<PAGE> 1
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1999
SECURITIES ACT FILE NO. 33-32430
INVESTMENT COMPANY ACT FILE NO. 811-5969
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. [ ]
(CHECK APPROPRIATE BOX OR BOXES)
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SCUDDER NEW EUROPE FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
345 PARK AVENUE
NEW YORK, NEW YORK 10154
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 891-0667
------------------------
BRUCE H. GOLDFARB, ESQ.
SCUDDER KEMPER INVESTMENTS, INC.
345 PARK AVENUE
NEW YORK, NEW YORK 10154
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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COPY TO:
BURTON M. LEIBERT, ESQ.
WILLKIE FARR & GALLAGHER
787 SEVENTH AVENUE
NEW YORK, NEW YORK 10019-6099
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 8, 1999
LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD
, 1999
PROSPECTUS
Mutual funds:
- are not FDIC-insured
- have no bank guarantees
- may lose value
SCUDDER NEW EUROPE FUND, INC.
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> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
FUND SUMMARY................................................ 1
Investment Objective and Principal Strategies............. 1
PRINCIPAL RISK FACTORS...................................... 1
Past Performance.......................................... 2
Fee and Expense Information............................... 3
Example................................................... 3
ABOUT THE FUND.............................................. 5
Principal Investment Strategies........................... 5
Other Investments......................................... 6
Risk Management Strategies................................ 6
Main Risks -- Generally................................... 6
Types of Investment Risk.................................. 7
Investment Manager........................................ 7
Portfolio Management...................................... 8
ABOUT YOUR INVESTMENT....................................... 9
Choosing a Share Class.................................... 9
Rule 12b-1 Plan........................................... 10
Special Features.......................................... 10
Buying Shares............................................. 11
Class A Shares............................................ 11
NAV Purchases............................................. 11
Selling and Exchanging Shares............................. 15
Distributions and Taxes................................... 15
Transaction Information................................... 16
FINANCIAL HIGHLIGHTS........................................ 18
</TABLE>
THE FUND IS A CLOSED-END FUND LISTED ON THE NEW YORK STOCK EXCHANGE. THE
SHAREHOLDERS OF THE FUND ARE BEING ASKED TO APPROVE A PROPOSAL TO CONVERT THE
FUND TO OPEN-END STATUS -- TO BECOME A MUTUAL FUND. IF APPROVED, THE CONVERSION
OF THE FUND TO AN OPEN-END INVESTMENT COMPANY IS EXPECTED TO OCCUR ON OR ABOUT
SEPTEMBER 1, 1999. THIS PROSPECTUS PERTAINS TO THE FUND AS AN OPEN-END
INVESTMENT COMPANY.
i
<PAGE> 4
FUND SUMMARY
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
The fund seeks long-term capital appreciation. Except as otherwise
indicated, the fund's investment objective and policies may be changed without a
vote of shareholders.
The fund seeks to achieve its investment objective by investing at least
65% of its total assets in equity securities of European companies that in the
opinion of the fund's investment manager, are likely to benefit from economic,
political, structural and technological changes and developments in Western,
Southern and Eastern Europe.
The fund will invest primarily in the more established and liquid markets
of Western and Southern Europe. To enhance return, the fund may also pursue
investment opportunities in the less wealthy nations of Southern Europe. The
fund intends to allocate its investments among at least three European countries
at all times.
The portfolio management team uses a growth style in buying and selling
securities for the fund.
PRINCIPAL RISK FACTORS
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. The principal risks of investing in the fund are:
- 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 or in the types of equity securities held by the fund.
- PORTFOLIO STRATEGY. The portfolio manager's skill in choosing
appropriate investments for the fund will determine in large part the
fund's ability to achieve its investment objective.
- FOREIGN SECURITIES. Investing in foreign securities involves other
considerations including limited information, higher brokerage costs,
different accounting standards and thinner trading markets as compared to
U.S. markets. In addition, investing in foreign securities, and to a
greater extent emerging markets, involves special risks including changes
in foreign currency exchange rates and political and economic
instability.
- EUROPEAN SECURITIES. The fund's performance will be affected by
political, social and economic factors affecting issuers in European
countries, including: growth of GDP or GNP, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position,
as well as interest and monetary exchange rates among European countries.
- EMERGING MARKETS. Eastern European countries and certain Southern
European countries are considered to be emerging markets. Investing in
emerging markets involves higher levels of risk, including increased
currency, information, liquidity, market, political and valuation risk.
Deficiencies in regulatory oversight, market infrastructure, shareholder
protections and company laws could expose the fund to operational and
other risks as well. Some countries may have restrictions that could
limit the fund's access to attractive opportunities. Additionally,
emerging markets often face serious problems (such as high external debt,
inflation and unemployment) that could subject the fund to increased
volatility or substantial declines in value.
- NON-DIVERSIFIED STATUS. The fund is considered a non-diversified
investment company under the Investment Company Act of 1940, as amended
(1940 Act), and is permitted to invest a greater proportion of its assets
in the securities of a smaller number of issuers than a diversified fund.
As a result, the fund may be subject to greater volatility with respect
to its portfolio securities than a fund that is more broadly diversified.
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PAST PERFORMANCE
The performance of Class M shares shown in the bar chart and performance
table reflects the performance of the fund in closed-end form. The bar chart and
performance table provide some indication of risks of investing in the fund by
showing changes in the fund's performance from year to year and by showing how
the fund's average annual returns for 1 and 5-year periods and since inception
compare with those of a broad measure of market performance. The fund's past
performance is not necessarily an indication of how the fund will perform in the
future.
TOTAL RETURNS FOR YEARS ENDED DECEMBER 31:
YEAR-BY-YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
YEAR-BY-YEAR TOTAL RETURNS
--------------------------
<S> <C>
'1991' 3.06
'1992' -9.59
'1993' 25.62
'1994' -0.27
'1995' 18.97
'1996' 34.38
'1997' 20.03
'1998' 34.39
</TABLE>
For the period included in the bar chart, the fund's highest return for a
calendar quarter was 27.41% (1st Quarter 1998), and the fund's lowest return for
a calendar quarter was 16.81% (3rd Quarter 1998).* The fund's year to date
performance through March 31, 1999 was (-.71%).
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* During this period, the fund operated as a closed-end investment company,
without daily sales and redemptions.
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
MSCI
EUROPE
FOR PERIODS ENDED DECEMBER 31, 1998 CLASS M* INDEX**
----------------------------------- -------- -------
<S> <C> <C>
One Year.................................................... 34.39% 28.53%
Five Years.................................................. 20.80% 19.09%
Since Inception***.......................................... 12.45% 14.47%
</TABLE>
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* Average annual total returns do not reflect the imposition of a 2%
redemption fee. If such fee had been included, the 1 year and since
inception returns would have been 30.33%, and 12.29%, respectively.
** The Morgan Stanley Capital International Europe Index is an unmanaged index
that is generally representative of the equity securities of the European
markets. Index returns assume reinvestment of dividends and unlike the
fund's returns, do not reflect any fees, expenses or sales charges.
*** Inception date for Class M Shares is February 16, 1990.
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<PAGE> 6
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
Special Features sections of this prospectus.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS M
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<S> <C> <C> <C> <C>
SHAREHOLDER FEES: FEES PAID DIRECTLY FROM YOUR
INVESTMENT.
Maximum Sales Charge (Load) Imposed on Purchases (as a %
of offering price).................................... 5.75% None None None
Maximum Deferred Sales Charge (Load) (as a % of
redemption proceeds).................................. None(1) 4% 1% None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends/Distributions............................... None None None None
Redemption Fee (as % of amount redeemed, if
applicable)........................................... None None None 2%(2)
Exchange Fee............................................ None None None 2%(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS M
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<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES: (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS).
Management Fee.......................................... 0.74% 0.74% 0.74% 0.74%
Distribution and Service (12b-1) Fees................... None 0.75% 0.75% None
Other Expenses.......................................... 1.11% 1.65% 1.13% 0.68%
Total Annual Fund Operating Expenses.................... 1.85% 3.14% 2.62% 1.42%
Expense Reimbursement................................... 0.10% 0.49% None None
Net Annual Fund Operating Expenses(3)................... 1.75% 2.65% 2.62% 1.42%
==== ==== ==== ====
</TABLE>
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(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.
(2) A 2% redemption fee, which is retained by the fund, is imposed on all
redemptions (including redemptions paid in-kind) and exchanges of Class M
shares for a period of one year from the date of this prospectus.
(3) The fund is expected to be reorganized from a closed-end fund to an open-end
fund in September 1999. 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 for the fund's current fiscal year ending
October 31, 1999, based on the fund's current fee schedule and expenses
incurred by the fund during its most recent fiscal year. 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. Pursuant to contractual agreements with the fund, the investment
manager, the underwriter, the administrator, the accounting agent and the
transfer agent have agreed, for the one year period commencing on the date
of this prospectus, to limit their respective fees and to reimburse other
operating expenses, to the extent necessary to limit total operating
expenses of the classes of the fund to the levels set forth in the table
above.
EXAMPLE
This example is to help you compare the cost of investing in the fund with
the cost of investing in other mutual funds.
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<PAGE> 7
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. The expense
calculations incorporate the contractual expense reimbursements in place for the
first year in the periods reflected below. 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:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
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<S> <C> <C> <C>
1 Year................................................... $ 743 $ 668 $ 365
3 Years.................................................. $1,118 $1,230 $ 814
5 Years.................................................. $1,519 $1,824 $1,390
10 Years*................................................ $2,641 $3,529 $2,954
</TABLE>
FEES AND EXPENSES IF YOU DID NOT SELL YOUR SHARES:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
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<S> <C> <C> <C>
1 Year................................................... $ 743 $ 268 $ 265
3 Years.................................................. $1,118 $ 930 $ 814
5 Years.................................................. $1,519 $1,624 $1,390
10 Years*................................................ $2,641 $3,529 $2,954
</TABLE>
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* Class B automatically converts into Class A six years after purchase.
4
<PAGE> 8
ABOUT THE FUND
OPEN-ENDING AND REORGANIZATION
The fund began operations on February 9, 1990 as a closed-end management
investment company. On July 20, 1999, the fund's shareholders will be asked to
approve the conversion of the fund to an open-end investment company. As a
result of a proposed reorganization with Kemper Europe Fund, the fund intends to
change its name to "Kemper Europe Fund, Inc." and issue newly designated Class
A, Class B and Class C shares to the shareholders of Kemper Europe Fund and
Class M shares to its existing shareholders. Class M shares will automatically
convert to Class A shares one year after the date of this prospectus.
PRINCIPAL INVESTMENT STRATEGIES
Under normal circumstances, the fund will invest at least 65% of its total
assets in equity securities of European companies and intends to allocate its
investments among at least three countries at all times. The fund considers an
issuer of securities to be a European company if:
- the company is organized under the laws of a European country and has a
principal office in a European country; or
- the company derives 50% or more of its total revenues from business in
Europe; or
- the company's equity securities are traded principally in European
securities markets.
Equity securities that may be purchased by the fund include:
- common and preferred stocks;
- sponsored and unsponsored depositary receipts;
- debt securities convertible into common stock;
- common stock purchase warrants and rights; and
- joint venture interests and general and limited partnership interests.
The fund will invest in established markets as well as newer markets, and
the portion of the fund's assets invested in each will vary from time to time.
The fund may also invest in companies of any size. The fund expects, however, to
invest primarily in the more established and liquid markets of Western and
Southern Europe. These countries include: Austria, Belgium, Denmark, Finland,
France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway,
Spain, Sweden, Switzerland and the United Kingdom.
To enhance return, the fund may also pursue investment opportunities in the
less wealthy nations of Southern Europe, currently Greece, Portugal and Turkey,
and the former Communist countries once part of the Soviet Union, although the
fund has no current intention to invest a significant amount of its assets in
these countries. The fund may invest in other European countries if
opportunities arise. To a lesser extent, the fund may also invest in
"Specialized Investments" which include equity securities of:
- privately-held and small European companies;
- companies and joint ventures based in Eastern Europe;
- European companies that have recently made initial public offerings of
their shares; and
- European companies that, in the public market, are selling at a
significant discount to their "private market value" (i.e., the value the
fund's investment manager believes informed investors would be willing to
pay to acquire such companies).
In choosing investments, the fund's investment manager will focus on
European companies that:
- generate or apply new technologies, distribution systems or services;
- expect to benefit from changing consumer demands or lifestyles;
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<PAGE> 9
- have prospects for above-average earnings growth; or
- are undervalued due to market misperception, temporary negative
developments, limited investor familiarity or other factors.
A security is typically sold when, in the opinion of the portfolio
management team, the stock has reached its fair market value and its
appreciation is limited, a company's fundamentals have deteriorated, the
portfolio management team loses confidence in company management, the fund's
portfolio is too heavily weighted in a particular company, country or sector, or
more attractive alternatives are available in other companies or sectors.
OTHER INVESTMENTS
The fund may invest up to 20% of its total assets in European debt
securities. Within this 20% limit, the fund may invest in debt securities which
are rated below Baa by Moody's Investors Service, Inc. or below BBB by Standard
& Poor's or unrated securities of comparable quality as determined by the
investment manager. Below-investment grade securities are commonly referred to
as "junk bonds."
The fund may invest in when-issued securities, illiquid and restricted
securities and convertible securities and may enter into repurchase agreements
and reverse repurchase agreements. The fund may also invest in investment
companies that invest primarily in equity securities of European companies.
RISK MANAGEMENT STRATEGIES
The fund may use certain derivatives (investments whose value is based on
indices or other securities) to protect against or otherwise cushion price
declines in the value of the fund's portfolio, to manage the effective maturity
or duration of fixed-income securities in the fund's portfolio or to enhance
potential gain. These instruments include:
- options on securities, equity and fixed-income indices and other
financial instruments;
- financial futures and related options;
- interest rate transactions (i.e., swaps, caps, floors and collars); and
- currency transactions (i.e., currency forward contracts, currency futures
contracts, currency swaps and options on currencies and currency
futures).
The fund is not obligated to pursue any hedging strategy. In addition,
hedging practices may not be available, may be too costly to be used effectively
or may be unable to be used for other reasons. The fund is limited to 5% of net
assets for initial margin and premium amounts on futures positions considered
speculative by the Commodities Futures Trading Commission.
Under unusual circumstances, the fund may invest up to 100% of its assets
in short and medium term high-grade debt securities, cash and cash equivalents
for temporary defensive purposes and up to 20% to maintain liquidity. Because
this defensive policy differs from the fund's investment objective, the fund may
not achieve its goal during a defensive period.
MAIN RISKS -- GENERALLY
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 investment manager's choice of countries,
market sectors or specific investments may not perform as well as expected, and
the fund could underperform its peers or lose money.
6
<PAGE> 10
TYPES OF INVESTMENT RISK
ACCESS RISK. The risk that some countries may restrict the fund's access
to investments or offer terms that are less advantageous than those for local
investors. This could limit the attractive investment opportunities available to
the fund.
CREDIT RISK. The risk that the issuer of a security, or the counterparty
to a contract, will default or otherwise become unable to honor a financial
obligation.
INTEREST RATE RISK. Changes in interest rates may cause a decline in an
investment's market value. With bonds and other fixed income securities, a rise
in interest rates typically causes a fall in values, while a fall in interest
rates typically causes a rise in values.
LIQUIDITY RISK. The risk that certain securities may be difficult or
impossible to sell at the time and the price that the fund would like. The fund
may have to lower the price, sell other securities instead or forego an
investment opportunity. Any of these could have a negative effect on fund
management or performance.
LOWER RATED SECURITIES (I.E., "JUNK BONDS"). These securities carry a
higher risk that the issuer will be unable to pay principal and interest when
due, and the market to sell such securities may be limited.
OPERATIONAL RISK. The risk that some countries may have less developed
securities markets (and related transaction, registration and custody
practices). Related to this factor is the concern that reliance on computer
systems not Year 2000 compliant could severely hamper a marketplace's ability to
handle securities transactions.
RISKS OF DERIVATIVE INSTRUMENTS. The use of these instruments requires
special skills, knowledge and investment techniques that differ from those
required for normal portfolio management. The success of the fund in selecting
these instruments for its portfolio depends on the skill of the investment
manager in predicting the movement of interest rates, the value of particular
instruments and other economic variables. There is no assurance that the
investment manager will accurately predict these movements.
EXPOSURE RISK. The risk associated with techniques that increase the
fund's exposure to a security, index or its investment portfolio. Exposure is
the fund's maximum potential gain or loss from an investment. Certain
investments (such as options and futures) may have the effect of magnifying
declines as well as increases in the fund's net asset value. Losses from writing
options and entering into futures can be unlimited.
SMALL COMPANIES RISK. The risk that small companies may have
less-experienced management, limited product lines, unproven track records or
inadequate capital reserves. These securities may carry increased market and
liquidity risks. Key information about the company may also be inaccurate or
unavailable.
TRADING LIMIT AND TRADING HALT RISK. Exchanges on which options and
futures contracts are traded have established limits on how much an option or
futures contract may decline over various time periods within a day. If an
option or futures contract's price declines more than the established limits, no
trading may occur at prices outside that limit. If a trading limit is reached
before the close of a trading day, the fund may not be able to purchase or sell
options or futures contracts at advantageous prices or at all. In such an event,
the fund also may be required to use a "fair-value" method to price its
outstanding contracts.
INVESTMENT MANAGER
The 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
fund's Board. Scudder Kemper Investments, Inc. 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. 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.
7
<PAGE> 11
The fund pays the investment manager a (graduated) monthly investment
management fee at the following rate:
<TABLE>
<CAPTION>
ANNUAL MANAGEMENT
AVERAGE DAILY NET ASSETS OF THE FUND FEE RATES
- ------------------------------------ -----------------
<S> <C>
$0 -- $250 million....................................... 0.75%
$250 million -- $1 billion............................... 0.72
$1 billion -- $2.5 billion............................... 0.70
$2.5 billion -- $5 billion............................... 0.68
$5 billion -- $7.5 billion............................... 0.65
$7.5 billion -- $10 billion.............................. 0.64
$10 billion -- $12.5 billion............................. 0.63
Over $12.5 billion....................................... 0.62
</TABLE>
For the fiscal year ended October 31, 1998, the investment manager received
an investment management fee of $4,151,077 (approximately 1.15% of the fund's
average net assets), which was based upon the fund's prior (higher) investment
management fee schedule.
PORTFOLIO MANAGEMENT
The fund is managed by a team of investment professionals who each play an
important role in the fund's management process. Team members work together to
develop investment strategies and select securities for the fund's portfolio.
They are supported by the investment manager's large staff of economists,
research analysts, traders and other investment specialists who work in the
investment manager's offices across the United States and abroad. The investment
manager 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:
<TABLE>
<CAPTION>
JOINED
NAME & TITLE THE FUND BACKGROUND
- ------------ -------- ----------
<S> <C> <C>
Carol L. Franklin 1990 Joined Scudder Kemper in 1981 as a portfolio manager.
Lead 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 1992 Joined Scudder Kemper in 1992 as a portfolio manager.
Portfolio 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.
Marc Slendebroek 1998 Joined Scudder Kemper in 1994 as a European equity
Portfolio Manager 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.
</TABLE>
YEAR 2000 READINESS
Like other mutual funds and financial and business organizations worldwide,
the fund could be adversely affected if computer systems on which it 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 fund's business
8
<PAGE> 12
and operations, such as problems with calculating net asset value and
difficulties in implementing the fund's purchase and redemption procedures. The
investment manager 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. To the extent that
the impact on a fund holding or on markets or economies is negative, it could
seriously affect the fund's performance.
