any taxes in determining whether to acquire any particular investments,
but can provide no assurance that the taxes will not be subject to change.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in a Fund's
portfolio. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could adversely
affect a Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make
timely payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of emerging
markets to these forms of external funding may not be certain, and a withdrawal
of external funding could adversely affect the capacity of emerging market
country governmental issuers to make payments on their obligations. In addition,
the cost of servicing emerging market debt obligations can be affected by a
change in international interest rates since the majority of these obligations
carry interest rates that are adjusted periodically based upon international
rates.
Another factor bearing on the ability of emerging market countries to
repay debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, a Fund
could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
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<PAGE>
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
Each Fund may invest a portion of its assets in securities denominated
in currencies of Latin American countries. Accordingly, changes in the value of
these currencies against the U.S. dollar may result in corresponding changes in
the U.S. dollar value of the Fund's assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which a Fund's portfolio securities are denominated may have a
detrimental impact on the Fund's net asset value.
The economies of individual Latin American countries may differ
favorably or unfavorably from the U.S. economy in such respects as the rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Certain Latin
American countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to a Fund
at a higher rate than those imposed by other foreign countries. This may reduce
a Fund's investment income available for distribution to shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico
are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region has a large population (roughly 300 million) representing a large
domestic market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in gross domestic product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions, and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect a Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
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, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and,
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<PAGE>
accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in
which each Fund may participate, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country or the Fund's investment in the debt of that
country.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.
Investing in Europe. Most Eastern European nations, including Hungary, Poland,
Czech Republic, Slovak Republic, and Romania have had centrally planned,
socialist economies since shortly after World War II. A number of their
governments, including those of Hungary, the Czech Republic, and Poland are
currently implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning, and move toward free market economies. At
present, no Eastern European country has a developed stock market, but Poland,
Hungary, and the Czech Republic have small securities markets in operation.
Ethnic and civil conflict currently rage through the former Yugoslavia. The
outcome is uncertain.
Both the European Community (the "EC") and Japan, among others, have
made overtures to establish trading arrangements and assist in the economic
development of the Eastern European nations. A great deal of interest also
surrounds opportunities created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable member of the EC and numerous other international alliances and
organizations. To reduce inflation caused by the unification of East and West
Germany, Germany has adopted a tight monetary policy which has led to weakened
exports and a reduced domestic demand for goods and services. However, in the
long-term, reunification could prove to be an engine for domestic and
international growth.
The conditions that have given rise to these developments are
changeable, and there is no assurance that reforms will continue or that their
goals will be achieved.
Portugal is a genuinely emerging market which has experienced rapid
growth since the mid-1980s, except for a brief period of stagnation over
1990-91. Portugal's government remains committed to privatization of the
financial system away from one dependent upon the banking system to a more
balanced structure appropriate for the requirements of a modern economy.
Inflation continues to be about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in
the 1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may
be subject to risks due to the inexperience of financial intermediaries, the
lack of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Fund's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated.
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<PAGE>
Finally, any change in leadership or policies of Eastern European countries, or
countries that exercise a significant influence over those countries, may halt
the expansion of or reverse the liberalization of foreign investment policies
now occurring and adversely affect existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, general decline in oil prices has had an adverse impact on many
economies.
Special Investment Considerations of Scudder Emerging Markets Income Fund
Brady Bonds. Emerging Markets Income Fund may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Argentina,
Bulgaria, Brazil, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico,
Morocco, Nigeria, the Philippines, Poland, and Uruguay.
Brady Bonds have been issued only recently, and for that reason do not
have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets.
Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on many Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds, with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative.
Sovereign Debt. Emerging Markets Income Fund may invest in sovereign debt which
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
towards 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
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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
(including the Fund) 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.
Loan Participations and Assignments. Emerging Markets Income Fund may invest in
fixed- and floating-rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt instruments and one or more financial
institutions ("Lenders"). The Fund's investments in Loans are expected in most
instances to be in the form of participations in Loans ("Participations") and
assignments of portions of Loans ("Assignments") from third parties.
Participations typically will result in the Fund having a contractual
relationship only with the Lender and not with the borrower. The Fund will have
the right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the Loan, nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the Loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy.
When the Fund purchases Assignments from Lenders, it will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and may be more limited than, those
held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and
Participations. Because no liquid market for these obligations typically exists,
the Fund anticipates that these obligations could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market will
have an adverse effect on the Fund's ability to dispose of particular
Assignments or Participations when necessary to meet the Fund's liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations may also make it more difficult for the Fund to
assign a value to those securities for purposes of valuing the Fund's portfolio
and calculating its net asset value.
Debt Securities. Each fund may invest in debt securities if the Adviser
determines that the capital appreciation on debt securities is likely to exceed
that of common stocks. Portfolio debt investments will be selected on the basis
of capital appreciation potential, by evaluating, among other things, potential
yield, if any, credit quality, and the fundamental outlooks for currency and
interest rate trends in different parts of the world, taking into account the
ability to hedge a degree of currency or local bond price risk. The Funds may
purchase "investment-grade" bonds, which are those rated Aaa, Aa, A or Baa by
Moody's or AAA, AA, A or BBB by 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. Below
investment-grade securities, are those rated below Baa by Moody's or below BBB
by S&P and in unrated securities of equivalent quality. Global Bond Fund may
invest up to 15% of its net assets in securities rated below BBB or below Baa,
but may not invest in securities rated B or lower by Moody's and S&P or in
equivalent unrated securities. International Bond Fund may invest up to 15% of
its total assets in securities rated below BBB or below Baa, but may not invest
in securities rated lower than B by Moody's and S&P or in equivalent unrated
securities.
Emerging Markets Income Fund may also invest in securities rated lower
than Baa/BBB and in unrated securities judged to be of equivalent quality as
determined by the Adviser. The Fund may invest in debt securities which are
rated as low as C by Moody's or D by S&P. Such securities may be in default with
respect to payment of principal or interest.
The Adviser expects that a significant portion of Emerging Markets
Income Fund's investments will be purchased at a discount to par value. To the
extent developments in emerging markets result in improving credit fundamentals
and rating upgrades for countries in emerging markets, the Adviser believes that
there is the potential for capital appreciation as the improving fundamentals
become reflected in the price of the debt instruments. The Adviser
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also believes that a country's sovereign credit rating (with respect to foreign
currency denominated issues) acts as a "ceiling" on the rating of all debt
issuers from that country. Thus, the ratings of private sector companies cannot
be higher than that of their home countries. The Adviser believes, however, that
many companies in emerging market countries, if rated on a stand alone basis
without regard to the rating of the home country, possess fundamentals that
could justify a higher credit rating, particularly if they are major exporters
and receive the bulk of their revenues in U.S. dollars or other hard currencies.
The Adviser seeks to identify such opportunities and benefit from this type of
market inefficiency.
High Yield, High Risk Securities. Below investment grade securities (rated below
Baa by Moody's and below BBB by S&P and commonly referred to as "high yield" or
"junk" bonds) or unrated securities of equivalent quality in the Adviser's
judgment, carry a high degree of risk (including the possibility of default or
bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of principal and income, and may be less liquid,
than securities in the higher rating categories and are considered speculative.
The lower the ratings of such debt securities, the greater their risks render
them like equity securities. Global Bond Fund and International Bond Fund may
invest up to 15% of its net assets and Emerging Markets Income Fund may invest
up to 100% of its net assets See the Appendix to this Statement of Additional
Information for a more complete description of the ratings assigned by ratings
organizations and their respective characteristics.
An economic downturn could disrupt the high-yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have a greater adverse impact on the value of such
obligations than on higher quality debt securities. During an economic downturn
or period of rising interest rates, highly leveraged issues may experience
financial stress which could adversely affect their ability to service their
principal and interest payment obligations. Prices and yields of high-yield
securities will fluctuate over time and, during periods of economic uncertainty,
volatility of high-yield securities may adversely affect a Fund's net asset
value. In addition, investments in high-yield zero coupon or pay-in-kind bonds,
rather than income-bearing high-yield securities, may be more speculative and
may be subject to greater fluctuations in value due to changes in interest
rates.
The trading market for high-yield securities may be thin to the extent
that there is no established retail secondary market. A thin trading market may
limit the ability of a Fund to accurately value high-yield securities in its
portfolio and to dispose of those securities. Adverse publicity and investor
perceptions may decrease the values and liquidity of high-yield securities.
These securities may also involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties.
Credit quality in the high-yield securities market can change suddenly
and unexpectedly, and even recently issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of the Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, recent legislation restricts the issuer's tax deduction for
interest payments on these securities. Such legislation may significantly
depress the prices of outstanding securities of this type. For more information
regarding tax issues related to high-yield securities (see "TAXES").
Convertible Securities. Each Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other 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. Each Fund
each limits its purchases of convertible securities to debt securities
convertible into common stock.
The convertible securities in which a Fund may invest are either 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
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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
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.