EURO CONVERSION
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operations of the 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 EMU
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, 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, the
fund's performance could be hurt.
ABOUT YOUR INVESTMENT
CHOOSING A SHARE CLASS
The fund provides investors with the option of purchasing shares in the
following ways:
CLASS A SHARES............. Offered at net asset value plus a maximum sales
charge of 5.75% of the offering price.
Reduced sales charges apply to purchases of $50,000
or more (the "Large Order NAV Purchase Privilege").
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 during
the second year of purchase.
CLASS B SHARES............. 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............. 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.
CLASS M SHARES............. Represent the initial shares of the fund and are no
longer offered. Class M shares are not subject to a
contingent deferred sales charge or a Rule 12b-1
distribution fee. Class M shares are subject to a
2% fee on all redemptions (including redemptions
in-kind) and exchanges. Class M Shares will
automatically convert to Class A shares one year
after the date of this prospectus.
9
<PAGE> 13
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 the 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 Kemper Distributors, Inc.
Be aware that financial services firms may receive different compensation
depending upon which class of shares they sell.
RULE 12b-1 PLAN
The 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
principal underwriter to pay for distribution and services for those classes.
Rule 12b-1 fees are not imposed on Class A or Class M shares. Because 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. The fund's Class A shares may be
purchased at the rate applicable to the discount bracket attained by combining
concurrent investments in Class A shares of most Kemper Funds.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for
Class A shares also apply to the aggregate amount of purchases made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by Kemper Distributors, Inc. The Letter, which imposes no obligation to
purchase or sell additional Class A shares, provides for a price adjustment
depending upon the actual amount purchased within such period.
CLASS A SHARES -- CUMULATIVE DISCOUNT. Class A shares of 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 most Kemper Funds (computed at the maximum offering price at the time
of the purchase for which the discount is applicable) already owned by the
investor.
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. Class M shareholders may exchange their shares for Class A
shares of a Kemper Mutual Fund and may only exchange shares in an amount less
than $500,000. A 2% fee will apply to any exchange of Class M shares and will be
retained by the fund for the benefit of the remaining shareholders (see
"Redemption Fee" below). 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"). Shares of a Kemper
Fund with a value of $1,000,000 or less (except Kemper Cash Reserve Fund)
acquired by exchange from another Kemper Fund or a Money Market Fund may not be
exchanged thereafter until they have been owned for 15 days, if, in the
investment manager's judgment, 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.
10
<PAGE> 14
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.
BUYING SHARES
You may purchase shares of the fund by contacting the securities dealer or
other financial services firm from whom you received this prospectus.
CLASS A SHARES
PUBLIC OFFERING PRICE, INCLUDING SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE
----------------------------------
AS A % OF AS A % OF NET
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED*
- ------------------ -------------- ----------------
<S> <C> <C>
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**
</TABLE>
- ---------------
* 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 the fund may be purchased at net asset value by:
- shareholders in connection with the investment or reinvestment of income
and capital gain dividends;
- 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;
- any purchaser with Kemper Funds investment totals of at least $1,000,000;
- 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;
- 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, any trust, pension, profit-sharing or other benefit plan
for only such persons;
- 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;
- registered representatives and employees of broker-dealers having selling
group agreements with Kemper Distributors, Inc., any trust, pension,
profit-sharing or other benefit plan for only such persons;
- officers, directors, and employees of service agents of the fund;
- 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);
- selected employees (including their spouses and dependent children) of
banks and other financial services firms that provide administrative
services related to the fund pursuant to an agreement with Kemper
Distributors, Inc. or one of its affiliates;
11
<PAGE> 15
- certain professionals who assist in the promotion of Kemper Funds
pursuant to personal services contracts with Kemper Distributors, Inc.,
for themselves or members of their families;
- in connection with the acquisition of the assets of or merger or
consolidation with another investment company;
- 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;
- persons who purchase shares of the fund through Kemper Distributors, Inc.
as part of an automated billing and wage deduction program administered
by RewardsPlus of America;
- 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, Inc., including a requirement that such shares be
sold for the benefit of their clients participating in an investment
advisory program or agency commission program under which such clients
pay a fee to the investment 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:
- redemptions under the fund's Systematic Withdrawal Plan at a maximum of
10% per year of the net asset value of the account;
- redemption of shares of a shareholder (including a registered joint
owner) who has died;
- 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);
- 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;
- redemptions by employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder
Service Agent or its affiliates;
- redemptions of shares whose dealer of record at the time of the
investment notifies Kemper Distributors, Inc. 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.
12
<PAGE> 16
Class A shares purchased under the Large Order NAV Purchase Privilege may
be exchanged for Class A shares of any Kemper Fund or a Money Market Fund
without paying any contingent deferred sales charge. If the Class A shares
received on exchange are redeemed thereafter, a contingent deferred sales charge
may be imposed.
CLASS B SHARES
PUBLIC OFFERING PRICE
Net asset value per share without any sales charge at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge may be imposed upon redemption of Class
B shares. There is no such charge upon redemption of any share appreciation or
reinvested dividends. The charge is computed at the following rates applied to
the value of the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
YEAR OF REDEMPTION AFTER PURCHASE: FIRST SECOND THIRD FOURTH FIFTH SIXTH
- ---------------------------------- ----- ------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Contingent Deferred Sales Charge:....................... 4% 3% 3% 2% 2% 1%
</TABLE>
The contingent deferred sales charge will be waived:
- 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);
- 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 Section
72(t)(2)(A)(iv) of the Internal Revenue Code of 1986, as amended (Code)
prior to age 59 1/2;
- for redemptions made pursuant to a systematic withdrawal plan;
- 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;
- in the event of the death of the shareholder (including a registered
joint owner).
The contingent deferred sales charge will also be waived in connection with
the following redemptions of shares held by employer sponsored employee benefit
plans maintained on the subaccount record keeping system made available by the
Shareholder Service Agent:
- 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);
- redemptions in connection with retirement distributions (limited at any
one time to 10% of the total value of plan assets invested in the fund);
- redemptions in connection with distributions qualifying under the
hardship provisions of the Code;
- redemptions representing returns of excess contributions to such plans.
RULE 12B-1 FEE
0.75%
CONVERSION FEATURE
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. Shares purchased through the reinvestment of dividends
13
<PAGE> 17
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 the fund and Class B shares of most Kemper Funds may be
exchanged for each other at their relative net asset values without a contingent
deferred sales charge.
CLASS C SHARES
PUBLIC OFFERING PRICE
Net asset value per share without any sales charge at the time of purchase.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge of 1% may be imposed upon redemption of
Class C shares redeemed within one year of purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
contingent deferred sales charge will be waived in the event of:
- 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;
- redemption 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;
- redemption of shares of a shareholder (including a registered joint
owner) who has died;
- 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);
- redemptions under the fund's systematic withdrawal plan at a maximum of
10% per year of the net asset value of the account;
- 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 on the first year administrative service and
distribution fees applicable to such shares and agrees to receive such
fees quarterly;
- redemption of shares purchased through a dealer-sponsored asset
allocation program maintained on an omnibus record-keeping system
provided the dealer of record has waived the advance of the first year
administrative services and distribution fees applicable to such shares
and has agreed to receive such fees quarterly.
RULE 12B-1 FEE
0.75%
CONVERSION FEATURE
None
EXCHANGE PRIVILEGE
Class C shares of the fund and Class C shares of most Kemper Funds may be
exchanged for each other at their relative net asset value without paying any
contingent deferred sales charge.
14
<PAGE> 18
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 the fund to redeem his or her shares. When
shares are held for the account of a shareholder by the fund's transfer agent,
the shareholder may redeem 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.
Any 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 investment is received. For example, an investment made in
December, 1998 will be eligible for the second year's charge if redeemed on or
after December 1, 1999. In the event no specific order is requested when
redeeming shares subject to a contingent deferred sales charge, the redemption
will be made first from shares presenting reinvested dividends and then from the
earliest purchase of shares. Kemper Distributors, Inc. receives any contingent
deferred sales charges directly.
SHARE CERTIFICATES
When certificates for shares have been issued, they must be mailed to or
deposited with Kemper Services Company, along with a duly endorsed stock power
and accompanied by a written request for redemption. Redemption requests and a
stock power must be endorsed by the account holder with signatures guaranteed.
The redemption request and stock power must be signed exactly as the account is
registered, including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
REINVESTMENT PRIVILEGE
Under certain circumstances, a shareholder who has redeemed Class A shares
may reinvest up to the full amount redeemed at net asset value at the time of
the reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The fund normally distributes dividends of net investment income annually
and any net realized short-term and long-term capital gains at least annually.
Income and capital gains dividends, if any, of the fund will be credited to
shareholder accounts in full and fractional shares of the same class of the fund
at net asset value on the reinvestment date (with the exception of Class M
shareholders who will receive Class A shares of the fund), except that, upon
written request to the Shareholder Service Agent, Kemper Services 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
15
<PAGE> 19
(2) To receive income and capital gains dividends in cash.
Any dividends of the fund that are reinvested will normally be reinvested
in shares of the same class of the fund, except for Class M shareholders who
will receive Class A shares of the fund. However, by writing to the Shareholder
Service Agent, you may choose to have dividends of the 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 fund will reinvest dividend
checks (and future dividends) in shares of the same class of the fund 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
fund unless you request that such policy not be applied to your account.
Distributions are generally taxable, whether received in cash or
reinvested.
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 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.
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.
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 the fund may be subject to
state, local and foreign taxes on fund distributions and redemptions of fund
shares. You should consult your tax advisor regarding the particular tax
consequences of an investment in the fund.
The 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 the fund.
The fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions and redemption proceeds payable to you if you
fail to provide the fund your correct taxpayer identification number or to make
required certifications, or if you have been notified by the Internal Revenue
Service 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 fund 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 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.
The net asset value per share of the fund is the value of one share and is
determined separately for each class by dividing the value of the fund's net
assets attributable to that class, 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
16
<PAGE> 20
of the fund will generally be lower than that of the Class A and M shares of the
fund because of the higher annual expenses borne by the Class B and Class C
shares.
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 per share of the fund may
change at a time when shareholders are not able to purchase or redeem their
shares.
REDEMPTION FEE (CLASS M SHARES)
Upon the redemption or exchange of Class M shares of the fund (including
redemptions in-kind) for a period of one year from the date of this prospectus,
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. This fee is
intended to discourage short term trading in a vehicle intended for long term
investment, 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 all redemptions from the fund and exchanges to other
Kemper Funds by Class M shareholders. The fee is applied to the shares being
redeemed or exchanged in the order in which they were purchased.
PROCESSING TIME
All requests to buy and sell shares that are received in good order by 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 (subject to any applicable sales load, contingent deferred
sales charge or redemption fee). Orders received by dealers or other financial
services firms prior to the determination of net asset value and received by the
fund's 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 the 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 fund 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
Purchase and sales should be made for long-term investment purposes only.
The fund and its 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 the fund's share price. The fund reserves the right
to withdraw all or any part of the offering made by this prospectus and to
reject purchase orders. Also, from time to time, the fund may temporarily
17
<PAGE> 21
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 the fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an IRA 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 fund may assess
a quarterly fee of $9 on an account with a balance below $1,000 for the quarter
which will be collected automatically by the fund from the shareholder's
account. The fee will not apply to accounts enrolled in an automatic investment
program, IRAs 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 the fund through a member of the National
Association of Securities Dealers, Inc. (other than the fund's distributor),
that member may charge a fee for that service. This prospectus should be read in
connection with such firm's material regarding its fees and services.
REDEMPTIONS IN-KIND
The fund reserves the right to honor any request for redemption or
repurchases 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.
With respect to Class M shareholders, all redemptions will be paid in-kind
to the extent those redemptions exceed $500,000, and like all redemptions of
Class M shares, will be subject to a 2% redemption fee on the current net asset
value of the shares. Shareholders whose redemptions are effected in-kind may
bear expenses in excess of 1% of the net asset value of the shares redeemed,
which expenses are in addition to any applicable redemption fee. No redemption
requests subject to in-kind redemption may be made other than by a written
request accompanied by a properly completed redemption and certification form,
which is available from Kemper Service Company.
FINANCIAL HIGHLIGHTS
The table below is intended to help you understand the fund's financial
performance for the periods reflected below. Certain information reflects the
financial results for a single fund share. The total return figures show what an
investor in the fund would have earned (or lost) assuming reinvestment of all
distributions. This information has been audited by PricewaterhouseCoopers LLP
whose report, along with the fund's financial statements, is included in the
fund's annual report, which is available upon request by calling Kemper at
1-800-621-1048.
The following table shows financial information for the fund's original
share class (Class M) expressed in terms of one share outstanding throughout the
relevant period, and reflects the operations of the fund as a closed-end
investment company. Financial information is not available for the fund's Class
A, B and C shares since the reorganization of the fund will take place after the
close of the fund's most recent fiscal year. The fund's performance may have
been lower if it had operated as an open-end fund during this period.
18
<PAGE> 22
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $19.96 $16.60 $13.24 $11.61 $10.72
------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss)(a)............... -- (.01) .05 .05 .02
Net realized and unrealized gain (loss)
on investment transactions.................. 4.47 3.43 3.36 1.58 .87
------ ------ ------ ------ ------
Total from investment operations.............. 4.47 3.42 3.41 1.63 .89
------ ------ ------ ------ ------
Less distributions from:
Net investment income......................... (.09) (.06) (.05) -- --
Net realized gains on investment
transactions................................ (2.11) -- -- -- --
------ ------ ------ ------ ------
Total distributions........................... (2.20) (.06) (.05) -- --
------ ------ ------ ------ ------
Net asset value, end of period................ $22.23 $19.96 $16.60 $13.24 $11.61
====== ====== ====== ====== ======
Market value, end of period................... $18.88 $15.50 $14.00 $10.25 $ 9.75
====== ====== ====== ====== ======
TOTAL RETURN
Per share market value (%).................... 39.56 11.16 37.18 5.13 (4.88)
Per share net asset value (%)(b).............. 27.70 20.66 25.92 14.04 8.30
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)........ 359 320 266 213 186
Ratio of operating expenses to average net
assets (%).................................. 1.41 1.49 1.51 1.62 1.67
Ratio of net investment income (loss) to
average net assets (%)...................... (.01) (.03) .31 .39 .20
Portfolio turnover rate (%)................... 41.4 44.7 35.3 32.4 43.2
</TABLE>
- ---------------
(a) Based on monthly average shares outstanding during the period.
(b) Total investment returns reflect changes in net asset value per share during
each period and assume that dividends and capital gains distributions, if
any, were reinvested. These percentages are not an indication of the
performance of a shareholder's investment in the Fund based on market price.
Additional information about the fund may be found in the fund's 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 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
19
<PAGE> 23
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
CALL THE KEMPER FUNDS AT:
BY TELEPHONE 1-800-621-1048
- --------------------------------------------------------------------------------------------
<S> <C>
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more
information).
- --------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
- --------------------------------------------------------------------------------------------
</TABLE>
The Statement of Additional Information dated , 1999 is incorporated
by reference into this prospectus (is legally a part of this prospectus).
INVESTMENT COMPANY ACT FILE NUMBER: 811-5969
20
<PAGE> 24
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED JUNE 8, 1999
STATEMENT OF ADDITIONAL INFORMATION
, 1999
SCUDDER NEW EUROPE FUND, INC.
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the prospectus of the Scudder New Europe Fund, Inc.
(the "Fund") dated , 1999. The prospectus may be obtained without
charge from the Fund and is also available along with other related materials on
the SEC's Internet web site (http://www.sec.gov).
The Fund is a closed-end fund whose shares are listed on the New York Stock
Exchange, Inc. The shareholders of the Fund are being asked to approve a
proposal to open-end the Fund. The conversion of the Fund to an open-end
investment company is expected to occur on or about September 1, 1999. This
Statement of Additional Information pertains to the Fund as an open-end
investment company.
<PAGE> 25
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT RESTRICTIONS..................................... 1
INVESTMENT OBJECTIVE AND POLICIES........................... 2
CERTAIN INVESTMENT PRACTICES................................ 4
DIVIDENDS AND TAXES......................................... 18
NET ASSET VALUE............................................. 22
PERFORMANCE................................................. 23
INVESTMENT MANAGER AND UNDERWRITER.......................... 26
PORTFOLIO TRANSACTIONS...................................... 30
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES............... 31
REDEMPTION OR REPURCHASE OF SHARES.......................... 36
SPECIAL FEATURES............................................ 41
OFFICERS AND DIRECTORS...................................... 45
ORGANIZATION OF THE FUND.................................... 47
</TABLE>
The financial statements appearing in the Fund's Annual Report to
Shareholders are incorporated herein by reference. The Report for the Fund
accompanies this document.
PRINTED
ON RECYCLED PAPER
i
<PAGE> 26
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which,
together with the investment objective and fundamental policies of the Fund,
cannot be changed without approval of a "majority" of its outstanding voting
securities. 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.
The Fund is classified as a non-diversified open-end management company.
The Fund may not:
1. Purchase securities on margin, except such short-term credits as
may be necessary or routine for clearance of transactions and the
maintenance of margin with respect to futures and forward contracts.
2. Make short sales of securities, except short sales against the
box.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow money as permitted under the 1940 Act, as
interpreted or modified by regulatory authority having jurisdiction from
time to time, and may also pledge its assets to secure such borrowings. For
the purposes of this investment restriction, collateral arrangements with
respect to the writing of options or the purchase or sale of futures
contracts are not deemed a pledge of assets or the issuance of a senior
security.
4. Invest more than 25% of the total value of its assets in a
particular industry; provided, however, that the foregoing restriction
shall not be deemed to prohibit the Fund from purchasing the securities of
any issuer pursuant to the exercise of rights distributed to the Fund by
the issuer, except that no such purchase may be made if as a result the
Fund will fail to meet the diversification requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). This restriction does not
apply to securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, but will apply to foreign government
obligations unless the U.S. Securities and Exchange Commission (the "SEC")
permits their exclusion.
5. Act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under applicable securities laws.
6. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, although it may purchase and sell securities that
are secured by real estate or commodities and securities of companies that
invest or deal in real estate or commodities, may purchase and sell futures
contracts and related options on stock indices and currencies, may enter
into forward currency exchange contracts, may write options on stocks and
may purchase and sell options on currencies and stock indexes.
7. Make loans, provided that the Fund may (a) acquire debt securities
as described herein, (b) enter into repurchase agreements and (c) lend
portfolio securities in an amount not to exceed 25% of the Fund's total
assets.
The following additional restrictions are not fundamental policies of the
Fund and may be changed by the Board of Directors.
The Fund may not:
1. Borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by engaging in
reverse repurchase agreements, 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.
<PAGE> 27
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 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.
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).
6. Lend portfolio securities in an amount greater than 5% of its
total assets.
7. Make investments for the purpose of exercising control or
management. Substantial stock ownership may occasionally confer on the Fund
the ability to influence policies of portfolio companies. In addition, the
Fund's management may consult with and advise the management of portfolio
companies with respect to the operating and financial policies of such
companies.
8. Participate on a joint and several basis in any trading account in
securities.