Illiquid Securities. Each Fund may 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" or "not readily marketable," i.e.,
securities 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 Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of a Fund. It is each Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Funds' net assets. The Corporation's Board of Directors has approved guidelines
for use by the Adviser in determining whether a security is illiquid. Only
Emerging Markets Income Fund has adopted 144A procedures.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) 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 (iv) in a public offering for which a
registration statement is in effect under the 1933 Act. Issuers of restricted
securities may not be subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
If adverse market conditions were to develop during the period between a Fund's
decision to sell a restricted or illiquid security and the point at which the
Fund is permitted or able to sell such security, the Fund might obtain a price
less favorable than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted securities, a
Fund may be required to bear all or part of the registration expenses. A 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 is materially inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the
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Board of Directors. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Dollar Rolls. Global Bond Fund and International Bond Fund may enter into
"dollar roll" transactions, which consist of the sale by the Fund to a bank or
broker/dealer (the "counterparty") of GNMA certificates or other mortgage-backed
securities together with a commitment to purchase similar, but not identical,
securities at a future date, at the same price. The counterparty receives all
principal and interest payments, including prepayments, made on the security
while the counterparty is the holder. Each Fund receives a fee from the
counterparty as consideration for entering into the commitment to purchase.
Dollar rolls may be renewed over a period of several months with a different
repurchase price and a cash settlement made at each renewal without physical
delivery of securities. Moreover, the transaction may be preceded by a firm
commitment agreement pursuant to which the Fund agrees to buy a security on a
future date.
Global Bond Fund and International Bond Fund will not use such
transactions for leveraging purposes and, accordingly, will segregate cash or
liquid assets in an amount sufficient to meet its purchase obligations under the
transactions. Each Fund will also maintain asset coverage of at least 300% for
all outstanding firm commitments, dollar rolls and other borrowings.
Notwithstanding such safeguards, the Funds' overall investment exposure may be
increased by such transactions to the extent that each Fund bears a risk of loss
on the securities it is committed to purchase, as well as on the segregated
assets.
Dollar rolls are treated for purposes of the 1940 Act as borrowings of
each Fund because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Funds.
For example, while each Fund receives a fee as consideration for agreeing to
repurchase the security, each Fund forgoes the right to receive all principal
and interest payments while the counterparty holds the security. These payments
to the counterparty may exceed the fee received by the Funds, thereby
effectively charging each Fund interest on its borrowing. Further, although each
Fund can estimate the amount of expected principal prepayment over the term of
the dollar roll, a variation in the actual amount of prepayment could increase
or decrease the cost of the Funds' borrowing.
The entry into dollar rolls involves potential risks of loss which are
different from those of the securities underlying the transactions. For example,
if the counterparty becomes insolvent, the Funds' right to purchase from the
counterparty might be restricted. Additionally, the value of such securities may
change adversely before each Fund is able to purchase them. Similarly, each Fund
may be required to purchase securities in connection with a dollar roll at a
higher price than may otherwise be available on the open market. Since, as noted
above, the counterparty is required to deliver a similar, but not identical
security to each Fund, the security which each Fund is required to buy under the
dollar roll may be worth less than an identical security. Finally, there can be
no assurance that the Funds' use of the cash that it receives from a dollar roll
will provide a return that exceeds borrowing costs.
The Directors of the Corporation on behalf of Global Bond Fund and
International Bond Fund have adopted guidelines to ensure that those securities
received are substantially identical to those sold. To reduce the risk of
default, each Fund will engage in such transactions only with banks and
broker-dealers selected pursuant to such guidelines.
Repurchase Agreements. Each Fund may enter into repurchase agreements with
member banks of the Federal Reserve System, any foreign bank or with any
domestic or foreign 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 a
Fund may purchase. In addition, Global Bond Fund may enter into repurchase
agreements with any foreign bank or with any domestic or foreign 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 a Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., a 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 a Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to a Fund
together with the repurchase price on repurchase. In either case, the income to
a Fund is unrelated to the interest rate on the Obligation
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itself. Obligations will be physically held by the Fund's custodian (Brown
Brothers Harriman and Co. for Global Bond Fund and International Bond Fund) or
in the Federal Reserve Book Entry system.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to that Fund's investment restrictions
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a 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, a Fund may encounter delay 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 a 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, a Fund would be at
risk of losing some or the entire principal and income involved in the
transaction. As with any unsecured debt instrument purchased for a 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. 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), a Fund will direct
the seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that a Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
A repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction, and such
repurchase agreements involve risks similar to repurchase agreements with U.S.
entities.
The International Bond Fund may also enter into repurchase commitments
with any party deemed creditworthy by the Adviser, including foreign banks and
broker/dealers, if the transaction is entered into for investment purposes and
the counterparty's creditworthiness is at least equal to that of issuers of
securities which the Fund may purchase. Such transactions may not provide the
Fund with collateral which is marked-to-market during the term of the
commitment.
Repurchase Commitments. Global Bond Fund and Emerging Markets Income Fund may
enter into repurchase commitments with any party deemed creditworthy by the
Adviser, including foreign banks and broker/dealers, if the transaction is
entered into for investment purposes and the counterparty's creditworthiness is
at least equal to that of issuers of securities which a Fund may purchase. Such
transactions may not provide a Fund with collateral marked-to-market during the
term of the commitment.
Indexed Securities. Each 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 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.
When-Issued Securities. Global Bond Fund and Emerging Markets Income 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
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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 a Fund to the issuer and no interest accrues to the Fund. To the extent
that assets of a Fund are held in cash pending the settlement of a 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, a Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time a 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. Each 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. Each Fund
will establish a segregated account with the Funds' custodian in which it will
maintain cash or liquid assets equal in value to commitments for when-issued or
forward delivery securities. Such segregated securities either will mature or,
if necessary, be sold on or before the settlement date. Each Fund will not enter
into such transactions for leverage purposes.
Zero Coupon Securities. Each 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 follows 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.
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 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").
Lending of Portfolio Securities. Each Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in
cash, U.S. Government Securities and liquid high grade debt obligations
maintained on a current basis at an amount at least equal to the market value
and accrued interest of the securities loaned. Each Fund has the right to call a
loan and obtain the securities loaned on no more than five days' notice. During
the existence of a loan, a Fund will continue to receive the equivalent of any
distributions paid by the issuer on the securities loaned and will also receive
compensation based on investment of the collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms
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deemed by the Adviser to be in good standing. The value of the securities loaned
will not exceed 5% of the value of a Funds' total assets at the time any loan is
made.
Zero Coupon Securities. Global Bond Fund and International Bond 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 follows 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 Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act.
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 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").
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 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").
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Mortgage-Backed Securities and Mortgage Pass-Through Securities. Global Bond
Fund may also invest in mortgage-backed securities, which are interests in pools
of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
Fund may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities.
When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the Fund's shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage-backed securities or to the value of Fund shares.
Also, GNMA securities often are purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance
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and guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Fund's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Global Bond Fund may buy
mortgage-related securities without insurance or guarantees, if through an
examination of the loan experience and practices of the originators/servicers
and poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable.
Collateralized Mortgage Obligations ("CMO"s). Global Bond Fund may invest in
CMOs. A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party director as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. Global Bond Fund will not purchase mortgage-backed securities or
any other assets which, in the opinion of the Adviser, are illiquid, in
accordance with the
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nonfundamental investment restriction on securities which are not readily
marketable discussed below. As new types of mortgage-related securities are
developed and offered to investors, the Adviser will, consistent with Global
Bond Fund's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with the Fund's investment objectives and policies, Global
Bond Fund may invest in these and other types of asset-backed securities that
may be developed in the future. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile Receivables(SM) ("CARS(SM)").
CARS(SM) represent undivided fractional interests in a trust whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARS(SM) are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the directors or
originator of the Corporation. An investor's return on CARS(SM) may be affected
by early prepayment of principal on the underlying vehicle sales contracts. If
the letter of credit is exhausted, the Corporation may be prevented from
realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of federal and state
bankruptcy and insolvency laws, or other factors. As a result, certificate
holders may experience delays in payments or losses if the letter of credit is
exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through a
combination of such approaches. Global Bond Fund will not pay any additional or
separate fees for credit support. The degree of credit support provided for each
issue is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquency or loss in excess
of that anticipated or failure of the credit support could adversely affect the
return on an investment in such a security.
Global Bond Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the 1933 Act may be subject to certain restrictions on
transferability. In addition, there may be no liquid market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require Global Bond Fund to dispose of any then existing holdings of such
securities.
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Reverse Repurchase Agreements. Emerging Markets Income Fund may enter into
"reverse repurchase agreements," which are repurchase agreements in which the
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.
Borrowing. As a matter of fundamental policy, each Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Directors do not currently intend to borrow for investment leverage
purposes, if such a strategy were implemented in the future it would increase
the Funds' volatility and the risk of loss in a declining market. Borrowing by a
Fund will involve special risk considerations. Although the principal of a
Fund's borrowings will be fixed, a Fund's assets may change in value during the
time a borrowing is outstanding, thus increasing exposure to capital risk.
Synthetic Investments. In certain circumstances, Emerging Markets Income 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 Funds may, but are not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as, hedging various market risks, managing the effective maturity
or duration of the fixed-income securities in each Fund's portfolio, enhancing
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.
In the course of pursuing these investment strategies, the Funds may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors , collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, investments or strategies that are permitted as regulatory
changes occur. 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 each Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect a 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 each Fund's portfolio, or to establish a position in
the derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of a 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 Funds to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Funds will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions will not be used to alter the
fundamental investment purposes and characteristics of a Fund and each Fund will
segregate assets (or as provided by applicable regulations, enter into certain
offsetting positions) to cover its obligations under options, futures and swaps
to limit leveraging of a Fund.
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 a 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
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options) current market values, limit the amount of appreciation a Fund can
realize on its investments or cause a Fund to hold a security it might otherwise
sell. The use of currency transactions can result in a 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 a
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, a
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 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, a 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. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect a 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. Each 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 offsetting purchase or sale transactions that do not result in
ownership of the new option.
A 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.
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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. Each
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. Each
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 a 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. Each 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 A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other 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 a Fund, and
portfolio securities "covering" the amount of a 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 Funds' limitation on investing no
more than 15% of its net assets in illiquid securities.
If a 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.
Each 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 a 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 a Fund will receive the option premium to help protect it against
loss, a call sold by a 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.
Each 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. Each 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. Each Fund may enter into 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, and for duration
management , risk management, and return enhancement 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 a Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and 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.
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Each Fund's use of 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
for bona fide hedging, risk management (including duration management) or other
portfolio management and return enhancement purposes. Typically, maintaining a
futures contract or selling an option thereon requires a 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 futures involves payment of a premium
for the option without any further obligation on the part of the Fund. If a 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.
No Fund will 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 a 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. Each 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
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. Each Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of 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. Each 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 (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
A Fund may enter into currency transactions with Counterparties which
have received (or the guarantors of the obligations of 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.
Each Fund's dealings in currency transactions such as futures, options,
options on futures and swaps generally will be limited to hedging involving
either specific transactions or portfolio positions except as described below.
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.
No Fund generally will 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
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entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to forward currency contracts entered into for
non-hedging purposes, or to proxy hedging or cross hedging as described below.
Each Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, each Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
a Fund holds securities denominated in schillings and the Adviser believes that
the value of schillings will decline against the U.S. dollar, the Adviser may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that a Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, a Fund will comply with the asset
segregation requirements described below.
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 a 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 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. Each 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
Funds may enter are interest rate, currency , index and other swaps and the
purchase or sale of related caps, floors and collars. The Funds expect to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of their portfolios, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Funds anticipate purchasing at a later
date. The Funds will not sell interest rate caps or floors where they do not own
securities or other instruments providing the income stream the Funds may be
obligated to pay. Interest rate swaps involve the exchange by a 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
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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.
Each 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
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch each Fund will segregate
assets (or enter into any offsetting position) to cover obligations under swaps,
the Adviser and the Funds 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. Each 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. Each 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. A 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.
Warrants. Each Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by a Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
Investment Company Securities. Securities of other investment companies may be
acquired by Global Bond Fund and Emerging Markets Income 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.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
high grade 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
a Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required 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 a 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 a Fund on an index will require the Fund to own
portfolio securities which correlate with the index or to segregate cash or
liquid
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assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by a Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when a 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 assets 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 a 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 cash or liquid
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 a 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 cash or liquid 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, a Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid 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 liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
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. Each 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, a 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 cash or liquid assets if a
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, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Investment Restrictions
Unless specified to the contrary, the following fundamental policies
may not be changed without the approval of a majority of the outstanding voting
securities of each Fund which, under the 1940 Act and the rules thereunder and
as used in this Statement of Additional Information, means the lesser of (1) 67%
or more of the voting securities present at such meeting, if the holders of more
than 50% of the outstanding voting securities of a Fund are present or
represented by proxy, or (2) more than 50% of the outstanding voting securities
of a Fund.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of a Funds' assets will
not be considered a violation of the restriction.
Each Fund has elected to be classified as a non-diversified series of
an open-end investment company. In addition, as a matter of fundamental policy,
each Fund may not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
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(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
(4) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(5) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(6) purchase or sell real estate, which term does not include
securities or companies which deal in real estate or interests
therein, except that the Fund reserves freedom of action to
hold and to sell real estate acquired as a result of the
Fund's ownership of securities; or
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
The Directors of the Corporation have voluntarily adopted certain
policies and restrictions which are observed in the conduct of the Funds'
affairs. These represent intentions of the Directors based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Directors without requiring prior notice
to or approval of shareholders.
As a matter of non-fundamental policy each Fund does not currently
intend to:
(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, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(3) 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;
(4) 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 do 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;
(5) 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); and
(6) lend portfolio securities in an amount greater than 5% of its
total assets.
With respect to International Bond Fund, restrictions with respect to
repurchase agreements shall be construed to be for repurchase agreements entered
into for the investment of available cash, consistent with the Fund's repurchase
agreement procedures, not repurchase commitments entered into for general
investment purposes.
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PURCHASES
(See ABOUT YOUR INVESTMENT in the Funds' combined prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Directors. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
Each Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the Fee to be paid to the
Fund) for any non-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of the
account. The Fund will mail the proceeds of the redeemed account to the
shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments by Telephone Order
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed
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out promptly following receipt of a request to buy. Federal regulations require
that payment be received within three business days. If payment is not received
within that time, the order is subject to cancellation. In the event of such
cancellation or cancellation at the purchaser's request, the purchaser will be
responsible for any loss incurred by the Fund or the principal underwriter by
reason of such cancellation. If the purchaser is a shareholder, the Corporation
shall have the authority, as agent of the shareholder, to redeem shares in the
account in order to reimburse the Fund or the principal underwriter for the loss
incurred. Net losses on such transactions which are not recovered from the
purchaser will be absorbed by the principal underwriter. Any net profit on the
liquidation of unpaid shares will accrue to the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that each Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. Each Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of a Fund are purchased by a check which proves to be
uncollectible, the Corporation reserves the right to cancel the purchase
immediately and the purchaser will be responsible for any loss incurred by the
Trust or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Corporation will have the authority, as agent of
the shareholder, to redeem shares in the account in order to reimburse the Fund
or the principal underwriter for the loss incurred. Investors whose orders have
been canceled may be prohibited from, or restricted in, placing future orders in
any of the Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
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Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Corporation's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
Each Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Funds' shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Directors and the Distributor, also the Funds' principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Directors and the Distributor may suspend or terminate the
offering of shares of a Fund at any time for any reason.
The Board of Directors and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of a Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. Each Fund 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 each Fund with a tax identification number
during the 30-day notice period.
The Corporation may issue shares at net asset value in connection with
any merger or consolidation with, or acquisition of the assets of, any
investment company or personal holding company, subject to the requirements of
the 1940 Act.
EXCHANGES AND REDEMPTIONS
(See ABOUT YOUR INVESTMENT in the Funds' combined prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be
33
<PAGE>
established with the same registration, tax identification number, address,
telephone redemption option, "Scudder Automated Information Line" (SAIL)
transaction authorization and dividend option as the existing account. Other
features will not carry over automatically to the new account. Exchanges to a
new fund account must be for a minimum of $2,500. When an exchange represents an
additional investment into an existing account, the account receiving the
exchange proceeds must have identical registration, tax identification number,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more.
If the account receiving the exchange proceeds is to be different in
any respect, the exchange request must be in writing and must contain an
original signature guarantee as described under "Transaction information --
Signature guarantees" in the Funds' prospectuses.
Exchange orders received before the close of regular trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values determined on that day. Exchange orders received after the close of
trading will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Corporation and the Transfer Agent each reserves the right to
suspend or terminate the privilege of the Automatic Exchange Program at any
time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares, and therefore
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such an exchange may be subject to backup withholding (see "TAXES").
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Funds employ
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that each Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Funds will not be liable for acting upon
instructions communicated by telephone that they reasonably believe to be
genuine. The Funds and the Transfer Agent each reserves the right to suspend or
terminate the privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $50,000 and have the proceeds mailed
to their address of record. Shareholders may request to have the proceeds mailed
or wired to their predesignated bank account. In order to request redemptions by
telephone, shareholders must have completed and returned to the Transfer Agent
an application, including the designation of a bank account to which the
redemption proceeds are to be sent.
(a) NEW INVESTORS wishing to establish the telephone redemption
privilege must complete the appropriate section on the
application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder pension and profit-sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a predesignated bank account or who want to change the bank
account previously designated to receive redemption proceeds
should either return a Telephone Redemption Option Form
(available upon request), or send a letter identifying the
account and specifying the exact information to be
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<PAGE>
changed. The letter must be signed exactly as the
shareholder's name(s) appears on the account. An original
signature and an original signature guarantee are required for
each person in whose name the account is registered.
If a request for a redemption to a shareholder's bank account is made
by telephone or fax, payment will be made by Federal Reserve bank wire to the
bank account designated on the application, unless a request is made that the
redemption be mailed to the designated bank account. There will be a $5 charge
for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Funds employ procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that each Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Funds will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of a Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which redemption proceeds will be credited. New
investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
Each Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that a Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions. A Fund will not be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with a signature guarantee as explained in the
Funds' prospectuses.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax required in
some states when settling estates.