9. Purchase any security (other than obligations of the U.S.
government, its agencies or instrumentalities) if, as a result, more than
10% of the Fund's total assets (taken at current value) would then be
invested in securities of any single issuer. The exercise of stock
subscription rights or conversion rights is not deemed to be a purchase for
purposes of this restriction.
10. Invest more than 15% of its assets in illiquid securities.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is long-term capital appreciation,
which it seeks to achieve by investing primarily in equity securities of
European companies.
The Fund will invest in both the industrialized nations of Western Europe
and the less wealthy or developed countries in Southern and Eastern Europe. The
Fund will invest in established markets and companies with large capitalizations
as well as newer markets and smaller companies, and the portion of the Fund's
assets invested in each will vary from time to time. The Fund seeks to benefit
from accelerating economic growth transformation and deregulation taking hold in
Europe. These developments involve, among other things, increased privatizations
and corporate restructurings, the reopening of equity markets and economies in
Eastern Europe, further broadening of the European Union, and the implementation
of economic policies to promote non-inflationary growth. The Fund invests in
companies it believes are well placed to benefit from these and other structural
and cyclical changes now underway in this region.
Except as otherwise indicated, the Fund's investment objective and policies
are not fundamental and may be changed without a vote of shareholders. If there
is a change in investment objective, shareholders should consider whether the
Fund remains an appropriate investment in light of their then current financial
position and needs. There can be no assurance that the Fund's objective will be
met.
The Fund will invest, under normal market conditions, at least 65% of its
total assets in the equity securities of European companies. The Fund defines a
European company as: (i) a company organized under the laws of a European
country and that has a principal office in a European country; or (ii) a
company, wherever organized, where at least 50% of the company's non-current
assets, capitalization, gross revenue or profit in its most recent fiscal year
represents (directly or indirectly through subsidiaries) assets or activities
located in Europe; or (iii) a company whose equity securities are traded
principally in European securities markets. The Fund's definition of European
companies may include companies that have characteristics and business
relationships common to companies in other regions. As a result, the value of
the securities of such
2
<PAGE> 28
companies may reflect economic and market forces applicable to other regions, as
well as to Europe. The Fund believes, however, that investment in such companies
will be appropriate in light of the Fund's investment objective, because Scudder
Kemper Investments, Inc. (the "Adviser") will select among such companies only
those which, in its view, have sufficiently strong exposure to economic and
market forces in Europe such that their value will tend to reflect European
developments to a greater extent than developments in other regions. For
example, the Adviser may invest in companies organized and located in the U.S.
or other countries outside of Europe, including companies having their entire
production facilities outside of Europe, when such companies meet one or more
elements of the Fund's definition of European companies so long as the Adviser
believes at the time of investment that the value of the company's securities
will reflect principally conditions in Europe.
The Fund expects the majority of its equity assets to be invested in the
more established and liquid markets of Western and Southern Europe. These more
established Western and Southern European countries include: Austria, Belgium,
Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the
Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. To
enhance return potential, however, the Fund may pursue investment opportunities
in the less wealthy nations of Southern Europe, currently Greece, Portugal and
Turkey, and the former communist countries of Eastern Europe, including
countries once part of the Soviet Union. The Fund may invest in other countries
of Europe when their markets become sufficiently developed, in the opinion of
the Adviser.
The Fund intends to allocate its investments among at least three countries
at all times. The Fund's equity investments may consist of: common stock,
preferred stock (convertible or non-convertible), depositary receipts (sponsored
or unsponsored) and warrants. These may be illiquid securities. Equity
securities may also be purchased through rights. Securities may be listed on
securities exchanges, traded over-the-counter ("OTC")or have no organized
market. In addition, the Fund may engage in strategic transactions, including
derivatives.
The Fund may invest, under normal market conditions, up to 20% of its total
assets in European debt securities. Capital appreciation in debt securities may
arise from a favorable change in relative interest rate levels or in the
creditworthiness of issuers. Within this 20% limit, the Fund may invest in debt
securities which are unrated, rated, or the equivalent of those rated below
investment grade (commonly referred to as "junk bonds"); that is, rated below
Baa by Moody's Investor Service, Inc. ("Moody's") or below BBB by Standard &
Poor's Ratings Service ("S&P"). Such securities may be in default with respect
to payment of principal or interest.
The Fund may invest in when-issued securities, illiquid and restricted
securities and convertible securities and may enter into repurchase agreements
and reverse repurchase agreements. The Fund may also invest in closed-end
investment companies that invest primarily in Europe.
When, in the opinion of the Adviser, market conditions warrant, the Fund
may hold foreign or U.S. debt instruments as well as cash or cash equivalents,
including foreign and domestic money market instruments, short-term government
and corporate obligations, and repurchase agreements without limit for temporary
defensive purposes and up to 20% to maintain liquidity. It is impossible to
accurately predict how long such alternative strategies may be utilized.
Foreign securities such as those purchased by the Fund may be subject to
foreign government 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.
From time to time, the Fund may be a purchaser of restricted debt or equity
securities (i.e., securities which may require registration under the Securities
Act of 1933, as amended (the "1933 Act"), or an exemption therefrom, in order to
be sold in the ordinary course of business) in a private placement. The Fund has
undertaken not to purchase or acquire any such securities if, solely as a result
of such purchase or acquisition, more than 15% of the value of the Fund's net
assets would be invested in illiquid securities.
3
<PAGE> 29
To a lesser extent, the Fund may also invest in "Specialized Investments"
which consist of equity securities of: (i) privately-held European companies;
(ii) European companies that have recently made initial public offerings of
their shares; (iii) government-owned or -controlled companies that are being
privatized; (iv) smaller publicly-held European companies, i.e., any European
company having a market capitalization of less than $500 million (the Board of
Directors of the Fund may, in the future, reevaluate and increase or decrease
the maximum market capitalization for qualification as a smaller European
company); (v) companies and joint ventures based in Eastern Europe; (vi) private
placements and joint venture participations in European companies that may not
be readily marketable; (vii) pooled investment funds that invest principally in
securities in which the Fund may invest, which are considered investment
companies for purposes of the 1940 Act restrictions described below; and (viii)
European companies with private market values perceived by the Adviser to be
substantially in excess of their publicly-traded values.
CERTAIN INVESTMENT PRACTICES
INVESTING IN FOREIGN SECURITIES
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Fund's performance. As foreign companies are not
generally subject to uniform accounting and auditing 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 the New York
Stock Exchange (the "NYSE"), and securities of some foreign companies are less
liquid and more volatile than securities of domestic companies. Similarly,
volume and liquidity in most foreign bond markets are less than the volume and
liquidity in the U.S. and at times, volatility of price can be greater than in
the U.S. Further, foreign markets have different clearance and settlement
procedures and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems either could result in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Payment
for securities without delivery may be required in certain foreign markets.
Fixed commissions on some foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges, although the Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. Further,
the Fund may encounter difficulties or be unable to pursue legal remedies and
obtain judgments in foreign courts. There is generally less government
supervision and regulation of business and industry practices, stock exchanges,
brokers and listed companies in foreign countries 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 withholding or
confiscatory taxes, 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.
Many of the currencies of Eastern European countries have experienced a
steady devaluation relative to Western currencies. Any future devaluation may
have a detrimental impact on any investments made by the
4
<PAGE> 30
Fund in Eastern Europe. The currencies of most Eastern European countries are
not freely convertible into other currencies and are not internationally traded.
The Fund will not invest its assets in non-convertible fixed income securities
denominated in currencies that are not freely convertible into other currencies
at the time the investment is made.
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 management of the Fund seeks to mitigate the risks associated
with these considerations through diversification and active professional
management. Although investments in companies domiciled in developing countries
may not be subject to potentially greater risks than investments in developed
countries, the Fund will not invest in any securities of issuers located in
developing countries if the securities, in the judgment of the Adviser, are
speculative.
EMERGING MARKETS. While the Fund's investments in foreign securities will
principally be in developed countries, the Fund may invest in countries
considered by the Adviser to be developing or "emerging" markets. Developing or
emerging markets involve exposure to economic structures that are generally less
diverse and mature than in the U.S., and to political systems that may be less
stable. A developing country or emerging market country can be considered to be
a country that is in the initial stages of its industrialization cycle.
Currently, emerging markets generally include every country in the world other
than the U.S., Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and
most Western European countries. Currently, investing in many emerging markets
may not be desirable or feasible because of the lack of adequate custody
arrangements for the Fund's assets, overly burdensome repatriation and similar
restrictions, the lack of organized and liquid securities markets, unacceptable
political risks or other reasons. As opportunities to invest in securities in
emerging markets develop, the Fund may expand and further broaden the group of
emerging markets in which it invests. In the past, markets of developing
countries have been more volatile than the markets of developed countries;
however, such markets often have provided higher rates of return to investors.
The Adviser believes that these characteristics can be expected to continue in
the future.
Many of the risks described above relating to foreign securities generally
will be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the U.S. and other more developed countries. Disclosure, regulatory
and accounting standards in many respects are less stringent than in the U.S.
and other developed markets. There also may be a lower level of monitoring and
regulation of developing markets and the activities of investors in such
markets, and enforcement of existing regulations has been extremely limited.
In addition, brokerage commissions, custodial services and other costs
relating to investment in foreign markets generally are more expensive than in
the U.S.; this is particularly true with respect to emerging markets. Such
markets have different settlement and clearance procedures. In certain markets,
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Such settlement problems may cause emerging market securities to
be illiquid. The inability of the Fund to make intended securities purchases due
to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to 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
5
<PAGE> 31
to the purchaser. Certain emerging markets may lack clearing facilities
equivalent to those in developed countries. Accordingly, settlements can pose
additional risks in such markets and ultimately can expose the Fund to the risk
of losses resulting from the Fund's inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for the Fund's portfolio securities in such
markets may not be readily available. The Fund's portfolio securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of its Board of Directors.
Investment in certain emerging market securities is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain emerging market securities and
increase the costs and expenses of a Fund. Emerging markets may require
governmental approval for the repatriation of investment income, capital or the
proceeds of sales of securities by foreign investors. In addition, if a
deterioration occurs in an emerging market's balance of payments, the market
could impose temporary restrictions on foreign capital remittances.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include
securities issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. The Fund's investments in the
securities of privatized enterprises include privately negotiated investments in
a government- or state-owned or -controlled company or enterprise that has not
yet conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as the
Fund, to participate in privatizations may be limited by local law, or the price
or terms on which the Fund may be able to participate may be less advantageous
than for local investors. Moreover, there can be no assurance that governments
that have embarked on privatization programs will continue to divest their
ownership of state enterprises, that proposed privatizations will be successful
or that governments will not re-nationalize enterprises that have been
privatized.
In the case of the enterprises in which the Fund may invest, large blocks
of the stock of those enterprises may be held by a small group of stockholders,
even after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or
former state enterprises go through an internal reorganization or management.
Such reorganizations are made in an attempt to better enable these enterprises
to compete in the private sector. However, certain reorganizations could result
in a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which the Fund may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering, these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
FOREIGN CURRENCIES. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on futures
contracts on foreign currencies, 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.
6
<PAGE> 32
Although the Fund values its assets daily in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. The Fund will conduct its foreign currency
exchange transactions either on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into
forward or futures contracts to purchase or sell foreign currencies.
DEPOSITARY RECEIPTS. The Fund may invest directly in securities of
emerging country issuers through sponsored or unsponsored American Depositary
Receipts ("ADRs"), Global Depositary Receipts ("GDRs"), International Depositary
Receipts ("IDRs") and other types of Depositary Receipts (which, together with
ADRs, GDRs and IDRs are hereinafter referred to as "Depositary Receipts").
Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. In addition, the
issuers of the stock of unsponsored Depositary Receipts are not obligated to
disclose material information in the U.S. and, therefore, there may not be a
correlation between such information and the market value of the Depositary
Receipts. ADRs are Depositary Receipts typically issued by a U.S. bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. GDRs, IDRs and other types of Depositary Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
U.S. banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts
in bearer form are designed for use in securities markets outside the U.S. For
purposes of the Fund's investment policies, the Fund's investments in ADRs, GDRs
and other types of Depositary Receipts will be deemed to be investments in the
underlying securities of the European company into which they may be converted.
Depositary Receipts other than those denominated in U.S. dollars will be subject
to foreign currency exchange rate risk. Certain Depositary Receipts may not be
listed on an exchange and therefore may be illiquid securities.
DEBT SECURITIES. When the Adviser believes that it is appropriate to do so
in order to achieve the Fund's objective of long-term capital appreciation, the
Fund may invest up to 20% of its total assets in European debt securities,
including bonds of foreign governments, supranational organizations and private
issuers. Portfolio debt investments will be selected on the basis of, among
other things, credit quality, and the fundamental outlooks for currency,
economic and interest rate trends, taking into account the ability to hedge a
degree of currency or local bond price risk. The Fund may purchase
"investment-grade" bonds, rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P
or, if unrated, judged to be of equivalent quality as determined by the Adviser.
Subject to the above 20% limit, the Fund may also purchase debt securities
which are rated below investment-grade, that is, rated below Baa by Moody's or
below BBB by S&P and unrated securities ("high-yield/high-risk securities"),
which usually entail greater 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. The lower the ratings of such
debt securities, the greater their risks. The Fund may also purchase bonds rated
B or lower by Moody's or S&P, and may invest in securities which are rated C by
Moody's or D by S&P or securities of comparable quality in the Adviser's
judgment. Such securities may be in default with respect to payment of principal
or interest, carry a high degree of risk and are considered speculative. See the
Appendix to this Statement of Additional Information for a more complete
description of the ratings assigned by Moody's and S&P and their respective
characteristics.
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 debt instruments. The Adviser 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
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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.
Trading in debt obligations ("sovereign debt") issued or guaranteed by
foreign governments or their agencies or instrumentalities ("governmental
entities") also involves a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be willing or able to repay the
principal and/or interest when due in accordance with the terms of such
obligations. 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, dependence on expected disbursements from third parties,
the governmental entity's policy towards the International Monetary Fund and the
political constraints to which a governmental entity may be subject. As a
result, governmental entities may default on their sovereign debt. Holders of
sovereign debt may be requested to participate in the rescheduling of such debt
and to extend further loans to governmental entities. There is no bankruptcy
proceeding by which defaulted sovereign debt may be collected in whole or in
part.
HIGH-YIELD/HIGH-RISK SECURITIES. As stated above, within the Fund's 20%
limit of investments in European debt securities, the Fund may also invest in
high-yield/high-risk securities.
High-yield, high-risk securities are especially subject to adverse changes
in general economic conditions, to changes in the financial condition of their
issuers and to price fluctuations in response to changes in interest rates. 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 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 issuers may experience financial stress which
would 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. A thin trading market may limit
the ability of the 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 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 securities.
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.
SMALL COMPANIES. The Fund may invest its assets in the securities of small
companies. Investments in small companies involve considerations that are not
applicable to investing in securities of established, larger-capitalization
issuers, including reduced and less reliable information about issuers and
markets, less stringent financial disclosure requirements and accounting
standards, illiquidity of securities, higher brokerage commissions and fees and
greater market risk in general. In addition, these securities involve greater
risks since they may have limited marketability and, thus, may be more volatile.
Because such companies normally have fewer shares outstanding than larger
companies, it may be more difficult for the Fund to buy or sell significant
amounts of such shares without an unfavorable impact on prevailing prices. These
companies may have
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<PAGE> 34
limited product lines, markets or financial resources and may lack management
depth. In addition, these companies are typically subject to a greater degree of
changes in earnings and business prospectus than are larger, more established
companies.
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 protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the fixed-income securities in the Fund's portfolio, to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities, or to enhance potential gain. No
more than 5% of the Fund's assets will be [committed] to Strategic Transactions
(as defined below) entered into for non-hedging purposes. Strategic Transactions
involving financial futures and options thereon will be purchased, sold or
entered into only for bona fide hedging, risk management or portfolio management
purposes and not for speculative purposes. These strategies may be executed
through the use of derivative contracts. Such strategies are generally accepted
as 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 OTC 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, "Strategic Transactions"). 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.
The use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize Strategic
Transactions successfully will depend on the Adviser's ability to predict market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments.
Strategic Transactions, including derivative contracts, involve risks,
including possible default by the other party to the transactions, 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 purchase or sale 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 OTC 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. 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 used.
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, The Chase Manhattan Bank (the "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
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<PAGE> 35
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 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 obligations.
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 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, 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
deliver 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 possibly 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.
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
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<PAGE> 36
purchased or sold. Thus, the following general discussion relates to each of the
types of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of Fund assets as described
above 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
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 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
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<PAGE> 37
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 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 a fund's limitation on investing no
more than 15% of its net 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
OTC 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 above as long as the call is outstanding. See "Use of
Segregated and Other Special Accounts." 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.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities 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. 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.
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GENERAL CHARACTERISTICS OF FUTURES. As stated above, the Fund may enter
into financial futures contracts or purchase or sell put and call options on
such futures for bona fide hedging, risk management or portfolio management
purposes and not for speculative 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.
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. 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 future 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 above. See "Use of Segregated and Other Special Accounts."
CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or (except for OTC currency options)
are determined to be of equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or
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<PAGE> 39
generally quoted in or currently convertible into such currency, other than with
respect to proxy 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 into 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
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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. 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 agreement 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.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities
which are bonds, notes, debentures, preferred stocks, and other securities which
are convertible into common stocks. Investments in convertible securities can
provide income through interest and dividend payment and/or an opportunity for
capital appreciation by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest 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
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<PAGE> 41
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 increases, 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 fixed income 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 fixed income 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 stocks 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). 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 purchase 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.
REPURCHASE AGREEMENTS. The 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
the Fund may purchase.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a 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 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 the 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
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<PAGE> 42
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. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
Obligation to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to enforce the seller's contractual obligation to deliver additional securities.
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.
BORROWING. The fund may not borrow money, except as permitted under
Federal law. The Fund will borrow only when the Adviser believes that borrowing
will benefit the Fund after taking into account considerations such as the costs
of the borrowing. The Fund does not expect to borrow for investment purposes, to
increase return or leverage the portfolio. 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.
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 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 such
sale is made in violation of the 1933 Act or if the registration statement
prepared by the issuer, or the prospectus forming a part of it, is materially
inaccurate or misleading.
The Fund may invest up to 15% of its total net assets in illiquid
securities.
WHEN-ISSUED SECURITIES. The Fund may from time to time purchase equity and
debt securities on a "when-issued" or "forward delivery" basis. 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
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<PAGE> 43
determining its net asset value. 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 NYSE, and would be required to be
secured continuously by collateral in cash, U.S. Government securities or other
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. 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 the 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.
SHORT SALES AGAINST-THE-BOX. The Fund may make short sales against-the-box
for the purpose of, but not limited to, deferring realization of loss when
deemed advantageous for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns at least an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and at least equal in amount to, the securities or other
assets sold short. [The Fund may engage in such short sales only to the extent
that not more than 10% of the Fund's total assets (determined at the time of the
short sale) is held as collateral for such sales.] [The Fund currently does not
intend, however, to engage in such short sales to the extent that more than 5%
of its net assets will be held as collateral therefor during the current year.]