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
redemptions to ensure that all necessary documents accompany the request. When
shares are held in the name of a corporation, trust, fiduciary agent, attorney
or partnership, the Transfer Agent requires,
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<PAGE>
in addition to the stock power, certified evidence of authority to sign. These
procedures are for the protection of shareholders and should be followed to
ensure prompt payment. Redemption requests must not be conditional as to date or
price of the redemption. Proceeds of a redemption will be sent within seven
business days after receipt by the Transfer Agent of a request for redemption
that complies with the above requirements. Delays of more than seven days of
payment for shares tendered for redemption may result but only until the
purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information, please call 1-800-225-5163.
Redemption-in-Kind
The Corporation reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Corporation and valued as they are for purposes of computing a Fund's net
asset value (a redemption-in-kind). If payment is made in securities, a
shareholder may incur transaction expenses in converting these securities into
cash. The Corporation has elected, however, to be governed by Rule 18f-1 under
the 1940 Act as a result of which each Fund is obligated to redeem 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 relevant Fund at the
beginning of the period.
Other Information
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to a Fund
through Scudder Investor Services, Inc. at Two International Place, Boston,
Massachusetts 02110-4103 by letter, fax, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the repurchase
request. A written request in good order with a proper original signature
guarantee, as described in each Fund's prospectus under "Transaction information
- -- Signature guarantees," should be sent with a copy of the invoice to Scudder
Funds, c/o Scudder Confirmed Processing, Two International Place, Boston,
Massachusetts 02110-4103. Failure to deliver shares or required documents (see
above) by the settlement date may result in cancellation of the trade and the
shareholder will be responsible for any loss incurred by a Fund or the principal
underwriter by reason of such cancellation. Net losses on such transactions
which are not recovered from the shareholder will be absorbed by the principal
underwriter. Any net gains so resulting will accrue to a Fund. For this group,
repurchases will be carried out at the net asset value next computed after such
repurchase requests have been received. The arrangements described in this
paragraph for repurchasing shares are discretionary and may be discontinued at
any time.
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than the shareholder's cost
depending on the net asset value at the time of redemption or repurchase. The
Corporation does not impose a redemption or repurchase charge. Redemption of
shares, including an exchange into another Scudder fund, may result in tax
consequences (gain or loss) to the shareholder and the proceeds of such
redemptions may be subject to backup withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment may be suspended at
times during which (a) the Exchange is closed, other than customary weekend and
holiday closings, (b) trading on the Exchange is restricted for any reason, (c)
an emergency exists as a result of which disposal by a Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for a
Fund fairly to determine the value of its net assets, or (d) the SEC may by
order permit such a suspension for the protection of the Corporation's
shareholders; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b) or (c) exist.
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FEATURES AND SERVICES OFFERED BY THE FUNDS
(See ABOUT YOUR INVESTMENT in the Funds' combined prospectus.)
The No- Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee do not exceed
0.25% of a fund's average annual net assets.
Scudder pioneered the no-load concept when it created the nation's
first no-load fund in 1928, and later developed the nation's first family of
no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds no-load fund over investing the
same amount in a load fund that collects an 8.50% front-end load, a load fund
that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund charging
only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the chart
show the value of an account assuming a constant 10% rate of return over the
time periods indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
No-Load Fund with
Scudder Load Fund with 0.75% 0.25% 12b-1
YEARS No-Load Fund 8.50% Load Fund 12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Investors are encouraged to review the fee tables in the Funds'
combined prospectus for more specific information about the rates at which
management fees and other expenses are assessed.
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://funds.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links
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between summary information in Profiles and details in the Prospectus. Users can
fill out new account forms on-line, order free software, and request literature
on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
Scudder has communicated with shareholders and other interested parties
on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- Scudder is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
Scudder's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. The Transfer Agent must receive a change
of instructions for the method of payment at least five days prior to a dividend
record date. Shareholders also may change their dividend option either by
calling 1-800-225-5163 or by sending written instructions to the Transfer Agent.
Please include your account number with your written request. See "Investment
Products and Services" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
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<PAGE>
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Investment Products and Services" in the prospectuses.
Reports to Shareholders
The Corporation issues shareholders unaudited semiannual financial
statements and annual financial statements audited by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets and financial highlights.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
(See "Investment products and services" in the Funds' combined prospectuses.)
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
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<PAGE>
Scudder Tax Free Money Market Series seeks to provide investors with as
high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
- -----------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
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<PAGE>
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide a high level of income
consistent with a high degree of principal stability by investing
primarily in high quality short-term bonds.
Scudder Zero Coupon 2000 Fund seeks to provide as high an investment
return over a selected period as is consistent with investment in U.S.
Government securities and the minimization of reinvestment risk.
Scudder GNMA Fund seeks to provide high current income primarily from
U.S. Government guaranteed mortgage-backed (Ginnie Mae) securities.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program
emphasizing high-grade bonds.
Scudder Corporate Bond Fund seeks a high level of current income
through investment primarily in investment-grade corporate debt
securities.
Scudder High Yield Bond Fund seeks a high level of current income and,
secondarily, capital appreciation through investment primarily in below
investment-grade domestic debt securities.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
41
<PAGE>
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder S&P 500 Index Fund seeks to provide investment results that,
before expenses, correspond to the total return of common stocks
publicly traded in the United States, as represented by the Standard &
Poor's 500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustaining
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
- -----------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
42
<PAGE>
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
- -----------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
*** Only the International Shares are part of the Scudder Family of Funds.
43
<PAGE>
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; no-load funds with no commissions to purchase or redeem
shares or Rule 12b-1 distribution fees; individual attention from a service
representative of Scudder Investor Relations; and easy telephone exchanges into
other Scudder funds. Certain Scudder funds or classes thereof may not be
available for purchase or exchange. For more information, please call
1-800-225-5163.
SPECIAL PLAN ACCOUNTS
(See ABOUT YOUR INVESTMENT in the Funds' combined prospectus.)
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of each Fund may also be a permitted investment under profit
sharing and pension plans and IRA's other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Pension Plans for Corporations and Self-Employed Individuals
Shares of each Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of each Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
44
<PAGE>
Scudder IRA: Individual Retirement Account
Shares of each Fund may be purchased as the underlying investment for
an Individual Retirement Account which meets the requirements of Section 408(a)
of the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%.
(At withdrawal, accumulations in this table will be taxable.)
<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Shares of each Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
45
<PAGE>
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of each Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Signature guarantees" in the Funds'
prospectus. Any such requests must be received by the Fund's transfer agent ten
days prior to the date of the first automatic withdrawal. An Automatic
Withdrawal Plan may be terminated at any time by the shareholder, the
Corporation or its agent on written notice, and will be terminated when all
shares of the Fund under the Plan have been liquidated or upon receipt by the
Corporation of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the Corporation and its
46
<PAGE>
agents reserve the right to establish a maintenance charge in the future
depending on the services required by the investor.
The Corporation reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Corporation reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "ABOUT THE FUND - Distributions" in the Funds' combined prospectus.)
Each Fund intends to follow the practice of distributing substantially
all and in no event less than 90% of its investment company taxable income
including any excess of net realized short-term capital gains over net realized
long-term capital losses. A 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, a Fund may retain all or part of such gain
for reinvestment, after paying the related federal income taxes for which the
shareholders may then claim a credit against their federal income tax liability.
If a Fund does not distribute an amount of capital gains and/or ordinary income
required to be distributed by an excise tax provision of the Code, it may be
subject to such tax. In certain circumstances, a Fund may determine that it is
in the interest of shareholders to distribute less than such an amount. (See
"TAXES.")
Global Bond Fund intends to declare daily and distribute monthly
substantially all of its net investment income (excluding short-term capital
gains) resulting from Fund investment activity. Distributions, if any, of net
realized capital gains (short-term and long-term) will normally be made in
December. Distributions of certain realized gains or losses on the sale or
retirement of securities denominated in foreign currencies held by the Fund, to
the extent attributable to fluctuations in currency exchange rates, as well as
certain other gains or losses attributable to exchange rate fluctuations, are
treated as ordinary income or loss and will also normally be made in December.
International Bond Fund intends to declare daily and distribute monthly
substantially all of its investment company taxable income resulting from Fund
investment activity. Distributions, if any, of net realized capital gains
normally will be distributed in November or December. An additional distribution
may be made, if necessary. Distributions of certain realized gains or losses on
the sale or retirement of securities denominated in foreign currencies
47
<PAGE>
held by the Fund, to the extent attributable to fluctuations in currency
exchange rates, as well as certain other gains or losses attributable to
exchange rate fluctuations, are treated as ordinary income or loss and also
normally will be made in December . Additional distributions may be made if
necessary.
Emerging Markets Income Fund intends to distribute investment company
taxable income (exclusive of net short-term capital gains in excess of net
long-term capital losses) quarterly in March, June, September and December each
year. Distributions, if any, of net realized capital gain during each fiscal
year will normally be made in December. Additional distributions may be made if
necessary.
All distributions will be made in shares of a Fund and confirmations
will be mailed to each shareholder unless a shareholder has elected to receive
cash, in which case a check will be sent. Distributions are taxable, whether
made in shares or cash. (See "TAXES.")
PERFORMANCE INFORMATION
(See "ABOUT THE FUND -Past performance" in the Funds' combined prospectus)
From time to time, quotations of the Funds' performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures are calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year, five years and the life of a Fund, each
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Funds' shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by
computing the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
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.
Average Annual Total Return for periods ended October 31, 1998
<TABLE>
<CAPTION>
One Year Five Years Ten Year Life of the Fund
<S> <C> <C> <C> <C>
Global Bond Fund* 8.91%# 3.69%# - 5.21%(1)#
International Bond Fund 8.72%# 1.85%# 8.17%#
Emerging Markets Income Fund -27.60% - - 2.65%(2) #
</TABLE>
(1) For the period beginning March 1, 1991.
(2) For the period beginning December 31, 1993.
* On December 27, 1995, the Fund adopted its present name and objective.
Prior to that date, the Fund was known as Scudder Short Term Global
Income Fund and its objective was high current income. Financial
information for the periods ended October 31, 1995 should not be
considered representative of the present Fund under its current
objectives.
# If the Adviser had not maintained expenses, the average annual returns
for periods indicated would have been lower.
48
<PAGE>
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of the Funds' shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by computing
the cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
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.
Cumulative Total Return for periods ended October 31, 1998
<TABLE>
<CAPTION>
One Year Five Years Ten Year Life of the Fund
<S> <C> <C> <C> <C>
Global Bond Fund* 8.91%# 19.87%# - 47.69%(1)#
International Bond Fund 8.72%# 9.61%# 119.36%#
Emerging Markets Income Fund -27.60% - - 13.45%(2) #
</TABLE>
(1) For the period beginning March 1, 1991.
(2) For the period beginning December 31, 1993.
* On December 27, 1995, the Fund adopted its present name and objective.
Prior to that date, the Fund was known as Scudder Short Term Global
Income Fund and its objective was high current income. Financial
information for the periods ended October 31, 1995 should not be
considered representative of the present Fund under its current
objectives.
# If the Adviser had not maintained expenses, the cumulative total
returns for periods indicated would have been lower.
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
Yield of International Bond Fund
Yield of International Bond Fund is the net annualized SEC yield of the
Fund based on a specified 30-day (or one month) period assuming semiannual
compounding of income. Yield is calculated by dividing the net investment income
per share earned during the period by the maximum offering price per share on
the last day of the period, according to the following formula:
YIELD = 2[(a-b/cd + 1)6-1]
Where:
<TABLE>
<CAPTION>
<S> <C> <C>
a = dividends and interest earned during the period, including amortization
of market premium or accretion of market discount
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
</TABLE>
The SEC net annualized yield for the 30-day period ended October 31,
1998 was 4.50% for Global Bond Fund. On December 27, 1995, the Fund adopted its
present name and objective. Prior to that date, the Fund was known as
49
<PAGE>
Scudder Short Term Global Income Fund and its objective was high current income.
Financial information for the periods ended October 31, 1995 should not be
considered representative of the present Fund under its current objectives.
The SEC yield of International Bond Fund for the 30-day period ended
October 31, 1998 was 3.67 %.
The SEC net annualized yield for the 30-day period ended October 31,
1998 was 13.06% for Emerging Markets Income Fund.
Calculation of the Fund's yield does not take into account "Section 988
Transactions." (See "TAXES.")
From time to time International Bond Fund may advertise potential
advantages of investing in foreign markets and may use these figures in an
updated form. Past market results are no guarantee of future performance. Data
are based on bonds with maturities of at least one year. Source: Salomon
Brothers World Government Bond Index.
Quotations of each Fund's performance are historical, show the
performance of a hypothetical investment, and are not intended to indicate
future performance. An investor's shares when redeemed may be worth more or less
than their original cost. Performance of a Fund will vary based on changed in
market conditions and the level of the Fund's expenses.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Directors
and officers of the Funds, the Funds' portfolio manager, or members of the
portfolio management team may be depicted and quoted to give prospective and
current shareholders a better sense of the outlook and approach of those who
manage the Funds. In addition, the amount of assets that the Adviser has under
management in various geographical areas may be quoted in advertising and
marketing materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
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Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
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Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
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United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.
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ORGANIZATION OF THE FUNDS
(See "ABOUT THE FUND -Investment Adviser" in the Funds' combined prospectus.)
The Funds are separate series of Global/International Fund, Inc., a
Maryland corporation organized on May 15, 1986. The name of the Corporation was
changed, effective May 28, 1998, from Scudder Global Fund, Inc. The Corporation
currently consists of five series: Scudder Global Bond Fund, Scudder
International Bond Fund, Scudder Global Fund, Global Discovery Fund and Scudder
Emerging Markets Income Fund.
The Board of Directors has subdivided the shares of Global Discovery
Fund into four classes, namely, the Scudder Shares, Global Discovery Fund Kemper
Class A, B and C shares. Although shareholders of different classes of a series
have an interest in the same portfolio of assets, shareholders of different
classes may bear different expenses in connection with different methods of
distribution.
The authorized capital stock of the Corporation consists of 800 million
shares with $0.01 par value, 300 million shares of which are allocated to Global
Bond Fund and 200 million shares of which are allocated to International Bond
Fund and 100 million shares each are allocated to Scudder Global Fund, Global
Discovery Fund and Scudder Emerging Markets Growth Fund. Each share of each
series of the Corporation has equal voting rights as to each other share of that
series as to voting for directors, redemption, dividends and liquidation.
Shareholders have one vote for each share held. The Directors have the authority
to issue additional series of shares and to designate the relative rights and
preferences as between the different series. If a series were unable to meet its
obligations, the remaining series should not have to assume the unsatisfied
obligation of that series. All shares issued and outstanding are fully paid and
non-assessable, transferable, and redeemable at net asset value at the option of
the shareholder. Shares have no pre-emptive or conversion rights.
Shares of the Corporation entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment advisory agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The shares of the Corporation have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the directors if they choose to do so, and, in such
event, the holders of the remaining less than 50% of the shares voting for the
election of Directors will not be able to elect any person or persons to the
Board of Directors.
The Directors, in their discretion, may authorize the division of
shares of the Funds (or shares of either series) into different classes
permitting shares of different classes to be distributed by different methods.
Although shareholders of different classes of a series would have an interest in
the same portfolio of assets, shareholders of different classes may bear
different expenses in connection with different methods of distribution.
Maryland corporate law provides that a Director of the Corporation
shall not be liable for actions taken in good faith, in a manner he or she
reasonably believes to be in the best interests of the Corporation and with the
care that an ordinarily prudent person in a like position would use under
similar circumstances. In so acting, a Director shall be fully protected in
relying in good faith upon the records of the Corporation and upon reports made
to the Corporation by persons selected in good faith by the Directors as
qualified to make such reports. The By-Laws provide that the Corporation will
indemnify Directors and officers of the Corporation against liabilities and
expenses reasonably incurred in connection with litigation in which they may be
involved because of their positions with the Corporation, to the fullest extent
permitted by Maryland corporate law as amended from time to time. However,
nothing in the Articles of Incorporation or the By-Laws protects or indemnifies
a Director or officer against any liability to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
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INVESTMENT ADVISER
(See "ABOUT THE FUND - Investment Adviser" in the Funds' combined prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., 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. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder'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"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder International Fund, Inc., Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free
Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc. and The
Japan Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Funds may invest, the conclusions and
investment decisions of the Adviser with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for a Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the
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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 day. 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 a
Fund. Purchase and sale orders for a 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 transaction between Scudder and Zurich resulted in the assignment
of the Funds' investment management agreements with Scudder, those agreements
were deemed to be automatically terminated at the consummation of the
transaction. In anticipation of the transaction, however, the Directors approved
new investment management agreements between the Funds and the Adviser on August
6, 1997. At the special meeting of the Funds' shareholders held on October 27,
1997, the shareholders also approved the investment management agreements. The
investment management agreements became effective as of December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Funds' existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved new investment management
agreements (the "Agreements") with Scudder Kemper, which are substantially
identical to the current investment management agreements, except for the dates
of execution and termination. The Agreements became effective September 7, 1998,
upon the termination of the then current investment management agreements and
were approved at a shareholder meeting held on December 15, 1998.
The Directors approved the Agreements dated September 7, 1998 on August
6, 1998. The Agreements will continue in effect until September 30, 1999 and
from year to year thereafter only if their continuance is approved annually by
the vote of a majority of those Directors who are not parties to such Agreements
or interested persons of the Adviser or the Corporation, cast in person at a
meeting called for the purpose of voting on such approval, and either by a vote
of the Corporation's Directors or of a majority of the outstanding voting
securities of the respective Fund. The Agreements may be terminated at any time
without payment of penalty by either party on sixty days' written notice and
automatically terminate in the event of their assignment.
Under each Agreement, the Adviser regularly provides a Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objectives, 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
Corporation's Articles of Incorporation and By-Laws, of the 1940 Act and the
Code and to the Fund's investment objectives, 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
Corporation.
Under each Agreement, the Adviser also renders significant
administrative services (not otherwise provided by third parties) necessary for
a 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 arrangements with, and monitoring various
third-party service providers to the Fund (such as the Fund's transfer agent,
pricing agents, custodians, 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 Funds; 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
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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 (except those of
attending Board and committee meetings outside New York, New York and Boston,
Massachusetts) of all directors, officers and executive employees of the
Corporation affiliated with the Adviser and makes available, without expense to
the Funds, the services of such directors, officers and employees as may duly be
elected officers, subject to their individual consent to serve and to any
limitations imposed by law, and provides the Funds' office space and facilities.