If the Fund effects a short sale of securities at a time when it has an
unrealized gain on the securities, it may be required to recognize that gain as
if it had actually sold the securities (as a "constructive sale") on the date it
effects the short sale. However, such constructive sale treatment may not apply
if the Fund closes out the short sale with securities other than the appreciated
securities held at the time of the short sale and if certain other conditions
are satisfied. Uncertainty regarding the tax consequences of effecting short
sales may limit the extent to which the Fund may effect short sales.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund normally distributes dividends of net investment
income and any net realized short-term and long-term capital gains at least
annually. The level of income dividends per share (as a percentage of net asset
value) may be lower for Class B and Class C shares than for Class A and M shares
primarily as a result of the distribution services fee applicable to Class B and
Class C shares. Distributions of capital gains, if any, will be paid in the same
amount for each class.
The Fund may vary at any time the foregoing dividend practice and,
therefore, reserves the right from time to time either to distribute or to
retain for reinvestment such of its net investment income and its net short-term
and long-term capital gains as the Board of Directors of the Fund determines
appropriate under then current circumstances. In particular, and without
limiting the foregoing, the Fund may make additional distributions of net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Code. Income dividends and capital
gain dividends, if any, of the Fund will be credited to shareholder accounts in
full and fractional Fund shares of the same class at net asset value except
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that, upon written request to the Shareholder Service Agent, a shareholder may
select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net
asset value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of the Fund that are reinvested normally will be reinvested
in Fund shares of the same class. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of the Fund
invested without a sales charge in shares of the same class of another Kemper
Fund at the net asset value of such class of such other fund. See "Special
Features -- Class A Shares -- Combined Purchases" for a list of such other
Kemper Funds. To use this privilege of investing dividends of the Fund in shares
of another Kemper Fund, shareholders must maintain a minimum account value of
$1,000 in the Fund distributing the dividends. The Fund reinvests dividend
checks (and future dividends) in shares of the same class of the same Fund 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 class of the same Fund unless the shareholder requests that such policy not
be applied to the shareholder's account.
TAXES. The Fund intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, will not be liable
for federal income taxes to the extent its earnings are distributed in the
manner required by the Code. Such qualification does not involve governmental
supervision or management of investment practices or policy.
To so qualify, the Fund is required to distribute to its shareholders at
least 90% of its investment company taxable income (including net short-term
capital gain) (the "90% Distribution Requirement").
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of the Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. The Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to meet the 90% Distribution Requirement and to prevent imposition of the 4%
excise tax.
Dividends derived from net investment income and net short-term capital
gains are taxable to shareholders as ordinary income and long-term capital gain
dividends are taxable to shareholders as long-term capital gain regardless of
how long the shares have been held and whether received in cash or shares.
Dividends declared in October, November or December to shareholders of record as
of a date in one of those months and paid during the following January are
treated as paid on December 31 of the calendar year declared.
A dividend received shortly after the purchase of shares reduces the net
asset value of the shares by the amount of the dividend and, although in effect
a return of capital, will be taxable to the shareholder.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a pro rata share of federal income taxes paid by
the Fund on such gains as a credit against federal income tax liability, and
will be entitled to increase the adjusted tax basis on Fund shares by the
difference between such gains and the tax credit.
A shareholder who redeems shares of the Fund will recognize capital gain or
loss for federal income tax purposes measured by the difference between the
value of the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as
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long-term capital loss to the extent that the shareholder has received any
long-term capital gain dividends on such shares.
A shareholder who has redeemed shares of the Fund or any other Kemper
Mutual Fund listed 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 the same Fund within 30 days before or
after the redemption or exchange, the transactions may be subject to the wash
sale rules resulting in a postponement of the recognition of such loss for
federal income tax purposes. An exchange of 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.
Investment income derived from foreign securities may be subject to foreign
income taxes withheld at the source. Because the amount of the Fund's
investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance. The Fund may
elect for U.S. income tax purposes to treat foreign income taxes paid by it as
paid by its shareholders if: (i) the Fund qualifies as a regulated investment
company, (ii) certain asset and distribution requirements are satisfied, and
(iii) more than 50% of the Fund's total assets at the close of its fiscal year
consists of stock or securities of foreign corporations. The Fund may qualify
for and make this election in some, but not necessarily all, of its taxable
years. If the Fund were to make an election, shareholders of the Fund would be
required to take into account an amount equal to their pro rata portions of such
foreign taxes in computing their taxable income and then treat an amount equal
to those foreign taxes as a U.S. federal income tax deduction or as a foreign
tax credit against their U.S. federal income taxes. Shortly after any year for
which it makes such an election, the Fund will report to its shareholders the
amount per share of such foreign income tax that must be included in each
shareholder's gross income and the amount which will be available for the
deduction or credit. No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions. Certain limitations will be imposed
on the extent to which the credit (but not the deduction) for foreign taxes may
be claimed.
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 (such as a
gain on a sale of PFIC shares) 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. Mark
to market losses would be deductible, as ordinary losses, 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
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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.
The Fund's Strategic Transactions will be subject to special tax rules.
Equity options (including covered call options on portfolio stock) and OTC
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 a
put option, on the Fund's holding period for the underlying stock. 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 stock. 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. In general, 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 treated as ordinary income.
Positions of the Fund which consist of at least one stock and at least one
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 certain "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 or forward contract or non-equity
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." 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 intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Under certain circumstances, the purchase of a put option or the 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. Moreover, 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.
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 options, futures contracts 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
21
<PAGE> 47
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.
Under the backup withholding provisions, distributions of taxable income
and capital gains and proceeds from the redemption or exchange of the shares of
a regulated investment company may be subject to withholding of federal income
tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the investment company with their taxpayer identification numbers and
with required certifications regarding their status under the federal income tax
law. Withholding may also be required if the Fund is notified by the IRS or a
broker that the taxpayer identification number furnished by the shareholder is
incorrect or that the shareholder has previously failed to report interest or
dividend income. If the withholding provisions are applicable, any such
distributions and proceeds, whether taken in cash or reinvested in additional
shares, will be reduced by the amounts required to be withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund issues to each
shareholder a statement of the federal income tax status of all distributions.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons, i.e., U.S. citizens and residents
and U.S. corporations, partnerships, trusts and estates. Each shareholder who is
not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A and M shares of the
Fund because of the higher expenses borne by the Class B and Class C shares. The
net asset value of shares of the Fund is computed as of the close of regular
trading (the "value time") on the NYSE on each day the NYSE is open for trading.
The NYSE 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 Day and Christmas Day.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board of Directors.
Securities listed primarily on foreign exchanges may trade on days when the
Fund's net asset value is not computed; and therefore, the net asset value of
the Fund may be significantly affected on days when investors have no access to
the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another OTC market, is its most
recent sale price. Lacking any
22
<PAGE> 48
sales, the security is valued at the Calculated Mean. Lacking a Calculated Mean,
the security is valued at the most recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board of Directors 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 of the Fund may calculate the price of that
debt security, subject to limitations established by the Board of Directors.
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 OTC is
valued at the most recent bid quotation in the case of a purchased options
contract and at the most recent asked quotation in the case of a written options
contract. Futures contracts are valued at the most recent settlement price.
Foreign currency exchange forward contracts are valued at the value of the
underlying currency at the prevailing exchange rate on the valuation date.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the OTC market, quotations are taken from the market in which
the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Directors,
the value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects 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.
PERFORMANCE
The Fund may advertise several types of performance information for a class
of shares, including "average annual total return" and "total return."
Performance information will be computed separately for each class. Each of
these figures is based upon historical results and is not representative of the
future performance of any class of the Fund. If fees or expenses are being
waived or absorbed by the Adviser, the Fund may also advertise performance
information before and after the effect of the fee waiver or expense absorption.
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 the Fund for a specific period is found by first taking a
hypothetical $1,000 investment ("initial investment") in the Fund's shares on
the first day of the period, adjusting to deduct the maximum sales charge (in
the case of Class A shares), and computing the "redeemable value" of that
investment at the end of the period. The redeemable value in the case of Class B
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 in the
case of Class M shares may or may not include the effect of any applicable
redemption fee. The redeemable value is then divided by the initial investment,
and this quotient is taken to the Nth root (N representing the number of years
in the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains
23
<PAGE> 49
dividends paid by the Fund have been reinvested at net asset value on the
reinvestment dates during the period. Average annual total return figures may
also be calculated without deducting the maximum sales charge.
Calculation of the Fund's total return is not subject to a standardized
formula, except when calculated for the Fund's "Financial Highlights" table in
the Fund's financial statements and Prospectus. Total return performance for a
specific period is calculated by first taking a hypothetical investment
("initial investment") in the Fund's shares on the first day of the period,
either adjusting 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, Class C and Class M 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 or any applicable redemption fee. 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 or C shares or redemption fee for Class M
shares would be reduced if such charges were included.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in the Fund
during a specified period. Average annual total return will be quoted for at
least the one-, five- and ten-year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Fund for performance purposes). Average annual
total return figures represent the average annual percentage change over the
period in question. Total return figures represent the aggregate percentage or
dollar value change over the period in question.
The Fund's performance figures are based upon historical results and are
not 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 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
purchase. Redemptions and exchanges of Class M shares (including redemptions
in-kind) will be subject to a 2% redemption fee. Average annual total return
figures do, and total return figures may, include the effect of the contingent
deferred sales charge for the Class B and C shares that may be imposed at the
end of the period in question and the applicable redemption fee imposed on Class
M shares. Performance figures for the Class B, C and M shares not including the
effect of the applicable contingent deferred sales charge or redemption fee
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 [ ] and may
also be compared to the performance of other mutual funds or mutual fund indexes
with similar objectives and policies as reported by independent mutual fund
reporting services such as Lipper Analytical Services, Inc. ("Lipper"). Lipper
performance calculations are based upon changes in net asset value with all
dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The
Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago
Tribune, USA Today, Institutional Investor and Registered Representative.
24
<PAGE> 50
Also, investors may want to compare the historical returns of various
investments, performance indexes of those investments or economic indicators,
including but not limited to stocks, bonds, certificates of deposit and other
bank products, money market funds and U.S. Treasury obligations. Bank product
performance may be based upon, among other things, the Bank Rate Monitor
National Index(TM) or various certificate of deposit indexes. Performance of
U.S. Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC/Donoghue's Money Fund Averages(R)
(All Taxable). As reported by IBC/Donoghue's, all investment results represent
total return (annualized results for the period net of management fees and
expenses) and one year investment results are effective annual yields assuming
reinvestment of dividends.
The Fund may depict the historical performance of the securities in which
the Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund.
The Fund's returns and net asset value will fluctuate and shares of the
Fund are redeemable by an investor at the then current net asset value, which
may be more or less than original cost. Redemption of Class B shares and Class C
shares may be subject to a contingent deferred sales charge as described above.
Redemption and exchanges of Class M shares (including redemptions in-kind) are
subject to a 2% fee as described above. Additional information about the Fund's
performance also appears in its Annual Report to Shareholders, which is
available without charge from the Fund.
The Fund expects to convert to open-end status and combine, as the
surviving entity, with the Kemper Europe Fund, on or about September 1, 1999
(the "Reorganization"). The Fund currently has only one class of shares which
will be renamed Class M shares upon the Reorganization. The figures below show
performance information prior to the Reorganization for Class M shares over
various periods. Class A, B and C shares are newly offered and therefore have no
available performance information. The other share classes, however, would have
substantially similar returns because the shares are invested in the same
portfolio securities and the annual returns would differ only to the extent that
Class A, B and C shares do not have the same expenses. Comparative information
with respect to certain indices is also included. 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 foregoing indices are unmanaged. The net asset value and
returns of the Fund will fluctuate. No adjustment has been made for taxes
payable on dividends. The periods indicated were ones of fluctuating securities
prices and interest rates.
The following table compares the performance of the Class M shares of the
Fund over various periods with that of other mutual funds within the category
described below according to data reported by Lipper. Lipper performance figures
are based on changes in net asset value, with all income and capital gain
dividends reinvested. Such calculations do not include the effect of any sales
charges. Future performance cannot be guaranteed. Lipper publishes performance
analyses on a regular basis.
Again, the historical performance figures reflected above represent the
operations of the Fund in closed-end form. If the Fund had operated as an
open-end fund during those periods, the performance of the Fund would likely
have been different and possibly lower.
25
<PAGE> 51
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("the Adviser"), 345
Park Avenue, New York, New York, is the Fund's investment manager. The Adviser
is approximately 70% owned directly and indirectly by Zurich Financial Services,
a newly formed global insurance and financial services company. The balance of
the Adviser is owned by its officers and employees. Pursuant to an investment
management agreement, the Adviser acts as the Fund's investment adviser, manages
its investments, administers its business affairs, furnishes office facilities
and equipment, provides clerical and administrative services, and permits any of
its officers or employees to serve without compensation as directors or officers
of the Fund if elected to such positions. The investment management agreement
provides that the Fund shall pay the charges and expenses of its operations,
including the fees and expenses of the directors (except those who are
affiliated with officers or employees of the Adviser), independent auditors,
counsel, custodian and transfer agent and the cost of share certificates,
reports and notices to shareholders, brokerage commissions or transaction costs,
costs of calculating net asset value and maintaining all accounting records
related thereto, taxes and membership dues. The Fund bears the expenses of
registration of its shares with the SEC, while Kemper Distributors, Inc.
("KDI"), as principal underwriter, pays the cost of qualifying and maintaining
the qualification of the Fund's shares for sale under the securities laws of the
various states.
The investment management agreement provides that the Adviser shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which 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 obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the agreement.
The Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by a majority of
the directors who are not parties to such agreement or interested persons of any
such party except in their capacity as directors of the Fund and by the
shareholders of the Fund subject thereto or the Board of Directors. The Fund's
investment management agreement may be terminated at any time upon 60 days'
notice by either party, or by a majority vote of the outstanding shares of the
Fund subject thereto, and will terminate automatically upon assignment.
Responsibility for overall management of the Fund rests with its Board of
Directors and officers. Professional investment supervision is provided by the
Adviser.
On December 31, 1997, pursuant to the terms of an agreement, Scudder,
Stevens & Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed
a new global organization by combining Scudder with Zurich Kemper Investments,
Inc., a former subsidiary of Zurich and the former investment manager to the
Fund, and Scudder changed its name to Scudder Kemper Investments, Inc. As a
result of the transaction, Zurich owned approximately 70% of the Adviser, with
the balance owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in the Adviser) and the financial services businesses of B.A.T.
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services, Inc. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with the Adviser was deemed to have been assigned and,
therefore, terminated. The Board therefore approved a new investment management
agreement with the Adviser, which was substantially identical to the prior
investment management agreement of the Fund in closed-end form, except for the
date of execution and termination. This agreement became effective upon the
termination of the then current investment management agreement and was approved
by shareholders at a special meeting which concluded in December 1998.
A new investment management agreement was approved by the Board of
Directors and subsequently by the shareholders of the Fund at the annual meeting
held on July 20, 1999, in connection with the proposal to convert the Fund to
open-end status and to combine the Fund with the Kemper Europe Fund. This new
26
<PAGE> 52
agreement reflects the implementation of lower advisory fees and other changes
to conform the agreement to those in place for other open-end funds in the
Kemper family of funds. A summary of the terms of the new agreement is provided
above.
The Fund pays Scudder Kemper an investment management fee, payable monthly,
at 1/12 of the annual rates shown below:
<TABLE>
<CAPTION>
ANNUAL MANAGEMENT
AVERAGE DAILY NET ASSETS OF THE FUND FEE RATES
- ------------------------------------ -----------------
<S> <C>
$0 - $250 million.......................................... 0.75%
$250 million - $1 billion.................................. 0.72
$1 billion - $2.5 billion.................................. 0.70
$2.5 billion - $5 billion.................................. 0.68
$5 billion - $7.5 billion.................................. 0.65
$7.5 billion - $10 billion................................. 0.64
$10 billion - $12.5 billion................................ 0.63
Over $12.5 billion......................................... 0.62
</TABLE>
The expenses of the Fund, and of other investment companies investing in
foreign securities, can be expected to be higher than for investment companies
investing primarily in domestic securities since the costs of operation are
higher, including custody and transaction costs for foreign securities and
investment management fees.
The investment management fees incurred by the Fund for its last three
fiscal years are shown in the table below. These fees are based on the Fund's
former fee schedule as a closed-end entity and are based on the Fund's average
weekly net assets. The investment management fees to be paid by the fund in
open-end form will be lower.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
<S> <C> <C> <C>
</TABLE>
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts 02110, a subsidiary of the Adviser,
is responsible for determining the daily net asset value per share of the Fund
and maintaining all accounting records related thereto. As a closed-end
investment company, the Fund was not charged any fees for the services provided
by SFAC. As an open-end investment company, however, the Fund will incur an
annual accounting service fee that is based on the actual services provided, but
is expected to equal approximately .10% of the average daily net assets of the
Fund.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution
services agreements ("distribution agreement"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, an affiliate of
the Adviser, is the principal underwriter and distributor for the shares of the
Fund and acts as agent of the Fund in the continuous offering of its shares. KDI
bears all of its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. The Fund pays the cost for
the prospectus and shareholder reports to be set in type and printed for
existing shareholders, and KDI pays for the printing and distribution of copies
thereof used in connection with the offering of shares to prospective investors.
KDI also pays for supplementary sales literature and advertising costs.
The distribution agreement continues in effect from year to year so long as
such continuance is approved for each relevant class at least annually by a vote
of the Board of Directors of the Fund, including the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the agreement. The agreement automatically terminates in the event
of its assignment and may be terminated for a class at any time without penalty
by the Fund or by KDI upon 60 days' notice. Termination by the Fund with respect
to a class may be by vote of a majority of the Board of Directors, or a majority
of the Directors who are not interested persons of the Fund and who have no
direct or indirect financial interest in the
27
<PAGE> 53
agreement, or a "majority of the outstanding voting securities" of the class of
the Fund, as defined under the 1940 Act. The agreement may not be amended for a
class to increase the fee to be paid by 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 agreement. The provisions concerning the continuation,
amendment and termination of the distribution agreement are on a class by class
basis.
CLASS A SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of the Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI
receives a fee from the Fund under a Rule 12b-1 Plan, payable monthly, at the
annual rate of 0.75% of average daily net assets of the Fund attributable to
Class B shares. This fee is accrued daily as an expense of Class B shares. KDI
also receives any contingent deferred sales charges. See "Redemption or
Repurchase of Shares -- Contingent Deferred Sales Charge -- Class B Shares." KDI
currently compensates firms for sales of Class B shares at a commission rate of
3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI
receives a fee from the Fund under a Rule 12b-1 Plan, payable monthly, at the
annual rate of 0.75% of average daily net assets of the Fund attributable to
Class C shares. This fee is accrued daily as an expense of Class C shares. KDI
currently advances to firms the first year distribution fee at a rate of 0.75%
of the purchase price of Class C shares. For periods after the first year, KDI
currently pays firms for sales of Class C shares a distribution fee, payable
quarterly, at an annual rate of 0.75% of net assets attributable to Class C
shares maintained and serviced by the firm and the fee continues until
terminated by KDI or the Fund. KDI also receives any contingent deferred sales
charges. See "Redemption or Repurchase of Shares -- Contingent Deferred Sales
Charges -- Class C Shares".
CLASS M SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class M shares.
CLASS B SHARES AND CLASS C SHARES. The Fund has adopted a plan under Rule
12b-1 of the Act (the "Plan") that provides for fees payable as an expense of
the Class B shares and Class C shares that are used by KDI to pay for
distribution and services for those classes. Because 12b-1 fees are paid out of
Fund assets on an ongoing basis, they will, over time, increase the cost of an
investment and cost more than other types of sales charges.