Global Bond Fund pays the Adviser an annual fee equal to 0.75 of 1.00%
of the first $1 billion of average daily net assets of such Fund and 0.70 of
1.00% of such net assets in excess of $1 billion. For the fiscal year ended
October 31, 1996, the Adviser did not impose a portion of its management fee
amounting to $775,310 and the portion imposed amounted to $1,292,288. For the
fiscal year ended October 31, 1997, the Adviser did not impose a portion of its
management fee amounting to $664,865 and the portion imposed amounted to
$604,704. For the fiscal year ended October 31, 1998, the Adviser did not impose
a portion of its management fee amounting to $554,345 and the portion imposed
amounted to $314,786. Until February 28, 1999 expenses had been contractually
maintained at 1.00%. Effective March 1, 1999 until February 29, 2000 total Fund
operating expenses are contractually maintained at 1.25%.
International Bond Fund pays the Adviser an annual fee equal to 0.85%
of the first $1 billion of average daily net assets and 0.80% of such assets in
excess of $1 billion. The fee is payable monthly, provided the Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of the Fund and unpaid. For the
fiscal years ended June 30, 1996, 1997 and 1998 the Adviser imposed a management
fee amounting to $6,133,574, $3,077,316 and $1,444,303 respectively. The Adviser
did not impose a portion of its management fee amounting to $110,285 for the
fiscal year ended June 30, 1998. For the four months ending October 31, 1998 the
Adviser did not impose a portion of its management fee amounting to $37,131, and
the Adviser imposed a management fee amounting to $375,286. Total Fund operating
expenses are contractually maintained at 1.50% until February 29, 2000.
Emerging Markets Income Fund pays the Adviser a fee equal to an annual
rate of 1.00% of the Fund's average daily net assets. For the fiscal year ended
October 31, 1996, the Adviser did not impose a portion of its management fee
amounting to $31,566, and the portion imposed amounted to $2,396,267. For the
fiscal year ended October 31, 1997 and 1998 the management fee amounted to
$3,563,175 and $3,051,240, respectively.
Under each Agreement, a Fund is responsible for all of its other
expenses including organization expenses; fees and expenses incurred in
connection with membership in investment company organizations; broker's
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of shares of capital stock; the expenses of and the
fees for registering or qualifying securities for sale; the fees and expenses of
the Directors, officers and employees 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 Corporation may arrange to have
third parties assume all or part of the expenses of sale, underwriting and
distribution of shares of Funds. Each 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 custodian agreements provide that the custodian shall compute each
Fund's net asset value. The Agreements expressly provide that the Adviser shall
not be required to pay a pricing agent of the Funds for portfolio pricing
services, if any.
Each Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder, Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Corporation, with respect to each Fund, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Corporation's investment products
and services.
Each 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 relevant
Fund in connection with matters to which the Agreements relate, 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 Agreements.
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Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Funds' custodian banks. 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.
The Adviser may serve as Adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the officers or Directors may have dealings with the Funds as
principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Funds.
Personal Investments by Employees of the Adviser
Employees of the Adviser 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 the Funds. 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.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age and Position Scudder Investor
Address with Corporation Principal Occupation** Services, Inc.
- ------- ---------------- ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce+ (64) Chairman of the Board, Chairman of the Board and Director, Vice President
Director and Vice President Managing Director of Scudder and Assistant Treasurer
Kemper Investments, Inc.
Nicholas Bratt (50)++@ President, all series Managing Director of Scudder --
except Scudder Global Fund Kemper Investments, Inc.
William E. Holzer++@ (49) President, Scudder Global Managing Director of Scudder --
Fund Kemper Investments, Inc.
Paul Bancroft III (69) Director Venture Capitalist and --
79 Pine Lane Consultant; Retired President,
Box 6639 Chief Executive Officer and
Snowmass Village, CO 81615 Director, Bessemer Securities
Corporation
Sheryle J. Bolton (52) Director Chief Executive Officer and --
Scientific Learning Corporation Director,
1995 University Ave. Scientific Learning
Suite 400 Corporation, Former President
San Francisco, CA 94704 and Chief Operating Officer,
Physicians Online, Inc.
(electronic transmission of
clinical information for
physicians (1994-1995)
58
<PAGE>
Position with
Underwriter,
Name, Age and Position Scudder Investor
Address with Corporation Principal Occupation** Services, Inc.
- ------- ---------------- ---------------------- --------------
William T. Burgin (55) Director General Partner, Bessemer --
83 Walnut Street Venture Partners; General
Wellesley, MA 02181-2101 Partner, Deer & Company;
Director Fort James
Corporation, Director of
various privately held
companies
Thomas J. Devine (72) Honorary Director Consultant --
450 Park Avenue
New York, NY 10022
Keith R. Fox (44) Director Private Equity Investor, --
10 East 53rd Street Exeter Capital Management
New York, NY 10022 Corporation
William H. Gleysteen, Jr. (72) Honorary Director Consultant; Guest Scholar, --
4937 Crescent Street Brookings Institution;
Bethesda, MD 20816 President, The Japan Society,
Inc. (1989-December 1995)
William H. Luers (69) Director Chairman and President of the --
993 Fifth Avenue U.N. Association of the U.S.A.
New York, NY 10028 President; The Metropolitan
Museum of Art (1986 until
1999)
Kathryn L. Quirk++* (46) Director, Vice President Managing Director of Scudder Director, Senior Vice
and Assistant Secretary Kemper Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Joan E. Spero (54) Director President, Doris Duke --
Doris Duke Charitable Charitable Foundation;
Foundation Department of State
650 Fifth Avenue - 19th Flr. Undersecretary of State for
New York, NY 10128 Economic Business and
Agricultural Affairs
(March 1993-January 1997)
Robert G. Stone, Jr. (75) Honorary Director Chairman Emeritus and --
405 Lexington Avenue Director, Kirby Corporation
New York, NY 10174 (inland and offshore marine
transportation and diesel
repairs)
Susan E. Dahl+ (33) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Gary P. Johnson+ (49) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
59
<PAGE>
Position with
Underwriter,
Name, Age and Position Scudder Investor
Address with Corporation Principal Occupation** Services, Inc.
- ------- ---------------- ---------------------- --------------
Thomas W. Joseph+ (59) Vice President Senior Vice President of Director, Vice
Scudder Kemper Investments, President, Treasurer and
Inc. Assistant Clerk
Ann M. McCreary++(42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Gerald J. Moran++ (59) Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
Isabel M. Saltzman+ (44) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas F. McDonough+ (52) Vice President and Senior Vice President of Clerk
Secretary Scudder Kemper Investments,
Inc.
John R. Hebble+ (40) Treasurer Senior Vice President of Assistant Treasurer
Scudder Kemper Investments,
Inc.
Caroline Pearson+ (36) Assistant Secretary Senior Vice President of --
Scudder Kemper Investments,
Inc.; Associate, Dechert Price
& Rhoads (law firm) 1989 - 1997
</TABLE>
* Mr. Pierce and Ms. Quirk, are considered by the Corporation and its
counsel to be persons who are "interested persons" of the Adviser or of
the Corporation (as defined in the 1940 Act).
** Unless otherwise stated, all the Directors and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
# Ms. Quirk is a member of the Executive Committee, which may exercise
the powers of the Directors when they are not in session.
+ Address: Two International Place, Boston, Massachusetts
++ Address: 345 Park Avenue, New York, New York
@ The President of a series shall have the status of Vice President of
the Corporation.
To the knowledge of the Corporation, as of January 31, 1999, all
Directors and Officers as a group owned beneficially (as the term is defined in
Section 13(d) under the Securities Exchange Act of 1934) less than 1% of the
shares of Global Bond Fund outstanding on such date.
As of January 31, 1999, all Directors and Officers as a group owned
beneficially (as the term is defined in Section 13 (d) under the Securities
Exchange Act of 1934) 163,031 shares, or 1.23% of the shares of International
Bond Fund outstanding on such date.
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<PAGE>
As of January 31, 1999, all Directors and Officers as a group owned
beneficially (as the term is defined in Section 13 (d) under the Securities
Exchange Act of 1934) 936,686 shares, or 3.28% of the shares of Emerging Markets
Income Fund outstanding on such date.
To the knowledge of the Corporation, as of January 31, 1999, 709,303
shares in the aggregate, 6.79% of the outstanding shares of Global Bond Fund,
were held in the name of Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104-4122, who may be deemed to be the beneficial owner of
certain of these shares, but disclaims any beneficial ownership therein.
To the knowledge of the Corporation, as of January 31, 1999, 1,846,689
shares in the aggregate, 13.94% of the outstanding shares of International Bond
Fund, were held in the name of Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94104-4122, who may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
To the knowledge of the Corporation, as of January 31, 1999, 6,474,871
shares in the aggregate, 22.71% of the outstanding shares of Emerging Markets
Income Fund, were held in the name of Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94104-4122, who may be deemed to be the beneficial
owner of certain of these shares, but disclaims any beneficial ownership
therein.
Except as stated above, to the knowledge of the Corporation, as of
January 31, 1999, no person owned beneficially more than 5% of a Fund's
outstanding shares.
The Directors and officers also serve in similar capacities with
respect to other Scudder funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Directors is responsible for the general oversight of each
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Directors" have primary
responsibility for assuring that each Fund is managed in the best interests of
its shareholders.
The Board of Directors meets at least quarterly to review the
investment performance of each Fund and other operational matters, including
policies and procedures designed to ensure compliance with various regulatory
requirements. At least annually, the Independent Directors review the fees paid
to the Adviser and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, each Fund's investment performance, the quality and efficiency of
the various other services provided, costs incurred by the Adviser and its
affiliates and comparative information regarding fees and expenses of
competitive funds. They are assisted in this process by each Fund's independent
public accountants and by independent legal counsel selected by the Independent
Directors.
All the Independent Directors serve on the Committee on Independent
Directors, which nominates Independent Directors and considers other related
matters, and the Audit Committee, which selects each Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Directors from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Directors
The Independent Directors receive the following compensation from the
Funds of Global/International Fund, Inc.: an annual director's fee of $3,500; a
fee of $325 for attendance at each board meeting, audit committee meeting or
other meeting held for the purposes of considering arrangements between the
Corporation on behalf of each Fund and the Adviser or any affiliate of the
Adviser; $100 for all other committee meetings; and reimbursement of expenses
incurred for travel to and from Board Meetings. No additional compensation is
paid to any Independent Director for travel time to meetings, attendance at
directors' educational seminars or conferences, service on industry or
association committees, participation as speakers at directors' conferences or
service on special director task forces or subcommittees. Independent Directors
do not receive any employee benefits such as pension or retirement benefits or
health insurance.
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<PAGE>
Notwithstanding the schedule of fees, the Independent Directors have in the past
and may in the future waive a portion of their compensation.
The Independent Directors also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Director fee schedules. The
following table shows the aggregate compensation received by each Independent
Director during 1998 from the Corporation and from all of the Scudder funds as a
group.
<TABLE>
<CAPTION>
Global/International Fund, Inc.* All Scudder Funds
-------------------------------- -----------------
Paid by Paid by Paid by Paid by
Name the Funds the Adviser the Funds the Adviser**
- ---- --------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Paul Bancroft III, $38,500 $2,125 $174,200 $8,925 (23 funds)
Director
Sheryle J. Bolton, $38,500 $0 $149,050 $0 (21 funds)
Director
William T. Burgin, $38,500 $2,125 $150,950 $8,925 (21 funds)
Director
Thomas J. Devine, $38,500 $2,125 $162,450 $8,925 (22 funds)
Honorary Director
Keith R. Fox, Director $39,750 $2,125 $156,800 $8,925 (21 funds)
William H. Gleysteen, $38,500 $2,125 $123,200@ $4,675 (15 funds)
Jr., Honorary Director
William H. Luers, $34,750 $2,125 $157,050 $8,925 (24 funds)
Director
Joan E. Spero*** $8,340 $0 $29,736 $0 (21 funds)
</TABLE>
* Global/International Fund, Inc. consists of five funds: Scudder Global
Fund, Scudder International Bond Fund, Scudder Global Bond Fund, Global
Discovery Fund and Scudder Emerging Markets Income Fund.
** Meetings associated with the Adviser's alliance with Zurich Insurance
Company. See "Insurance Adviser" for additional information.
*** Elected as Director of the Corporation in September 1998.
@ This amount does not reflect $6,208 in retirement benefits accrued as
part of Fund Complex expenses, and $3,000, in estimated annual benefits
payable upon retirement. Retirement benefits accrued and proposed are
to be paid to Mr. Gleysteen as additional compensation for serving on
the Board of The Japan Fund, Inc.
Members of the Board of Directors who are employees of the Adviser or
its affiliates receive no direct compensation from the Corporation, although
they are compensated as employees of the Adviser, or its affiliates, as a result
of which they may be deemed to participate in fees paid by each Fund.
DISTRIBUTOR
The Corporation has an underwriting agreement with Scudder Investor
Services, Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a wholly owned subsidiary of the Adviser,
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<PAGE>
a Delaware corporation. The Corporation's underwriting agreement dated September
7, 1998 will remain in effect until September 30, 1999 and from year to year
thereafter only if its continuance is approved annually by a majority of the
Board of Directors who are not parties to such agreement or interested persons
of any such party and either by a vote of a majority of the Directors or a
majority of the outstanding voting securities of the Corporation. The Directors
most recently approved the underwriting agreement on August 6, 1998.
Under the principal underwriting agreement, the Corporation is
responsible for: the payment of all fees and expenses in connection with the
preparation and filing with the SEC of the Funds' registration statement and
prospectuses and any amendments and supplements thereto, the registration and
qualification of shares for sale in the various states, including registering
the Corporation as a broker/dealer in various states; the fees and expenses of
preparing, printing and mailing prospectuses annually to existing shareholders
(see below for expenses relating to prospectuses paid by the Distributor),
notices, proxy statements, reports or other communications to shareholders of a
Fund; the cost of printing and mailing confirmations of purchases of shares and
any prospectuses accompanying such confirmations; any issue taxes or any initial
transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of shareholder service representatives, the cost of wiring funds for
share purchases and redemptions (unless paid by the shareholder who initiates
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Corporation and
the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Funds'
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of a Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Corporation unless a Rule 12b-1 Plan is in effect which provides that a Fund
shall bear some or all of such expenses.
Note: Although the Funds currently have no 12b-1 Plan, the Funds
would also pay those fees and expenses permitted to be paid or
assumed by a Fund pursuant to a 12b-1 Plan, if any, adopted by
a Fund, notwithstanding any other provision to the contrary in
the underwriting agreement.
As agent, the Distributor currently offers the Funds' shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of the Corporation.
TAXES
(See ABOUT THE FUND - "Taxes" in the Funds' combined prospectus)
Each Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. It intends to continue to qualify for such treatment.
Such qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
Each 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 a Fund's ordinary income for the 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 generally is made up of 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 a Fund.
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<PAGE>
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Fund for reinvestment, requiring
federal income taxes to be paid thereon by a Fund, that 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 proportionate share of federal income taxes paid
by a Fund on such gains as a credit against the shareholder's federal income tax
liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between such reported gains and the
shareholder's tax credit. If a Fund makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of a Fund's gross income. If any such dividends constitute a
portion of a Fund's gross income, a portion of the income distributions of that
Fund may be eligible for the 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares of
a Fund with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if either those
shares or shares of the Fund are deemed to have been held by the Fund or the
shareholder, as the case may be, for less than 46 days during the 90-day period
beginning 45 days before the shares become ex-dividend.
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 a 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.
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 declared in
October, November or December with a record date 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 Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,000 per individual for married couples if only one spouse has earned income)
for that year. 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 not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by a Fund result in a reduction in the net asset value of
that 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.
64
<PAGE>
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.
Each Fund intends to qualify for and may 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 returns for,
and will be required to treat as part of the amounts distributed to them, their
pro rata portion of qualified taxes paid by a Fund to foreign countries (which
taxes relate primarily to investment income). Each Fund may make an election
under Section 853 of the Code, provided that more than 50% of the value of the
total assets of a Fund at the close of the taxable year consists of securities
in 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 shareholders 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 shareholder, 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 a 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.
Equity options (including covered call options written on portfolio
stock) and over-the-counter options on debt securities written or purchased by a
Fund will be subject to tax under Section 1234 of the Code. In general, no loss
will be recognized by a 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 a Fund's holding period for the option, and in the case
of the exercise of a put option, on a Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in a Fund's portfolio similar to the property underlying the put option. If a
Fund writes an 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 short-term
capital gain or loss. If a call option is exercised, the character of the gain
or loss depends on the holding period of the underlying stock.
Positions of a Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes that 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 stocks or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for
certain "qualified covered call options" on stock written by the relevant Fund.
Many futures and forward contracts entered into by a Fund and listed
nonequity options written or purchased by a Fund (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), 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 generally will be treated as 60% long-term
and 40% short-term capital gain or loss, and on the last trading day of the
Fund's fiscal year, 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 capital gain or loss. 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 a Fund will be treated as ordinary income or loss.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures or forward contract or nonequity option
or other position governed by Section 1256 which substantially diminishes that
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, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. Each Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.
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<PAGE>
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 a 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 a Fund accrues receivables or
liabilities denominated in a foreign currency and the time that 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 options, futures
and forward contracts, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
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 a Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If a Fund invests in stock of certain foreign investment companies,
that Fund may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of a Fund's holding period for the stock. The distribution
or gain so allocated to any taxable year of a Fund, other than the taxable year
of the excess distribution or disposition, would be taxed to that Fund at the
highest ordinary income rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in a Fund's investment company taxable income
and, accordingly, would not be taxable to that Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Each 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, each
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
stock would be deductible as ordinary losses to the extent of any net
mark-to-market gains previously included in income in prior years. The effect of
this election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a Fund-level tax when distributed to
shareholders as a dividend. Alternatively, the Funds may elect to include as
income and gain their share of the ordinary earnings and net capital gain of
certain foreign investment companies in lieu of being taxed in the manner
described above.