If the Plan is terminated in accordance with its terms, the obligation of
the Fund to make payments to KDI pursuant to the Plan will cease and the Fund
will not be required to make any payments past the termination date. Thus, there
is no legal obligation for the Fund to pay any expenses incurred by KDI in
excess of its fees under a Plan, if for any reason the Plan is terminated in
accordance with its terms. Future fees under a Plan may or may not be sufficient
to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. Administrative services are provided to the Fund
under an administrative services agreement ("administrative agreement") with
KDI. KDI bears all its expenses of providing services pursuant to the
administrative agreement between KDI and the Fund, including the payment of
service fees. For the services under the administrative agreement, the Fund pays
KDI an administrative services fee, payable monthly, at the annual rate of up to
0.25% of average daily net assets of Class A, B, C and M shares of the Fund.
KDI enters into related arrangements with various broker-dealers and other
service or administrative firms ("firms"), that provide services and facilities
for their customers or clients who are investors of the Fund. The firms provide
such office space and equipment, telephone facilities and personnel as is
necessary or beneficial for providing information and services to their clients.
Such services and assistance may include, but are not limited to, establishing
and maintaining accounts and records, processing purchase and redemption
28
<PAGE> 54
transactions, answering routine inquiries regarding the Fund, assistance to
clients in changing dividend and investment options, account designations and
addresses and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. With respect to Class A and
Class M shares, KDI pays each firm a service fee, normally payable quarterly, at
an annual rate of up to 0.25% (calculated monthly and normally paid quarterly)
of the net assets attributable to Class A shares maintained and serviced by the
firm and the fee continues until terminated by KDI and the Fund. With respect to
Class B shares and Class C shares, KDI currently advances to firms the first
year service fee at a rate of up to 0.25% of the purchase price of such shares.
For periods after the first year, KDI currently intends to pay firms a service
fee at an annual rate of up to 0.25% (calculated monthly and normally paid
quarterly) of the net assets attributable to Class B and Class C shares
maintained and serviced by the firm and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include broker-dealers
affiliated with KDI.
Prior to the date of this Statement of Additional Information, the Fund has
not paid any administrative services fees.
KDI also may provide some of the above services and may retain any portion
of the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fees that it receives
from the Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of the Fund while this
procedure is in effect will depend upon the proportion of Fund assets that is in
accounts for which there is a firm of record. The Board of Directors of the
Fund, in its discretion, may approve basing the fee to KDI on all Fund assets in
the future.
Certain Directors or officers of the Fund are also directors or officers of
the Adviser, or KDI as indicated under "Officers and Directors."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Brown Brothers
Harriman & Co. (the "Custodian"), 40 Water Street, Boston, Massachusetts 02109,
has custody of all securities and cash of the Fund. 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. Investors Fiduciary Trust Company
("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105, is the Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of the Adviser, serves as
"Shareholder Service Agent" of the Fund and, as such, performs all of IFTC's
duties as transfer agent and dividend paying agent. IFTC receives as transfer
agent, and pays to KSvC, annual account fees of $10.00 ($18.00 for retirement
accounts) plus set up charges, annual fees associated with the contingent
deferred sales charge (Class B only), an asset-based fee of 0.08% and
out-of-pocket reimbursement. IFTC's fee is reduced by certain earnings credits
in favor of the Fund.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the 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. Prior to July 20, 1999,
PricewaterhouseCoopers LLP served as independent auditors to the Fund.
LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle
Street, Chicago, Illinois 60601, serves as legal counsel to the Fund.
29
<PAGE> 55
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
KDI with commissions charged on comparable transactions, as well as by comparing
commissions paid by the Fund to reported commissions paid by others. The Adviser
reviews on a routine basis commission rates, execution and settlement services
performed, making internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply 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 solely on account of the receipt of research,
market or statistical information. The Adviser may place orders with
broker/dealers on the basis that the broker/dealer has or has not sold shares of
the Fund. In effecting transactions in OTC 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 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 Funds 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 Board members 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.
30
<PAGE> 56
The table below shows total brokerage commissions paid by the Fund for the
last three fiscal periods and for the most recent fiscal year, the percentage
thereof that was allocated to firms based upon research information provided.
<TABLE>
<CAPTION>
ALLOCATED TO
FIRMS BASED ON
RESEARCH IN
FISCAL 1998 FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
</TABLE>
PURCHASE, REPURCHASE 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. Class M shares
represent the initial class of shares of the Fund and are no longer offered.
Class M shares are subject to a 2% fee on exchanges and redemptions (including
redemptions in-kind). Class M Shares expire one year from the date of this
Statement of Additional Information. 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. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------ ------------------ -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
5.75% of the public offering reduced for certain purchases
price
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first
year after purchase
Class M None None Subject to 2% fee on all
redemptions (including
redemptions in-kind) and
exchanges; all "large" redemption
requests (i.e., $250,000 or
greater) will be redeemed
in-kind; Class M shares will
convert into Class A shares of
the Fund one year from the date
of this Statement of Additional
Information
</TABLE>
The minimum initial investment for the Fund is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an IRA 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
31
<PAGE> 57
Deposit, the minimum initial and subsequent investment is $50. These minimum
amounts may be changed at any time in management's discretion.
Share certificates will not be issued unless requested in writing and may
not be available for certain types of account registrations. It is recommended
that investors not request share certificates unless needed for a specific
purpose. You cannot redeem shares by telephone or wire transfer or use the
telephone exchange privilege if share certificates have been issued. A lost or
destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The public offering
price of Class A shares for purchasers of the Fund choosing the initial sales
charge alternative is the net asset value plus a sales charge, as set forth
below.
SALES CHARGE
<TABLE>
<CAPTION>
ALLOWED TO
DEALERS AS A
AS A PERCENTAGE OF AS A PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET ASSET VALUE* OFFERING PRICE
- ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C>
Less than $50,000............................ 5.75% 6.10% 5.20%
$50,000 but less than $100,000............... 4.50 4.71 4.00
$100,000 but less than $250,000.............. 3.50 3.63 3.00
$250,000 but less than $500,000.............. 2.60 2.67 2.25
$500,000 but less than $1 million............ 2.00 2.04 1.75
$1 million and over.......................... 0.00** 0.00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all Class A 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 reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the 1933
Act.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in the Fund or other Kemper Mutual
Funds listed under "Special Features -- Class A Shares -- Combined Purchases"
totals at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district provided in each case
that such plan has not less than 200 eligible employees (the "Large Order NAV
Purchase Privilege"). Redemption within two years of shares purchased under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred sales
charge. See "Redemption or Repurchase of Shares -- Contingent Deferred Sales
Charge -- Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of 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
32
<PAGE> 58
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 KSvC. For purposes of
determining the appropriate commission percentage to be applied to a particular
sale, KDI will consider the cumulative amount invested by the purchaser in the
Fund and other Kemper Mutual Funds listed under "Special Features -- Class A
Shares -- Combined Purchases," including purchases pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features referred to
above. The privilege of purchasing Class A shares of 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 any other Kemper Mutual Fund listed under
"Special Features -- Class A Shares -- Combined Purchases" may be purchased at
net asset value in any amount by members of the plaintiff class in the
proceeding known as Howard and Audrey Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., Case No. 93 C 5231 (N.D.Il). This privilege is
generally non-transferable and continues for the lifetime of individual class
members and for a ten year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Fund shares at
net asset value pursuant to this privilege, KDI may 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 may be sold at net asset value in any amount to: (a)
officers, directors, trustees, employees (including retirees) and sales
representatives of the Fund, its Adviser, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on September
8, 1995, and have continuously owned shares of KVS (or a Kemper Fund acquired by
exchange of KVS shares) since that date, for themselves or members of their
families; and (d) any trust or pension, profit sharing or other benefit plan for
only such persons. Class A shares may be sold at net asset value in any amount
to selected employees (including their spouses and dependent children) of banks
and other financial services firms that provide administrative services related
to order placement and payment to facilitate transactions in shares of the 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 also be sold at
net asset value in any amount to unit investment trusts sponsored by Ranson &
Associates, Inc. In addition, unitholders of unit investment trusts sponsored by
Ranson & Associates, Inc. or its predecessors may purchase Fund Class A shares
at net asset value through reinvestment programs described herein of such trusts
that have such programs. Class A shares of the Fund may be sold at net asset
value through certain investment advisers registered under the 1940 Act and
other financial services firms acting solely as agents for their clients, that
adhere to certain standards established by KDI, including a requirement that
such shares be sold for the benefit of their clients participating in an
investment advisory program or agency commission program under which such
clients pay a fee to the investment adviser or other firm for portfolio
management or agency brokerage services. Such shares are sold for investment
purposes and on the condition that they will not be resold except through
redemption or repurchase by the Fund. The Fund may also issue Class A shares at
net asset value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
33
<PAGE> 59
Class A shares of the 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 the Fund may be purchased at net asset value by persons
who purchase shares of the Fund through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Investors choosing
the deferred sales charge alternative may purchase Class B shares at net asset
value per share without any sales charge at the time of purchase. Since Class B
shares are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "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. 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 the 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."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of
shares provides a more suitable investment for an investor depends on a number
of factors, including the amount and intended length
34
<PAGE> 60
of the investment. Investors making investments that qualify for reduced sales
charges might consider Class A shares. Investors who prefer not to pay an
initial sales charge and who plan to hold their investment for more than six
years might consider Class B shares. Investors who prefer not to pay an initial
sales charge but who plan to redeem their shares within six years might consider
Class C shares. Orders for Class B shares or Class C shares for $500,000 or more
will be declined. Orders for Class B shares or Class C shares by employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the KSvC will be invested instead in Class A shares at net
asset value where the combined subaccount value in the Fund or other Kemper
Mutual Funds listed under "Special Features -- Class A Shares -- Combined
Purchases" is in excess of $5 million including purchases pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features." For more information about the above sales
arrangements, consult your financial representative or the KSvC. Financial
services firms may receive different compensation depending upon which class of
shares they sell.
GENERAL. Banks and other financial services firms may provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients, and KDI may pay them a
transaction fee up to the level of the discount or commission allowable or
payable to dealers as described above. Banks currently are 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 by the firm under the following conditions:
(i) the purchased shares are held in a Kemper IRA account, (ii) the shares are
purchased as a direct "roll over" of a distribution from a qualified retirement
plan account maintained on a participant subaccount record keeping system
provided by KSvC, (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 or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund or other funds underwritten by
KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price
based on the net asset value of the Fund next determined after receipt by KDI of
the order accompanied by payment. However, orders received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of its business day will be confirmed at a
price based on the net asset value effective on that day ("trade date"). The
Fund reserves the right to determine the net asset value more frequently than
once a day if deemed desirable. Dealers and other financial services firms are
obligated to transmit orders promptly. Collection may take significantly longer
for a check drawn on a foreign bank than for a check drawn on a domestic bank.
Therefore, if an order is accompanied by a check drawn on a foreign bank, funds
must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund 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
Fund 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 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
35
<PAGE> 61
through the Shareholder Service Agent for recordkeeping and other expenses
relating to these nominee accounts. In addition, certain privileges with respect
to the purchase, repurchase 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.
The Fund reserves the right to withdraw all or any part of the offering
made by the prospectus and this statement of additional information and to
reject purchase orders. Also, from time to time, the Fund may temporarily
suspend the offering of any class of its shares to new investors. During the
period of such suspension, persons who are already shareholders of such class of
the Fund normally are permitted to continue to purchase additional shares of
such class and to have dividends reinvested.
Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this statement
of additional information.
As described herein, Fund shares are sold at their public offering price,
which is the net asset value next determined after an order is received in
proper form plus, with respect to Class A shares, an initial sales charge. The
minimum initial investment is $1,000 and the minimum subsequent investment is
$100 but such minimum amounts may be changed at any time. An order for the
purchase of shares that is accompanied by a check drawn on a foreign bank (other
than a check drawn on a Canadian bank in U.S. Dollars) will not be considered in
proper form and will not be processed unless and until the Fund determines that
it has received payment of the proceeds of the check. The time required for such
a determination will vary and cannot be determined in advance. The amount
received by a shareholder upon redemption or repurchase may be more or less than
the amount paid for such shares depending on the market value of the Fund's
portfolio securities at the time.
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than KDI to accept purchase and
redemption orders for the Fund's shares. Those brokers may also designate other
parties to accept purchase and redemption orders on the Fund's behalf. Orders
for purchase or redemption will be deemed to have been received by the Fund when
such brokers or their authorized designees accept the orders. Subject to the
terms of the contract between the Fund and the broker, ordinarily orders will be
priced as the Fund's net asset value next computed after acceptance by such
brokers or their authorized designees. Further, if purchases or redemptions of
the Fund's shares are arranged and settlement is made at an investor's election
through any other authorized NASD member, that member may, at its discretion,
charge a fee for that service. The Board of Directors of the Fund and KDI each
has the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Board and KDI may suspend or terminate the offering of shares of the
Fund at any time for any reason.
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 Fund's transfer
agent, the shareholder may redeem them by sending a written request with
signatures guaranteed to Kemper Mutual Funds, Attention: Redemption Department,
P.O. Box 419557, Kansas City, Missouri 64141-6557. When certificates for shares
have been issued, they must be mailed to or deposited with the Shareholder
Service Agent, along with a duly endorsed stock power and accompanied by a
written request for redemption. Redemption requests and a stock power must be
endorsed by the account holder with signatures guaranteed by a commercial bank,
trust company, savings and loan association, federal savings bank, member firm
of a national securities exchange or other eligible financial institution. The
redemption request and stock power must be signed exactly as the account is
registered including any special capacity of the registered owner. Additional
documentation may be requested, and a signature guarantee is normally required,
from institutional and fiduciary account holders, such as corporations,
custodians (e.g., under the Uniform Transfers to Minors Act), executors,
administrators, trustees or guardians.
36
<PAGE> 62
The redemption price for shares of the Fund will be the net asset value per
share 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 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") and 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).
Upon the redemption or exchange of Class M shares of the Fund (including
redemptions in-kind), 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. This fee is intended to discourage short term trading in a vehicle
intended for long term investment. 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 2% fee applies to
redemptions from the Fund and exchanges to other Kemper Mutual Funds by Class M
shareholders, 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.
Because of the high cost of maintaining small accounts, the Fund 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,
IRAs 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
telephone instructions are genuine. THE SHAREHOLDER WILL BEAR THE RISK OF LOSS
including loss resulting from fraudulent or unauthorized transactions, so long
as the reasonable verification procedures are followed. The verification
procedures include recording instructions, requiring certain identifying
information before acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge or applicable redemption fee)
are $50,000 or less and the proceeds are payable to the shareholder of record at
the address of record, normally a telephone request or a written request by any
one account holder without a signature guarantee is sufficient for redemptions
by individual or joint account holders, and trust, executor, guardian and
custodial account holders provided the trustee, executor, or guardian or
custodian is named in the account registration. Other institutional account
holders may exercise this special privilege of redeeming shares by telephone
request or written request without signature guarantee subject to the same
conditions as individual account holders and subject to the limitations on
liability described under "General" above, provided that this privilege has been
pre-authorized by the institutional account holder or guardian account holder by
written instruction to the Shareholder Service Agent with signatures guaranteed.
Telephone requests may be made by calling 1-800-621-1048. Shares purchased by
check or through
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<PAGE> 63
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value next determined after receipt of a request by KDI.
However, requests for repurchases received by dealers or other firms prior to
the determination of net asset value (see "Net Asset Value") and received by KDI
prior to the close of KDI's business day will be confirmed at the net asset
value effective on that day. The offer to repurchase may be suspended at any
time. Requirements as to stock powers, certificates, payments and delay of
payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds sent by 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 effective on
that day and normally the proceeds will be sent to the designated account the
following business day. Delivery of the proceeds of a wire redemption request of
$250,000 or more may be delayed by the Fund for up to seven days if Scudder
Kemper deems it appropriate under then current market conditions. Once
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The 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 or redemption fee). To change
the designated account to receive wire redemption proceeds, send a written
request to the Shareholder Service Agent with signatures guaranteed as described
above or contact the firm through which shares of the Fund were purchased.
Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may
not be redeemed by wire transfer until such shares have been owned for at least
10 days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
wire transfer redemption privilege. The Fund reserves the right to terminate or
modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE -- LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon the redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent or its affiliates;
(c) redemption of shares of a shareholder (including a registered joint owner)
who has died; (d) redemption of shares of a shareholder (including a registered
joint owner) who after purchase of the shares being redeemed becomes totally
disabled (as evidenced by a determination by the federal Social Security
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<PAGE> 64
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 commission applicable to such Large
Order NAV Purchase.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. A contingent deferred
sales charge may be imposed upon redemption of Class B shares. There is no such
charge upon redemption of any share appreciation or reinvested dividends on
Class B shares. The charge is computed at the following rates applied to the
value of the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE
- --------------------------------- -------------------
<S> <C>
First....................................................... 4%
Second...................................................... 3%
Third....................................................... 3%
Fourth...................................................... 2%
Fifth....................................................... 2%
Sixth....................................................... 1%
</TABLE>
The contingent deferred sales charge will be waived: (a) in the event of
the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features -- Systematic Withdrawal Plan" below), (d) for redemptions made
pursuant to any IRA systematic withdrawal based on the shareholder's life
expectancy including, but not limited to, substantially equal periodic payments
described in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for,
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in the Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Code and (d)
redemptions representing returns of excess contributions to such plans.
CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES. A contingent deferred
sales charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features -- Systematic Withdrawal Plan"), (d) for redemptions made pursuant to
any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) 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
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<PAGE> 65
of the first year administrative service and distribution fees applicable to
such shares and agrees to receive such fees quarterly.
CONTINGENT DEFERRED SALES CHARGE -- GENERAL. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of the Fund's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 in appreciation to a total of
$12,000. If the investor were then to redeem the entire $12,000 in share value,
the contingent deferred sales charge would be payable only with respect to
$10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of
share appreciation is subject to the charge. The charge would be at the rate of
3% ($300) because it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the
length of the period of ownership. Investments are tracked on a monthly basis.
The period of ownership for this purpose begins the first day of the month in
which the order for the investment is received. For example, an investment made
in March 1999 will be eligible for the second year's charge if redeemed on or
after March 1, 2000. In the event no specific order is requested, the redemption
will be made first from shares representing reinvested dividends and then from
the earliest purchase of shares. KDI receives any contingent deferred sales
charge directly.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of
the Fund or any other Kemper Mutual Fund listed under "Special Features -- Class
A Shares -- Combined Purchases" (other than shares of Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Mutual Funds. A shareholder of the Fund
or any other Kemper Mutual Fund who redeems Class A shares purchased under the
Large Order NAV Purchase Privilege (see "Purchase of Shares -- Initial Sales
Charge Alternative -- Class A Shares"), Class B shares or Class C shares and
incurs a contingent deferred sales charge may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares,
Class B shares or Class C shares, as the case may be, of the Fund or of other
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of the Fund or of the other Kemper Mutual Funds listed under
"Special Features -- Class A Shares -- Combined Purchases." Purchases through
the reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features -- Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of Fund
shares, the reinvestment in the same Fund may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinvestment
privilege may be terminated or modified at any time.
REDEMPTION IN-KIND. The Fund has adopted the following redemption policy
in an attempt to avoid the imposition of adverse tax consequences on remaining
shareholders that may be caused by certain large-scale redemptions. In
conformity with Rule 18f-1 under the 1940 Act, the Fund reserves the right 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 reserves
the right to satisfy redemption requests in excess of such amount by
distributing portfolio securities in lieu of cash. This policy may be modified
or terminated at any time by the Board of Directors. As to Class M shareholders,
the Fund will honor any request for redemptions by making payment in whole or in
part in readily marketable securities to the extent those redemptions exceed
$500,000. Any securities distributed in-kind would be valued in accordance with
the Fund's policies used to determine net asset value, and would be selected
pursuant to procedures adopted by the Board of Directors to help ensure that
such redemptions are effected in a manner that is fair and equitable to all
shareholders. The redeeming shareholder
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<PAGE> 66
will bear the risk of fluctuations in value of the in-kind redemption proceeds
after the trade date for the redemption. Shareholders who receive portfolio
securities in redemption of Fund shares will be required to make arrangements
for the transfer of custody of such securities to the shareholder's account and
must communicate relevant custody information to the Fund prior to the
effectiveness of a redemption request. Redemption requests subject to the Fund's
redemption in-kind policy will not be considered in good order unless such
information is provided. As discussed below, a redeeming shareholder will bear
all costs associated with the in-kind distribution of portfolio securities.
Shareholders receiving securities in-kind may, when selling them, receive less
than the redemption value of such securities and would also incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash.
Redeeming shareholders will bear any costs of delivery and transfer of the
portfolio securities received in an in-kind redemption (generally, certain
transfer taxes and custodial expenses), and such costs will be deducted from
their redemption proceeds. Redeeming shareholders will also bear the costs of
re-registering the securities, as the securities delivered will be registered in
the Fund's name or the nominee names of the Fund's custodians. The actual per
share expenses for redeeming shareholders of effecting an in-kind redemption and
of any subsequent liquidation by the shareholder of the portfolio securities
received will depend on a number of factors, including the number of shares
redeemed, the Fund's portfolio composition at the time and market conditions
prevailing during the liquidation process. The Fund gives no assurances of such
expenses, and shareholders whose redemptions are effected in-kind may bear
expenses in excess of 1% of the net asset value of the shares of the Fund
redeemed. These expenses are in addition to any applicable redemption fee or
contingent deferred sales charge.
The Fund has received an exemptive order from the SEC to permit in-kind
redemption transactions to be effected by shareholders who may be deemed to be
affiliated with the Fund because they own 5% or more of the Fund's outstanding
voting securities.
SPECIAL FEATURES
CLASS A SHARES -- COMBINED PURCHASES. The Fund's Class A shares may be
purchased at the rate applicable to the discount bracket attained by combining
concurrent investments in Class A shares of any of the following funds: Kemper
Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small
Capitalization Equity Fund, Kemper Income and Capital Preservation Fund, Kemper
Municipal Bond Fund, Kemper Strategic 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 Plus Growth Fund, Kemper Horizon Fund, Kemper Europe Fund,
Inc., Kemper Asian Growth Fund, Kemper Aggressive Growth Fund, Kemper
Global/International Series, Inc., Kemper Equity Trust, Kemper Income Trust,
Kemper Funds Trust and Kemper Securities Trust ("Kemper Mutual Funds"). Except
as noted below, there is no combined purchase credit for direct purchases of
shares of Zurich Money Funds, Cash Equivalent Fund, Tax-Exempt California Money
Market Fund, Cash Account Trust, Investors Municipal Cash Fund or Investors Cash
Trust ("Money Market Funds"), which are not considered "Kemper Mutual Funds" for
purposes hereof. For purposes of the Combined Purchases feature described above
as well as for the Letter of Intent and Cumulative Discount features described
below, employer sponsored employee benefit plans using the subaccount record
keeping system made available through the Shareholder Service Agent may include:
(a) Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of
any Kemper Mutual Fund and (c) the value of any other plan investments, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
CLASS A SHARES -- LETTER OF INTENT. The same reduced sales charges for
Class A shares, as shown in the applicable prospectus, also apply to the
aggregate amount of purchases of such Kemper Mutual Funds listed above made by
any purchaser within a 24-month period under a written Letter of Intent
("Letter") provided by KDI. The Letter, which imposes no obligation to purchase
or sell additional Class A shares, provides for a
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<PAGE> 67
price adjustment depending upon the actual amount purchased within such period.
The Letter provides that the first purchase following execution of the Letter
must be at least 5% of the amount of the intended purchase, and that 5% of the
amount of the intended purchase normally will be held in escrow in the form of
shares pending completion of the intended purchase. If the total investments
under the Letter are less than the intended amount and thereby qualify only for
a higher sales charge than actually paid, the appropriate number of escrowed
shares are redeemed and the proceeds used toward satisfaction of the obligation
to pay the increased sales charge. The Letter for an employer sponsored employee
benefit plan maintained on the subaccount record keeping system available
through the Shareholder Service Agent may have special provisions regarding
payment of any increased sales charge resulting from a failure to complete the
intended purchase under the Letter. A shareholder may include the value (at the
maximum offering price) of all shares of such Kemper Mutual Funds held of record
as of the initial purchase date under the Letter as an "accumulation credit"
toward the completion of the Letter, but no price adjustment will be made on
such shares. Only investments in Class A shares of a Fund are included for this
privilege.
CLASS A SHARES -- CUMULATIVE DISCOUNT. The Fund's Class A shares also may
be purchased at the rate applicable to the discount bracket attained by adding
to the cost of Fund shares being purchased the value of all Class A shares of
the above mentioned Kemper Mutual Funds (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
CLASS A SHARES -- AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares
may exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below. Shareholders of Class M
shares may also exchange their shares for Class A shares of other Kemper Mutual
Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features -- Class A
Shares -- Combined Purchases" above may be exchanged for each other at their
relative net asset values. Shares of Money Market Funds and Kemper Cash Reserves
Fund that were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the offering
period for such series as described in the applicable prospectus or 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 Mutual Fund or a
Money Market Fund under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of the Fund and Class B shares of any other
Kemper Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without any contingent deferred sales charge
being imposed at the time of exchange. For purposes of the contingent deferred
sales charge that may be imposed upon the redemption of the Class B shares
received on exchange, amounts exchanged retain their original cost and purchase
date.
CLASS C SHARES. Class C shares of the Fund and Class C shares of any other
Kemper Mutual Fund listed under "Special Features -- Class A Shares -- Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge
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<PAGE> 68
being imposed at the time of exchange. For determining whether there is a
contingent deferred sales charge that may be imposed upon the redemption of the
Class C shares received by exchange, the cost and purchase date of the shares
that were originally purchased and exchanged are retained.
CLASS M SHARES. Class M shares of the Fund may be exchanged for Class A
Shares of any other Kemper Mutual Fund listed under "Special Features -- Class A
Shares -- Combined Purchases", subject to 2% fee. Class M shareholders may not
exchange shares in an amount that would trigger an in-kind redemption (see
above).
GENERAL. Shares of a Kemper Mutual Fund with a value in excess of
$1,000,000 or less (except Kemper Cash Reserves Fund) acquired by exchange from
another Kemper Mutual Fund, or from a Money Market Fund, may not be exchanged
thereafter until they have been owned for 15 days (the "15-Day Hold Period").
The Fund reserves the right to invoke the 15-Day Hold Policy for exchanges of
$1,000,000 or less if, in the investment manager's judgment, 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 therefor 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. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
fund held and purchase of shares of the other fund. For federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss may be
realized, depending upon whether the value of the shares being exchanged is more
or less than the shareholder's adjusted cost basis of such shares. Shareholders
interested in exercising the exchange privilege may obtain prospectuses of the
other funds from dealers, other firms or KDI. Exchanges may be accomplished by a
written request to KSvC, Attention: Exchange Department, P.O. Box 419557, Kansas
City, Missouri 64141-6557, or by telephone if the shareholder has given
authorization. Once the authorization is on file, the Shareholder Service Agent
will honor requests by telephone at 1-800-621-1048, subject to the limitations
on liability under "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 implement 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 Kemper Funds that are
eligible for sale in the shareholder's state of residence. Currently Tax-Exempt
California Money Market Fund is available for sale only in California and the
portfolios of Investors Municipal Cash Fund are available for sale only in
certain states.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of
the shares of a Kemper Mutual Fund or Money Market Fund may authorize the
automatic exchange of a specified amount ($100 minimum) of such shares for
shares of the same class of another such Kemper Fund. If selected, exchanges
will be made automatically until the privilege is terminated by the shareholder
or the other Kemper Fund. Exchanges are subject to the terms and conditions
described above under "Exchange Privilege," except that the $1,000 minimum
investment requirement for the Kemper Fund acquired on exchange is not
applicable. This privilege may not be used for the exchange of shares held in
certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $5,000) 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
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<PAGE> 69
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 KSvC, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as IRAs.
BANK DIRECT DEPOSIT. A shareholder may purchase additional Fund shares
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (minimum $50, maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her plan
by sending written notice to KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. The Fund may
immediately terminate a shareholder's plan in the event that any item is unpaid
by the shareholder's financial institution. The Fund may terminate or modify
this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may
invest in the Fund through Payroll Direct Deposit or Government Direct Deposit.
Under these programs, all or a portion of a shareholder's net pay or government
check is automatically invested in the Fund account each payment period. A
shareholder may terminate participation in these programs by giving written
notice to the shareholder's employer or government agency, as appropriate. (A
reasonable time to act is required.) The Fund is not responsible for the
efficiency of the employer or government agency making the payment or any
financial institutions transmitting payments.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of the
Fund's shares at the offering price (net asset value plus, in the case of Class
A shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount up to $50,000 to be paid to the owner or
a designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to IRAs. The minimum periodic payment is
$100. The maximum annual rate at which Class B shares may be redeemed (and Class
A shares purchased under the Large Order NAV Purchase Privilege and Class C
shares in their first year following the purchase) under a systematic withdrawal
plan is 10% of the net asset value of the account. Shares are redeemed so that
the payee will receive payment approximately the first of the month. Any income
and capital gain dividends will be automatically reinvested at net asset value.
A sufficient number of full and fractional shares will be redeemed to make the
designated payment. Depending upon the size of the payments requested and
fluctuations in the net asset value of the shares 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 ordinarily will 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 already
have been paid. Therefore, the Funds 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
redemption of Class A shares purchased under the Large Order NAV Purchase
Privilege, Class B shares and Class C shares made pursuant to a systematic
withdrawal plan. The right is reserved to amend the systematic withdrawal plan
on 30 days' notice. The plan may be terminated at any time by the investor or
the Funds.
44
<PAGE> 70
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
- Traditional, Roth and Education IRAs with IFTC as custodian. This
includes Savings Incentive Match Plan for Employees of Small Employers
("SIMPLE") IRA accounts and Simplified Employee Pension Plan ("SEP") IRA
accounts and prototype documents.
- 403(b)(7) Custodial Accounts also with IFTC as custodian. This type of
plan is available to employees of most non-profit organizations.
- Prototype money purchase pension and profit-sharing plans may be adopted
by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. The brochures for plans with IFTC as custodian describe the
current fees payable to IFTC for its services as custodian. Investors should
consult with their own tax advisers before establishing a retirement plan.
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 such Fund as described in the Fund's prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares by certain classes of persons or
through certain types of transactions as described herein are provided because
of anticipated economies in sales and sales-related efforts.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the NYSE is closed other than customary
weekend and holiday closings or during any period in which trading on the NYSE
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.
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 IRS or other
assurance acceptable to the Fund to the effect that (a) the assessment of the
distribution services fee with respect to Class B shares and not Class A shares
does not result in the Fund's dividends constituting "preferential dividends"
under the Code, and (b) that the conversion of Class B shares to Class A shares
does not constitute a taxable event under the Code. The conversion of Class B
shares to Class A shares may be suspended if such assurance is not available. In
that event, no further conversions of Class B shares would occur, and shares
might continue to be subject to the distribution services fee for an indefinite
period that may extend beyond the proposed conversion date as described herein.
OFFICERS AND DIRECTORS
The officers and directors of the Fund, their birthdates, their principal
occupations, addresses, and their affiliations, if any, with the Adviser and KDI
are listed below. All persons named as directors also serve in similar
capacities for other funds managed by the Adviser.
DIRECTORS.
JAMES E. AKINS (10/15/26), Director, 2904 Garfield Terrace N.W.,
Washington, D.C.; Consultant on International, Political and Economic Affairs;
formerly, a career United States Foreign Service Officer; Energy Adviser for the
White House; United States Ambassador to Saudi Arabia, 1973-1976.
45
<PAGE> 71
ARTHUR R. GOTTSCHALK (2/13/25), Director, 10642 Brookridge Drive,
Frankfort, Illinois; Retired; formerly, President, Illinois Manufacturers
Association; Trustee, Illinois Masonic Medical Center; formerly, Illinois State
Senator; formerly, Vice President, The Reuben H. Donnelley Corp.; formerly,
attorney.
FREDERICK T. KELSEY (4/25/27), Director, 738 York Court, Northbrook,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Northern Institutional Funds; formerly,
Trustee of the Pilot Funds.
FRED B. RENWICK (2/1/30), Director, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director;
TIFF Industrial Program, Inc.; Director, The Warburg Home Foundation; Chairman,
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly, member of the Investment Committee
of Atlanta University Board of Trustees; formerly, Director of Board of Pensions
Evangelical Lutheran Church in America.
*THOMAS W. LITTAUER (4/26/55), Director, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper; formerly, Head of Broker
Dealer Division of an unaffiliated investment management firm during 1997; prior
thereto, President of Client Management Services of an unaffiliated investment
management firm from 1991 to 1996.
JOHN G. WEITHERS (8/8/33), Director, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company; President of the
Members of the Corporation and Trustee, DePaul University.
OFFICERS
*CORNELIA M. SMALL (7/28/44), Chairman, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
*MARK S. CASADY (9/21/60), President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
*PHILIP J. COLLORA (11/15/45), Vice President and Secretary, 222 South
Riverside Plaza, Chicago, Illinois; Senior Vice President, Scudder Kemper.
*THOMAS W. LITTAUER (4/26/55), Vice President, Two International Place,
Boston, Massachusetts; Managing Director, Scudder Kemper.
*ANN M. MCCREARY (11/6/56), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
*KATHRYN L. QUIRK (12/3/52), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
*LINDA J. WONDRACK (9/12/64), Vice President, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper.
*JOHN R. HEBBLE (6/27/58), Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
*BRENDA LYONS (2/21/63), Assistant Treasurer, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper.
*CAROL L. FRANKLIN (12/3/52), Vice President, 345 Park Avenue, New York,
New York; Managing Director, Scudder Kemper
*JOAN R. GREGORY (8/4/45), Vice President, 345 Park Avenue, New York, New
York; Vice President, Scudder Kemper.
46
<PAGE> 72
*MARC SLENDEBROEK (12/8/64), Vice President, 345 Park Avenue, New York, New
York; Vice President, Scudder Kemper.
*CAROLINE PEARSON (4/1/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper.
*MAUREEN E. KANE (2/14/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Vice President, Scudder Kemper.
*ELIZABETH C. WERTH (10/1/47), Assistant Secretary, 222 South Riverside
Plaza, Chicago, Illinois; Vice President, Scudder Kemper; Vice President and
Director of State Registrations, KDI.
- ---------------
* Interested persons of the Fund as defined in the 1940 Act.
The directors and officers who are "interested persons" as designated above
receive no compensation from the Fund. The tables below shows amounts estimated
to be paid or accrued to those directors who are not designated "interested
persons" during the Fund's first full fiscal year following its reorganization
to open-end status except that the information in the last column is for
calendar year 1998.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
ESTIMATED AGGREGATE KEMPER FUND COMPLEX PAID
COMPENSATION TO BOARD
NAME OF DIRECTOR FROM FUND(1) MEMBERS(2)
- ---------------- ------------------- ------------------------
<S> <C> <C>
James E. Akins.............................. $1,800 $130,000
Arthur R. Gottschalk(1)..................... $1,800 $133,200
Frederick T. Kelsey......................... $1,800 $130,500
Fred B. Renwick............................. $1,800 $130,500
John G. Weithers............................ $1,800 $134,800
</TABLE>
- ---------------
(1) Includes deferred fees pursuant to deferred compensation agreements with
certain Kemper funds. Deferred amounts accrue interest monthly at a rate
equal to the yield of Zurich Money Funds -- Zurich Money Market Fund.
(2) Includes compensation for service on the Boards of 15 Kemper Funds with 55
fund portfolios. Each Director currently serves as a board member of 15
Kemper funds with 55 fund portfolios.
As of the date the Fund's Registration Statement became effective, the
directors and officers as a group owned less than 1% of the then outstanding
shares of the Fund and no person owned of record more than 5% of the outstanding
shares of any class of the Fund, except as shown below:
<TABLE>
<CAPTION>
FUND NAME AND ADDRESS CLASS PERCENTAGE
- ---- ---------------- -------- ----------
<C> <S> <C> <C>
</TABLE>
ORGANIZATION OF THE FUND
The Fund was organized as a Maryland corporation on November 22, 1989. The
Fund began operations on February 9, 1990 as a closed-end management investment
company. On July 20, 1999, the fund's shareholders approved the conversion of
the Fund to an open-end investment company and the reorganization of the Fund
with Kemper Europe Fund. As a result of the reorganization, the Fund changed its
name to "Kemper Europe Fund, Inc." and issued newly designated Class A, Class B
and Class C shares to the shareholders of Kemper Europe Fund and Class M shares
to its existing shareholders. Class M shares will automatically convert to Class
A shares one year after the date of this Statement of Additional Information.
Currently, the Fund offers three classes of shares. These are Class A,
Class B and Class C shares, which have different expenses, which may affect
performance. Shares of the Fund have equal noncumulative voting rights except
that Class B and Class C shares have separate and exclusive voting rights with
respect to the Fund's Rule 12b-1 Plan. Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such Fund subject to
any preferences (such as resulting from different Rule 12b-1 distribution
47
<PAGE> 73
fees), rights or privileges of any classes of shares of the Fund. Shares are
fully paid and nonassessable when issued, are transferable without restriction
and have no preemptive rights. Class B Shares will convert to Class A Shares six
years after issuance and Class M shares will convert to Class A Shares one year
after the date of this Statement of Additional Information. The Fund is not
required to hold annual shareholder meetings and does not intend to do so.
However, it will hold special meetings as required or deemed desirable for such
purposes as electing directors, changing fundamental policies or approving an
investment management agreement. Subject to the Articles and By-laws of the
Fund, shareholders may remove directors.
Each director serves until the next meeting of shareholders, if any, called
for the purpose of electing directors and until the election and qualification
of a successor or until such director sooner dies, resigns, retires or is
removed by a majority vote of the shares entitled to vote (as described below).
In accordance with the 1940 Act (a) the Fund will hold a shareholder meeting for
the election of directors at such time as less than a majority of the directors
have been elected by shareholders, and (b) if, as a result of a vacancy in the
Board of Directors, less than two-thirds of the directors have been elected by
the shareholders, that vacancy will be filled only by a vote of the
shareholders.
Directors may be removed from office by a vote of the holders of a majority
of the outstanding shares at a meeting called for that purpose, which meeting
shall be held upon the written request of the holders of not less than 10% of
the outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of the Fund stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a director, the
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
The Fund's Articles provide that the presence at a shareholder meeting in
person or by proxy of at least one-third of the shares entitled to vote on a
matter shall constitute a quorum. Thus, a meeting of shareholders of the Fund
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of directors and ratification of the selection of
independent auditors. Investors in the Fund are entitled to one vote for each
full share held and fractional votes for fractional shares held. Shareholders of
the Fund will vote in the aggregate except where otherwise required by law and
except that each class will vote separately on certain matters pertaining to its
distribution and shareholder servicing arrangements.