If a 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 a Fund invests in certain high
yield original issue discount obligations issued by corporations, a portion of
the original issue discount accruing on the obligation may be eligible for the
deduction for dividends received by corporations. In such event, dividends of
investment company taxable income received from a Fund by its corporate
shareholders, to the extent attributable to such portion of accrued original
issue discount, may be eligible for this deduction for dividends received by
corporations if so designated by a Fund in a written notice to shareholders.
Each Fund will be required to report to the Internal Revenue Service
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of Fund shares, except in
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the case of certain exempt shareholders. Under the backup withholding provisions
of Section 3406 of the Code, distributions of investment company 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 a 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.
Shareholders of each Fund may be subject to state and local taxes on
distributions received from a Fund and on redemptions of a Fund's shares.
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 a 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.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Funds' 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 a Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to a
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 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 a Fund to pay
a brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research, market or statistical information. The Adviser will not place
orders with broker/dealers on the basis that the broker/dealer has or has not
sold shares of a Fund. In effecting transactions in over-the-counter securities,
orders are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
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Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to a Fund and to the Adviser, it is the opinion of
the Adviser that such information only supplements the Adviser's 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 a Fund, and the Adviser in connection with a Fund
uses not all such information. 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 a
Fund.
The Directors review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
In the fiscal year ended October 31, 1996, Global Bond Fund paid
brokerage commissions of $527,488. In the fiscal year ended October 31, 1997 and
1998, Global Bond Fund paid no brokerage commissions.
In the fiscal years ended June 30, 1998, 1997 and 1996, International
Bond Fund paid no brokerage commissions.
For the fiscal years ended October 31, 1998, 1997 and 1996,
respectively, Emerging Markets Income Fund paid no brokerage commissions.
Portfolio Turnover
Average annual 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 from both the numerator and the denominator all
securities with maturities at the time of acquisition of one year or less.
Global Bond Fund's portfolio turnover rate for each of the fiscal years
ended October 31, 1998 and 1997 was 218.3% and 256.5%, respectively.
International Bond Fund's portfolio turnover rate for each of the
fiscal years ended June 30, 1998 and 1997 was 190.1% and 298.2%, respectively.
For the four months ended October 31, 1998 it was 303.5% (annualized).
Emerging Markets Income Fund's portfolio turnover rate for each of the
fiscal years ended October 31, 1998 and 1997 was 239.7% and 409.5%,
respectively.
Recent economic and market conditions necessitated more active
trading, resulting in the higher portfolio turnover rates. A higher rate
involves greater transaction expenses to a 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 a Fund's portfolio whenever
necessary, in management's opinion, to meet the Fund's objectives. Under normal
investment conditions, Global Bond Fund's portfolio turnover rate is expected to
exceed 200%.
NET ASSET VALUE
The net asset value of shares of each Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. 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") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An
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equity security which is traded on the National Association of Securities
Dealers Automated Quotation ("Nasdaq") system will be valued at its most recent
sale price on such system as of the Value Time. Lacking any sales, the security
will be valued at the most recent bid quotation as of the Value Time. The value
of an equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, 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 with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the 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 Funds' Valuation Committee, 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.
ADDITIONAL INFORMATION
Experts
The Financial highlights of each Fund included in the Funds' combined
prospectus and the Financial Statements incorporated by reference in this
Statement of Additional Information have been so included or incorporated by
reference in reliance on the report of PricewaterhouseCoopers LLP, One Post
Office Square, Boston, Massachusetts 02109, independent accountants, and given
on the authority of that firm as experts in accounting and auditing.
PricewaterhouseCoopers LLP is responsible for performing semi-annual and annual
audits of the financial statements and financial highlights of each Fund in
accordance with generally accepted auditing standards, and the preparation of
federal tax returns.
Other Information
Many of the investment changes in a 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 the light of the objectives and policies of the
Fund, and such factors as its other portfolio holdings and tax considerations
and should not be construed as recommendations for similar action by other
investors.
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The CUSIP number for Global Bond Fund is 378947-40-2.
The CUSIP number of International Bond Fund is 378947-30-3.
The CUSIP number for Emerging Markets Income Fund is 378947-10-5.
Each Fund has a fiscal year end of October 31.
The law firm of Dechert Price & Rhoads is counsel for the Funds.
The Corporation employs Brown Brothers Harriman and Co., 40 Water
Street, Boston, Massachusetts 02109 as Custodian for each Fund. Brown Brothers
Harriman and Co. have entered into agreements with foreign subcustodians
approved by the Directors of the Corporation pursuant to Rule 17f-5 of the 1940
Act.
Scudder Fund Accounting Corporation
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts, 02210-4103, a subsidiary of the Adviser, computes net
asset value for the Funds. Each Fund pays Scudder Fund Accounting Corporation an
annual fee equal to 0.08% of the first $150 million of average net assets, 0.06%
of such assets in excess of $150 million and 0.04% of such assets in excess of
$1 billion.
For the fiscal years ended October 31, 1996, 1997 and 1998 Global Bond
Fund incurred fees of $233,988, $156,250 and $105,220, respectively, of which
$16,353 was unpaid on October 31, 1998.
For the fiscal year ended June 30, 1997 and 1998, SFAC charged
International Bond Fund aggregate fees of $285,933 and $154,342, respectively.
For the four months ended October 31, 1998, the International Bond Fund incurred
fees of $42,020, of which $21,295 was unpaid on October 31, 1998.
For the fiscal years ended October 31, 1996, 1997 and 1998 Emerging
Markets Income Fund incurred fees of $150,781, $258,022 and $225,422,
respectively, of which 26,626 was unpaid on October 31, 1998.
Scudder Service Corporation
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a subsidiary of the Adviser, is the transfer, dividend-paying and
shareholder service agent for each Fund. Each Fund pays Scudder Service
Corporation an annual fee of $25.00 for each account maintained for a
participant.
For the fiscal years ended October 31, 1996, 1997 and 1998 Global Bond
Fund incurred fees of $478,160, $375,659 and $250,999, respectively, of which
$19,166 were unpaid on October 31, 1998.
For the fiscal year ended June 30, 1998, Scudder Service Corporation
charged International Bond Fund aggregate fees of $462,449. For the four months
ended October 31, 1998, International Bond Fund incurred fees of $119,561, of
which $29,578 was unpaid at October 31, 1998.
For the fiscal years ended October 31, 1996, 1997 and 1998 Emerging
Markets Income Fund incurred fees of $308,543, $606,320 and $556,145,
respectively, of which $40,242 were unpaid on October 31, 1998.
Scudder Trust Company
Scudder Trust Company, an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by the Fund
to Scudder Trust Company, Two International Place, Boston, Massachusetts
02110-4103 for such accounts. Each Fund pays Scudder Trust Company an annual fee
of $29.00 per shareholder account.
For the fiscal years ended October 31, 1996, 1997 and 1998 Global Bond
Fund incurred fees of $14,129, $16,092 and $13,737, respectively, of which
$1,102 were unpaid on October 31, 1998.
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Scudder International Bond Fund incurred fees of $80,418. For the four
months ended October 31, 1998, International Bond Fund incurred fees of $25,953,
of which $6,499 was unpaid at October 31, 1998.
For the fiscal years ended October 31, 1996, 1997 and 1998 Emerging
Markets Income Fund incurred fees of $15,749, $33,703 and $41,122, respectively,
of which $3,828 were unpaid on October 31, 1998.
The Directors of the Corporation have considered the appropriateness of
using this combined Statement of Additional Information for the Funds. There is
a possibility that a Fund might become liable for any misstatement, inaccuracy,
or incomplete disclosure in this Statement of Additional Information concerning
the other Fund.
The Funds, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are held in an
omnibus account.
The Funds' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the
Corporation has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. This Registration
Statement is available for inspection by the public at the SEC in Washington,
D.C.
FINANCIAL STATEMENTS
Global Bond Fund
The financial statements, including the Investment Portfolio of Global
Bond Fund, together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements, are incorporated by reference and
attached hereto in the Annual Report to Shareholders of the Fund dated October
31, 1998, and are hereby deemed to be part of this Statement of Additional
Information.
International Bond Fund
The financial statements, including the Investment Portfolio of
International Bond Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements, are incorporated by
reference and attached hereto in the Annual Report to Shareholders of the Fund
dated October 31, 1998, and are hereby deemed to be part of this Statement of
Additional Information.
Emerging Markets Income Fund
The financial statements, including the Investment Portfolio of
Emerging Markets Income Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements, are
incorporated by reference and attached hereto in the Annual Report to
Shareholders of the Fund dated October 31, 1998, and are hereby deemed to be
part of this Statement of Additional Information.
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APPENDIX
The following is a description of the ratings given by Moody's and S&P
to corporate and municipal bonds.
Ratings of Municipal and Corporate Bonds
S&P:
Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong. Debt rated AA
has a very strong capacity to pay interest and repay principal and differs from
the highest rated issues only in small degree. 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. 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.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. Debt rated B has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The B rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BB or BB- rating.
Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
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. Bonds, which are rated Aa, are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. 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.
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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. 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 other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. 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.
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. Bonds, which are rated Ca, represent obligations that are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. 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.