48
<PAGE> 74
APPENDIX
The following is a description of the ratings given by S&P and Moody's to
corporate bonds.
RATINGS OF CORPORATE BONDS
S&P:
Debt rated AAA has the highest rating assigned by S&P. 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 Cl 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 winch 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
<PAGE> 75
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 both 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.
2
<PAGE> 76
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
(a) (1) Articles of Incorporation.(1)
(2) Articles of Amendment dated January 4, 1990.(1)
(3) Articles of Amendment dated February 2, 1990.(1)
(b) (1) Amended and Restated By-Laws.(1)
(2) Amendment to By-Laws dated June 27, 1990.(1)
(3) Amendment to By-Laws dated April 12, 1991.(1)
(4) Amendment to By-Laws dated May 22, 1992.(1)
(5) Amendment to By-Laws dated July 28, 1992.(1)
(6) Amendment to By-Laws dated July 19, 1993.(1)
(7) Amendment to By-Laws dated January 12, 1995.(1)
(8) Amendment to By-Laws dated October 30, 1996.(1)
(9) Amendment to By-Laws dated September 29, 1997.(1)
(10) Amendment to By-Laws dated April 27, 1999.(1)
(c) Form of Share Certificates.(2)
(d) Form of Investment Advisory Agreement with Scudder Kemper
Investments, Inc.(1)
(e) Form of Underwriting and Distribution Services Agreement
with Kemper Distributors, Inc.(1)
(f) Not applicable.
(g) Custodian Agreement with Brown Brothers Harriman & Co. Fee
Schedule and Amendment.
(h) (1) Form of Transfer Agency and Service Agreement with Investors
Fiduciary Trust Company.(1)
(2) Form of Administrative Services Agreement with Kemper
Distributors, Inc.(1)
(3) Form of Fund Accounting Services Agreement with Scudder Fund
Accounting Corporation.(1)
(i) (1) Opinion and Consent of Willkie Farr & Gallagher, counsel to
Registrant.(2)
(2) Opinion and Consent of Venable, Baetjer and Howard, LLP,
Maryland counsel to Registrant.(2)
(j) Consent of Ernst & Young LLP Independent Accountants.(2)
(k) Not applicable.
(l) Not applicable.
(m) (1) 12b-1 Plan for Class B Shares.(1)
(2) 12b-1 Plan for Class C Shares.(1)
(n) Financial Data Schedule.(2)
(o) 18f-3 Plan.(1)
</TABLE>
- ---------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
N-1A filed April 28, 1999.
(2) To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
C-1
<PAGE> 77
ITEM 25. INDEMNIFICATION
Under Article XII of Registrant's Charter, the Directors and officers of
Registrant shall not have any liability to Registrant or its stockholders for
money damages, to the fullest extent permitted by Maryland law. This limitation
on liability applies to events occurring at the time a person serves as a
Director or officer of Registrant whether or not such person is a Director or
officer at the time of any proceeding in which liability is asserted. No
provision of Article XII shall protect or purport to protect any Director or
officer of Registrant against any liability to Registrant or its stockholders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. Registrant shall indemnify and advance expenses to its currently
acting and its former Directors to the fullest extent that indemnification of
Directors and advancement of expenses to Directors is permitted by Maryland law.
Registrant shall indemnify and advance expenses to its officers or other
persons to the same extent as its Directors and to such further extent as is
consistent with such law.
Section 10.2 of Registrant's Bylaws authorize Registrant to obtain
insurance on behalf of its Directors, officers and employees, including any such
person who was serving at the request of the Registrant as a Director, trustee,
officer or employee of a corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against and claimed by such person in
such capacity, whether or not Registrant would have the power to indemnify such
person against such liability. Registrant may not, however, obtain insurance
that protects or purports to protect any Director, officer or employee against
any liability to Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question as to whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding Corp.
("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens & Clark,
Inc. ("Scudder") and the representatives of the beneficial owners of the capital
stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the directors' evaluation of
the Transaction, Zurich agreed to indemnify the Registrant and the directors who
were not interested persons of ZKI or Scudder (the "Independent Directors") for
and against any liability and expenses based upon any action or omission by the
Independent Directors in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Directors for and against any liability and
expenses based upon any misstatements or omissions by Scudder to the Independent
Directors in connection with their consideration of the Transaction.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Registrant is managed by Scudder Kemper Investments, Inc. ("Scudder
Kemper"). The list required by this Item 26 of officers and directors of Scudder
Kemper together with information as to their other businesses, professions,
vocations or employment of a substantial nature during the past two years is
C-2
<PAGE> 78
incorporated by reference to Schedules A and D of Form ADV filed by Scudder
Kemper (SEC File No. 801-00252) pursuant to the Investment Advisers Act of 1940,
as amended.
ITEM 27. PRINCIPAL UNDERWRITER
(a) Kemper Distributors, Inc. serves as principal underwriter for
Registrant and acts as principal underwriter of the Kemper Funds.
(b) The information required by this Item 27 relating to each director,
officer or partner of Kemper Distributors, Inc. is incorporated by reference to
Schedule A of Form BD filed by Kemper Distributors, Inc. (SEC File No.
008-47765) pursuant to the Securities Exchange Act of 1934.
(c) None.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(1) Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
(records relating to its functions as investment adviser; Registrant's
Articles of Incorporation, By-laws and minute books)
(2) Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
(records relating to its functions as distributor)
(3) Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
(records relating to its functions as custodian)
(4) Investors Fiduciary Trust Company
801 Pennsylvania Avenue
Kansas City, Missouri 64105
(records relating to its functions as transfer agent)
(5) Kemper Service Company
811 Main street
Kansas City, Missouri 64105
(records relating to its functions as shareholder service agent)
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
C-3
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, this Amendment to the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and State of New
York, on the 8th day of June, 1999.
Scudder New Europe Fund, Inc.
By: /s/ NICHOLAS BRATT
--------------------------------------
Nicholas Bratt
President and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman and Director June 8, 1999
- -----------------------------------------------------
Daniel Pierce*
Director June 8, 1999
- -----------------------------------------------------
Paul Bancroft III*
Director June 8, 1999
- -----------------------------------------------------
Mary Johnston Evans*
Director June 8, 1999
- -----------------------------------------------------
Richard Hunt*
Director June 8, 1999
- -----------------------------------------------------
William H. Luers*
Director June 8, 1999
- -----------------------------------------------------
Wilson Nolen*
Director June 8, 1999
- -----------------------------------------------------
Ladislas O. Rice*
/s/ JOHN R. HEBBLE Treasurer (Principal Financial June 8, 1999
- ----------------------------------------------------- and Accounting Officer)
John R. Hebble
By: /s/ CAROLINE PEARSON
-------------------------------------------------
Caroline Pearson
as Attorney-in-Fact
</TABLE>
* Caroline Pearson signs this document pursuant to powers of attorney filed with
the Registrant's Registration Statement on Form N-1A, as filed with the
Securities and Exchange Commission on April 28, 1999.
<PAGE> 80
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<C> <S>
(g) Custodian Agreement with Brown Brothers Harriman & Co. Fee
Schedule and Amendment.
</TABLE>
<PAGE> 1
CUSTODIAN AGREEMENT
Dated as of
May 21, 1995
Between
SCUDDER NEW EUROPE FUND, INC.
and
BROWN BROTHERS HARRIMAN & CO.
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
APPOINTMENT OF CUSTODIAN
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
2.1. Safekeeping 1
2.2. Manner of Holding Securities 2
2.3. Registered Name; Nominee 2
2.4. Purchases by the Fund 2
2.5. Exchanges of Securities 3
2.6. Sales of Securities 4
2.7. Depositary Receipts 4
2.8. Exercise of Rights; Tender Offers 5
2.9. Stock Dividends, Rights, Etc 5
2.10. Options 5
2.11. Futures and Forward Contracts 6
2.12. Borrowings 6
2.13. Bank Accounts 7
2.14. Interest-Bearing Deposits 7
2.15. Foreign Exchange Transactions 8
2.16. Securities Loans 9
2.17. Collections 9
2.18. Dividends, Distributions and
Redemptions 9
2.19. Proxies; Communications Relating to
Portfolio Securities 10
2.20. Bills 10
2.21. Nondiscretionary Details 11
2.22. Deposit of Fund Assets in Securities
Systems 11
2.23. Other Transfers 12
2.24. Establishment of Segregated Accounts 12
2.25. Custodian Advances 13
2
<PAGE> 3
TABLE OF CONTENTS
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. Proper Instructions and Special
Instructions 13
3.2. Authorized Persons 14
3.3 Persons Having Access to Assets of the Fund 15
3.4. Actions of Custodian Based on Proper
Instructions and Special Instructions 15
ARTICLE IV
SUBCUSTODIANS
4.1. Domestic Subcustodians 15
4.2. Foreign Subcustodians and Interim
Subcustodians 16
4.3. Termination of a Subcustodian 17
4.4. Agents 18
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care 18
5.2. Liability of Custodian for Actions of
Other Persons 19
5.3. Indemnification 20
5.4. Investment Limitations 21
5.5. Fund's Right to Proceed 22
ARTICLE VI
RECORDS
6.1. Preparation of Reports 22
6.2. Custodian's Books and Records 22
6.3. Opinion of Fund's Independent Certified
Public Accountants 23
6.4. Reports of Custodian's Independent
Certified Public Accountants 23
6.5. Calculation of Net Asset Value 24
6.6. Information Regarding Foreign
Subcustodians and Foreign Depositories 26
3
<PAGE> 4
TABLE OF CONTENTS
ARTICLE VII
CUSTODIAN FEES
ARTICLE VIII
TERMINATION
ARTICLE IX
MISCELLANEOUS
9.1. Execution of Documents 28
9.2. Entire Agreement 28
9.3. Waivers and Amendments 28
9.4. Captions 29
9.5. Governing Law 29
9.6. Notices 29
9.7. Successors and Assigns 29
9.8. Counterparts 29
9.9. Representative Capacity; Nonrecourse
Obligations 29
Appendix A Procedures Relating to Custodian's Security Interest
Appendix B Subcustodians, Foreign Countries, and Foreign Depositories
Appendix C Sources of Price Quotations
4
<PAGE> 5
Form of Custodian Agreement
CUSTODIAN AGREEMENT dated as of May 21, 1995, between Scudder New Europe
Fund, Inc. (the "Fund"), a Maryland corporation, and Brown Brothers Harriman &
Co. (the "Custodian"), a New York limited partnership.
In consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
The Fund hereby employs and appoints the Custodian as a custodian
for the term of and subject to the provisions of this Agreement. The Fund agrees
to deliver to the Custodian all securities, cash and other assets owned by it,
and all payments of income, payments of principal or capital distributions
received by it with respect to all securities owned by the Fund from time to
time, and the cash consideration received by it for such new or treasury shares
of capital stock of the Fund as may be issued or sold from time to time.
The Custodian shall not be under any duty or obligation to require
the Fund to deliver to it any securities, cash or other assets owned by the Fund
and shall have no responsibility or liability for or on account of securities,
cash or other assets not so delivered. The Fund will deposit with the Custodian
copies of the Articles of Incorporation and By-Laws (or comparable documents) of
the Fund and all amendments thereto, and copies of such votes and other
proceedings of the Fund as may be necessary for or convenient to the Custodian
in the performance of its duties.
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
The Custodian shall have and perform, or cause to be performed in
accordance with this Agreement, the powers and duties set forth in this Article
II. Pursuant to and in accordance with Article IV, the Custodian may appoint one
or more Subcustodians (as that term is defined in Article IV) to exercise the
powers and perform the duties of the Custodian set forth in this Article II and,
except as the context shall otherwise require, references to the Custodian in
this Article II shall include any Subcustodian so appointed.
2.1. Safekeeping. The Custodian shall keep safely the cash,
securities and other assets of the Fund that have been delivered to the
Custodian and from time to time shall accept delivery of cash,
5
<PAGE> 6
securities and other assets for safekeeping.
2.2. Manner of Holding Securities. (a) The Custodian shall hold
securities of the Fund (i) by physical possession of the share certificates or
other instruments representing such securities in registered or bearer form, or
the broker's receipts or confirmations for forward contracts, futures contracts,
options and similar contracts and securities, or (ii) in book-entry form by a
Securities System (as that term is defined in section 2.22) or (iii) by a
Foreign Depository (as that term is defined in section 4.2(a)).
(b) The Custodian shall identify securities and other assets held by
it hereunder as being held for the account of the Fund and shall require each
Subcustodian to identify securities and other assets held by such Subcustodian
as being held for the account of the Custodian for the Fund (or, if authorized
by Special Instructions, for customers of the Custodian) or for the account of
another Subcustodian for the Fund (or, if authorized by Special Instructions,
for customers of such Subcustodian); provided that if assets are held for the
account of the Custodian or a Subcustodian for customers of the Custodian or
such Subcustodian, the records of the Custodian shall at all times indicate the
Fund and other customers of the Custodian for which such assets are held in such
account and their respective interests therein.
2.3. Registered Name; Nominee. (a) The Custodian shall hold
registered securities and other assets of the Fund (i) in the name of the
Custodian (including any Subcustodian), the Fund, a Securities System, a Foreign
Depository or any nominee of any such person or (ii) in street certificate form,
so-called, and in any case with or without any indication of fiduciary capacity,
provided that such securities and other assets of the Fund are held in an
account of the Custodian containing only assets of the Fund or only assets held
as fiduciary or custodian for customers.
(b) Except with respect to securities or other assets which under
local custom and practice generally accepted by Institutional Clients are held
in the investor's name, the Custodian shall not hold registered securities or
other assets in the name of the Fund, and shall require each Subcustodian not to
hold registered securities or other assets in the name of the Fund, unless the
Custodian or such Subcustodian promptly notifies the Fund that such registered
securities are being held in the Fund's name and causes the Securities System,
Foreign Depository, issuer or other relevant person to direct all correspondence
and payments to the address of the Custodian or such Subcustodian, as the case
may be.
2.4. Purchases by the Fund. Upon receipt of Proper Instructions (as
that term is defined in section 3.1(a)) and insofar as funds are available for
the purpose (or as funds are otherwise provided by the Custodian at its
discretion pursuant to section 2.25),
6
<PAGE> 7
the Custodian shall pay for and receive securities or other assets purchased for
the account of the Fund, payment being made only upon receipt of the securities
or other assets (a) by the Custodian, or (b) by credit to an account which the
Custodian may have with a Securities System, clearing corporation of a national
securities exchange, Foreign Depository or other financial institution approved
by the Fund. Notwithstanding the foregoing, upon receipt of Proper Instructions:
(i) in the case of repurchase agreements entered into by the Fund in a
transaction involving a Securities System or a Foreign Depository, the Custodian
may release funds to the Securities System or Foreign Depository prior to the
receipt of advice from the Securities System or Foreign Depository that the
securities underlying such repurchase agreement have been transferred by book
entry into the Account (as defined in section 2.22) of the Custodian maintained
with such Securities System or similar account with a Foreign Depository,
provided that the instructions of the Custodian to the Securities System or
Foreign Depository require that the Securities System or Foreign Depository, as
the case may be, may make payment of such funds to the other party to the
repurchase agreement only upon transfer by book-entry of the securities
underlying the repurchase agreement into the Account, (ii) in the case of
futures and forward contracts, options and similar securities, foreign currency
purchased from third parties, time deposits, foreign currency call account
deposits, and other bank deposits, and transactions pursuant to sections 2.10,
2.11, 2.13, 2.14 and 2.15, the Custodian may make payment therefor prior to
delivery of the contract, currency, option or security without receiving an
instrument evidencing said contract, currency, option, security or deposit, and
(iii) in the case of the purchase of securities or other assets the settlement
of which occurs outside the United States of America, the Custodian may make
payment therefor and receive delivery thereof in accordance with local custom
and practice generally accepted by Institutional Clients (as defined below) in
the country in which settlement occurs, provided that in every case the
Custodian shall be subject to the standard of care set forth in Article V and to
any Special Instructions given in accordance with section 3.1(b). Except in the
cases provided for in the immediately preceding sentence, in any case where
payment for purchase of securities or other assets for the account of the Fund
is made by the Custodian in advance of receipt of the securities or other assets
so purchased in the absence of Proper Instructions to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities or other
assets to the same extent as if the securities or other assets had been received
by the Custodian. For purposes of this Agreement, "Institutional Clients" means
U.S. registered investment companies, or major, U.S.-based commercial banks,
insurance companies, pension funds or substantially similar financial
institutions which, as a substantial part of their business operations, purchase
or sell securities and make use of custodial services.
2.5. Exchanges of Securities. Upon receipt of Proper Instructions,
the Custodian shall exchange securities held by it for the account of the Fund
for other securities in connection with any
7
<PAGE> 8
reorganization, recapitalization, split-up of shares, change of par value,
conversion or other event, and to deposit any such securities in accordance with
the terms of any reorganization or protective plan. Without Proper Instructions,
the Custodian may surrender securities in temporary form for definitive
securities, may surrender securities for transfer into a name or nominee name as
permitted in section 2.3, and may surrender securities for a different number of
certificates or instruments representing the same number of shares or same
principal amount of indebtedness, provided that the securities to be issued are
to be delivered to the Custodian.
2.6. Sales of Securities. Upon receipt of Proper Instructions, the
Custodian shall make delivery of securities or other assets which have been sold
for the account of the Fund, but only against payment therefor (a) in cash, by a
certified check, bank cashier's check, bank credit, or bank wire transfer, or
(b) by credit to the account of the Custodian with a Securities System, clearing
corporation of a national securities exchange, Foreign Depository or other
financial institution approved by the Fund by Proper Instructions. However, (i)
in the case of delivery of physical certificates or instruments representing
securities, the Custodian may make delivery to the broker acting as agent for
the buyer of the securities, against receipt therefor, for examination in
accordance with "street delivery" custom, provided that the Custodian shall have
taken reasonable steps to ensure prompt collection of the payment for, or the
return of, such securities by the broker or its clearing agent and (ii) in the
case of the sale of securities or other assets the settlement of which occurs
outside the United States of America, such securities shall be delivered and
paid for in accordance with local custom and practice generally accepted by
Institutional Clients in the country in which settlement occurs, provided that
in every case the Custodian shall be subject to the standard of care set forth
in Article V and to any Special Instructions given in accordance with section
3.1(b). Except in the cases provided for in the immediately preceding sentence,
in any case where delivery of securities or other assets for the account of the
Fund is made by the Custodian in advance of receipt of payment for the
securities or other assets so sold in the absence of Proper Instructions to so
deliver in advance, the Custodian shall be absolutely liable to the Fund for
such payment to the same extent as if such payment had been received by the
Custodian.
2.7. Depositary Receipts. Upon receipt of Proper Instructions, the
Custodian shall surrender securities to the depositary used by an issuer of
American Depositary Receipts, European Depositary Receipts, Global Depositary
Receipts, International Depositary Receipts and other types of Depositary
Receipts (hereinafter collectively referred to as "ADRs") for such securities
against a written receipt therefor adequately describing such securities and
written evidence satisfactory to the Custodian that the depositary has
acknowledged receipt of instructions to issue ADRs with respect to such
securities in the name of the Custodian, or a nominee of the Custodian, for
delivery to the Custodian in Boston,
8
<PAGE> 9
Massachusetts, or at such other place as the Custodian may from time to time
designate.
Upon receipt of Proper Instructions, the Custodian shall surrender
ADRs to the issuer thereof against a written receipt therefor adequately
describing the ADRs surrendered and written evidence satisfactory to the
Custodian that the issuer of the ADRs has acknowledged receipt of instructions
to cause its depositary to deliver the securities underlying such ADRs to the
Custodian.
2.8. Exercise of Rights; Tender Offers. Upon receipt of Proper
Instructions, the Custodian shall (a) deliver to the issuer or trustee thereof,
or to the agent of either, warrants, puts, calls, futures contracts, options,
rights or similar securities for the purpose of being exercised or sold,
provided that the new securities and cash, if any, acquired by such action are
to be delivered to the Custodian, and (b) deposit securities upon invitations
for tenders of securities, provided that the consideration is to be paid or
delivered or the tendered securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the Custodian
shall take all necessary action, unless otherwise directed to the contrary by
Proper Instructions, to comply with the terms of all mandatory or compulsory
exchanges, calls, tenders, redemptions or similar rights of security ownership
of which the Custodian receives notice or otherwise becomes aware, and shall
promptly notify the Fund of any such action in writing by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
2.9. Stock Dividends, Rights, Etc. The Custodian shall receive and
collect all stock dividends, rights and other items of like nature and shall
deal with the same as it would other deposited assets or as directed in Proper
Instructions.
2.10. Options and Swaps. Upon receipt of Proper Instructions or
instructions from a third party properly given under any Procedural Agreement,
the Custodian shall (a) receive and retain confirmations or other documents (to
the extent confirmations or other documents are provided to the Custodian)
evidencing the purchase, sale or writing of an option or swap of any type on or
in respect of a security, securities index, currency or similar form of property
by the Fund; (b) deposit and maintain in a segregated account, either physically
or by book-entry in a Securities System or Foreign Depository or with a broker,
dealer or other party designated by the Fund, securities, cash or other assets
in connection with options transactions or swap agreements entered into by the
Fund; (c) transfer securities, cash or other assets to a Securities System,
Foreign Depository, broker, dealer or other party or organization, as margin
(including variation margin) or other security for the Fund's obligations in
respect of an option or swap; and (d) pay, release and/or transfer such
securities, cash or other assets only in accordance with a notice or other
communication evidencing the expiration, termination, exercise of any such
option or default under
9
<PAGE> 10
any such option or swap furnished by The Options Clearing Corporation, the
securities or options exchange on which such option is traded, or such other
organization, party, broker or dealer as may be responsible for handling such
options or swap transactions or have authority to give such notice or
communication under a Procedural Agreement. Subject to the standard of care set
forth in Article V (and to its safekeeping duties set forth in section 2.1), the
Custodian shall not be responsible for the sufficiency of assets held in any
segregated account established and maintained in accordance with Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement or for the performance by the Fund or any third party of
its obligations under any Procedural Agreement. For purposes of this Agreement,
a "Procedural Agreement" is a procedural agreement relating to options, swaps
(including caps, floors and similar arrangements), futures contracts, forward
contracts or borrowings by the Fund to which the Fund, the Custodian and a third
party are parties.
2.11. Futures and Forward Contracts. Upon receipt of Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement, the Custodian shall (a) receive and retain confirmations
or other documents (to the extent confirmations or other documents are provided
to the Custodian) evidencing the purchase or sale of a futures contract or an
option on a futures contract by the Fund or the entry into a forward contract by
the Fund; (b) deposit and maintain in a segregated account, either physically or
by book entry in a Securities System or Foreign Depository, for the benefit of
any futures commission merchant, or pay to such futures commission merchant,
securities, cash or other assets designated by the Fund as initial, maintenance
or variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written, purchased or sold by the Fund or any forward
contracts entered into, in accordance with the provisions of any Procedural
Agreement designed to comply with the rules of the Commodity Futures Trading
Commission and/or any contract market, or any similar organization or
organizations on which such contracts or options are traded; and (c) pay,
release and/or transfer securities, cash or other assets into or out of such
margin accounts only in accordance with any such agreements or rules. Subject to
the standard of care set forth in Article V, the Custodian shall not be
responsible for the sufficiency of assets held in any such margin account
established and maintained in accordance with Proper Instructions or
instructions from a third party properly given under any Procedural Agreement or
for the performance by the Fund or any third party of its obligations under any
Procedural Agreement.
2.12. Borrowings. Upon receipt of Proper Instructions or
instructions from a third party properly given under any Procedural Agreement,
the Custodian shall deliver securities of the Fund to lenders or their agents,
or otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for
10
<PAGE> 11
borrowings effected by the Fund, but only against receipt of the amounts
borrowed (or to adjust the amount of such collateral in accordance with the
Procedural Agreement), provided that if such collateral is held in book-entry
form by a Securities System or Foreign Depository, such collateral may be
transferred by book-entry to such lender or its agent against receipt by the
Custodian of an undertaking by such lender to pay such borrowed money to or upon
the order of the Fund on the next business day following such transfer of
collateral.
2.13. Bank Accounts. The Custodian shall open and operate one or
more accounts in the name of the Fund on the Custodian's books subject only to
draft or order by the Custodian. All funds received by the Custodian from or for
the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
Upon receipt of Proper Instructions, the Custodian may open and
operate additional accounts in such other banks or trust companies, including
any Subcustodian, as may be designated by the Fund in such instructions (any
such bank or trust company other than the Custodian so designated by the Fund
being referred to hereafter as a "Banking Institution"), provided that any such
account shall be in the name of the Custodian for the account of the Fund (or,
if authorized by Special Instructions, for the account of the Custodian's
customers generally) and subject only to the Custodian's draft or order;
provided that if assets are held in such an account for the account of the
Custodian's customers generally, the records of the Custodian shall at all times
indicate the Fund and other customers for which such assets are held in such
account and their respective interests therein. Such accounts may be opened with
Banking Institutions in the United States and in other countries and may be
denominated in U.S. Dollars or such other currencies as the Fund may determine.
So long as the Custodian exercises reasonable care and diligence in executing
Proper Instructions, the Custodian shall have no responsibility for the failure
of any Banking Institution to make payment from such an account upon demand.
2.14. Interest-Bearing Deposits. The Custodian shall place
interest-bearing fixed term and call deposits with such banks and in such
amounts as the Fund may authorize pursuant to Proper Instructions. Such deposits
may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U.S.
Dollars or other currencies, as the Fund may determine, and need not be
evidenced by the issuance or delivery of a certificate to the Custodian,
provided that the Custodian shall include in its records with respect to the
assets of the Fund, appropriate notation as to the amount and currency of each
such deposit, the accepting Banking Institution and all other appropriate
details, and shall retain such forms of advice or receipt evidencing such
deposits as may be forwarded to the Custodian by the
11
<PAGE> 12
Banking Institution in question. The responsibility of the Custodian for such
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit. With respect to interest-bearing deposits other than those
accepted on the Custodian's books, (a) the Custodian shall be responsible for
the collection of income as set forth in section 2.17, and (b) so long as the
Custodian exercises reasonable care and diligence in executing Proper
Instructions, the Custodian shall have no responsibility for the failure of any
Banking Institution to make payment in accordance with the terms of such an
account. Upon receipt of Proper Instructions, the Custodian shall take such
reasonable steps as the Fund deems necessary or appropriate to cause such
deposits to be insured to the maximum extent possible by the Federal Deposit
Insurance Corporation and any other applicable deposit insurers.
2.15. Foreign Exchange Transactions. (a) Upon receipt of Proper
Instructions, the Custodian shall settle foreign exchange contracts or options
to purchase and sell foreign currencies for spot and future delivery on behalf
and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may direct pursuant to Proper Instructions. The
Custodian shall be responsible for the transmission of cash and instructions to
and from the currency broker or Banking Institution with which the contract or
option is made, the safekeeping of all certificates and other documents and
agreements received by the Custodian evidencing or relating to such foreign
exchange transactions and the maintenance of proper records as set forth in
section 6.2. In connection with such transactions, upon receipt of Proper
Instructions, the Custodian shall be authorized to make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or confirmation that the
countervalue currency completing the foreign exchange contract has been
delivered or that the option has been delivered or received. The Custodian shall
have no authority to select third party foreign exchange dealers and, so long as
the Custodian exercises reasonable care and diligence in executing Proper
Instructions, shall have no responsibility for the failure of any such dealer to
settle any such contract or option in accordance with its terms. The Fund shall
reimburse the Custodian for any interest charges or reasonable out-of-pocket
expenses incurred by the Custodian resulting from the failure or delay of third
party foreign exchange dealers to deliver foreign exchange, other than interest
charges and expenses occasioned by or resulting from the negligence, misfeasance
or misconduct of the Custodian.
(b) The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to the Fund its services as principal in foreign exchange transactions, upon
receipt of Proper Instructions, the Custodian shall enter into foreign exchange
contracts or options to purchase and sell foreign currencies for spot and future
delivery on behalf of and for the account of the Fund with the Custodian as
principal. The responsibility of the Custodian with respect to
12
<PAGE> 13
foreign exchange contracts and options executed with the Custodian as principal
shall be that of a U.S. bank with respect to a similar contract or option.
2.16. Securities Loans. Upon receipt of Proper Instructions, the
Custodian shall deliver securities of the Fund, in connection with loans of
securities by the Fund, to the borrower thereof in accordance with the terms of
a written securities lending agreement to which the Fund is a party or which is
otherwise approved by the Fund.
2.17. Collections. The Custodian shall promptly collect, receive and
deposit in the account or accounts referred to in section 2.13 all income,
payments of principal and other payments with respect to the securities and
other assets held hereunder, promptly endorse and deliver any instruments
required to effect such collections and in connection therewith deliver the
certificates or other instruments representing securities to the issuer thereof
or its agent when securities are called, redeemed, retired or otherwise become
payable; provided that the payment is to be made in such form and manner and at
such time, which may be after delivery by the Custodian of the instrument
representing the security, as is in accordance with the terms of the instrument
representing the security, such Proper Instructions as the Custodian may
receive, governmental regulations, the rules of the Securities System or Foreign
Depository in which such security is held or, with respect to securities
referred to in clause (iii) of the second sentence of section 2.4, in accordance
with local custom and practice generally accepted by Institutional Clients in
the market where payment or delivery occurs, but in all events subject to the
standard of care set forth in Article V. The Custodian shall promptly execute
ownership and other certificates and affidavits for all federal, state and
foreign tax purposes in connection with receipt of income or other payments with
respect to securities or other assets of the Fund or in connection with transfer
of securities or other assets. Pursuant to Proper Instructions, the Custodian
shall take such other actions, which may involve an investment decision, as the
Fund may request with respect to the collection or receipt of funds or the
transfer of securities. Except in the cases provided for in the first sentence
of this section, in any case where delivery of securities for the account of the
Fund is made by the Custodian in advance of receipt of payment with respect to
such securities in the absence of Proper Instructions to so deliver in advance,
the Custodian shall be absolutely liable to the Fund for such payment to the
same extent as if such payment had been received by the Custodian. The Custodian
shall promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing if any amount
payable with respect to securities or other assets of the Fund is not received
by the Custodian when due.
2.18. Dividends, Distributions and Redemptions. Upon receipt of
Proper Instructions, or upon receipt of instructions from
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<PAGE> 14
the Fund's shareholder servicing agent or agent with comparable duties (the
"Shareholder Servicing Agent") (given by such person or persons and in such
manner on behalf of the Shareholder Servicing Agent as the Fund shall have
authorized by Proper Instructions), the Custodian shall release funds or
securities, insofar as available, to the Shareholder Servicing Agent or as such
Shareholder Servicing Agent shall otherwise instruct (a) for the payment of
dividends or other distributions to Fund shareholders or (b) for payment to the
Fund shareholders who have delivered to such Shareholder Servicing Agent a
request for repurchase or redemption of their shares of capital stock of the
Fund.
2.19. Proxies; Communications Relating to Portfolio Securities. The
Custodian shall, as promptly as is appropriate under the circumstances, deliver
or mail to the Fund all forms of proxies and all notices of meetings and any
other notices, announcements or information (including, without limitation,
information relating to pendency of calls and maturities of securities and
expirations of rights in connection therewith, notices of exercise of call and
put options written by the Fund, and notices of the maturity of futures
contracts (and options thereon) purchased or sold by the Fund) affecting or
relating to securities owned by the Fund that are received by the Custodian.
Upon receipt of Proper Instructions, the Custodian shall execute and deliver or
cause its nominee to execute and deliver such proxies or other authorizations as
may be required. Neither the Custodian nor its nominees shall vote upon any of
such securities or execute any proxy to vote thereon or give any consent or take
any other action with respect to securities or other assets of the Fund (except
as otherwise herein provided) unless ordered to do so by Proper Instructions.
The Custodian shall notify the Fund on or before ex-date (or if
later within 24 hours after receipt by the Custodian of the notice of such
corporate action) of all corporate actions affecting portfolio securities of the
Fund received by the Custodian from the issuers of the securities involved, from
third parties proposing a corporate action, from subcustodians, or from commonly
utilized sources (including proprietary sources) providing corporate action
information, a list of which will be provided by the Custodian to the Fund from
time to time upon request. Information as to corporate actions shall include
information as to dividends, distributions, stock splits, stock dividends,
rights offerings, conversions, exchanges, tender offers, recapitalizations,
mergers, redemptions, calls, maturity dates and similar transactions, including
ex-, record and pay dates and the amounts or other terms thereof. If the Fund
desires to take action with respect to any corporate action, the Fund shall
notify the Custodian within such period as will give the Custodian (including
any Subcustodian) a sufficient amount of time to take such action.
2.20. Bills. Upon receipt of Proper Instructions, the Custodian
shall pay or cause to be paid, insofar as funds are
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<PAGE> 15
available for the purpose, bills, statements, or other obligations of the Fund
(including but not limited to interest charges, taxes, advisory fees,
compensation to Fund officers and employees, and other operating expenses of the
Fund).
2.21. Nondiscretionary Details. Without the necessity of express
authorization from the Fund, the Custodian shall (a) attend to all
nondiscretionary details in connection with the sale, exchange, substitution,
purchase, transfer or other dealings with securities, cash or other assets of
the Fund held by the Custodian except as otherwise directed from time to time by
the Board of Directors of the Fund, and (b) make payments to itself or others
for minor expenses of handling securities or other assets and for other similar
items relating to the Custodian's duties under this Agreement, provided that all
such payments shall be accounted for to the Fund.
2.22. Deposit of Fund Assets in Securities Systems. The Custodian
may deposit and/or maintain securities owned by the Fund in (a) The Depository
Trust Company, (b) the Participants Trust Company, (c) any book-entry system as
provided in Subpart O of Treasury Circular No. 300, 31 CFR 306, Subpart B of 31
CFR Part 350, or the book-entry regulations of federal agencies substantially in
the form of Subpart O, or (d) any other domestic clearing agency registered with
the Securities and Exchange Commission (the "SEC") under Section 17A of the
Securities Exchange Act of 1934, as amended, which acts as a securities
depository and whose use the Fund has previously approved by Special
Instructions (as that term is defined in section 3.1(b)) (each of the foregoing
being referred to in this Agreement as a "Securities System"). Utilization of a
Securities System shall be in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the following provisions:
(i) The Custodian may deposit and/or maintain securities held
hereunder in a Securities System, provided that such securities are
represented in an account ("Account") of the Custodian in the Securities
System which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian, or otherwise for customers;
(ii) The records of the Custodian with respect to securities of the
Fund which are maintained in a securities System shall identify by book
entry those securities belonging to the Fund;
(iii) The Custodian shall pay for securities purchased for the
account of the Fund only upon (A) receipt of advice from the Securities
System that such securities have been transferred to the Account, and (B)
the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund only upon (1) receipt
of advice from the
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<PAGE> 16
Securities System that payment for such securities has been transferred to
the Account, and (2) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of the
Fund. Copies of all advices from the Securities System of transfers of
securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to the Fund at
its request. The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the Securities System for the
account of the Fund on the next business day;
(iv) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities deposited in
the Securities System; and the Custodian shall send to the Fund such
reports on its own systems of internal accounting control as the Fund may
reasonably request from time to time; and
(v) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any such Securities System on behalf of the Fund as
promptly as practicable and shall take all actions reasonably practicable
to safeguard the securities of the Fund that had been maintained with such
Securities System.
2.23. Other Transfers. The Custodian shall deliver securities, cash,
and other assets of the Fund to a Subcustodian as necessary to effect
transactions authorized by Proper Instructions. Upon receipt of Proper
Instructions in writing in advance, the Custodian shall make such other
disposition of securities, cash or other assets of the Fund in a manner other
than or for purposes other than as enumerated in this Agreement, provided that
such written Proper Instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
funds and/or securities to be delivered and the name of the person or persons to
whom delivery is to be made.
2.24. Establishment of Segregated Accounts. Upon receipt of Proper
Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other assets of the
Fund, including securities maintained by the Custodian in a Securities System,
said account to be maintained (a) for the purposes set forth in sections 2.10,
2.11, 2.12 and 2.15; (b) for the purposes of compliance by the Fund with the
procedures required by Release No. 10666 under the Investment Company Act of
1940, as amended (the "1940 Act"), or any subsequent release or releases of the
SEC relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as
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<PAGE> 17
set forth, from time to time, in Special Instructions.
2.25. Custodian Advances. (a) In the event that the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its discretion without further Proper
Instructions, provide an advance ("Advance") to the Fund in an amount sufficient
to allow the completion of the transaction by reason of which such payment or
transfer of funds is to be made. In addition, in the event the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund as to which it is subsequently determined that the Fund has
overdrawn its cash account with the Custodian as of the close of business on the
date of such payment or transfer, said overdraft shall constitute an Advance.
Any Advance shall be payable on demand by the Custodian, unless otherwise agreed
by the Fund and the Custodian, and shall accrue interest from the date of the
Advance to the date of payment by the Fund at a rate agreed upon in writing from
time to time by the Custodian and the Fund. It is understood that any
transaction in respect of which the Custodian shall have made an Advance,
including but not limited to a foreign exchange contract or other transaction in
respect of which the Custodian is not acting as a principal, is for the account
of and at the risk of the Fund, and not, by reason of such Advance, deemed to be
a transaction undertaken by the Custodian for its own account and risk. The
Custodian and the Fund acknowledge that the purpose of Advances is to finance
temporarily the purchase or sale of securities for prompt delivery or to meet
redemptions or emergency expenses or cash needs that are not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
(an "Notice of Advance") of any Advance by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing. At the request
of the Custodian, the Fund shall pledge, assign and grant to the Custodian a
security interest in certain specified securities of the Fund, as security for
Advances provided to the Fund, under the terms and conditions set forth in
Appendix A attached hereto.
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used in this Agreement, the term "Proper
Instructions" shall mean: (i) a tested telex from the Fund or the Fund's
investment manager or adviser, or a written request, direction, instruction or
certification (which may be given by facsimile transmission) signed or initialed
on behalf of the Fund by, one or more Authorized Persons (as that term is
defined in section 3.2); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication (other than
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<PAGE> 18
facsimile transmission) effected directly between electro-mechanical or
electronic devices or systems (including, without limitation, computers) by the
Fund or the Fund's investment manager or adviser or by one or more Authorized
Persons on behalf of the Fund; provided that communications of the types
described in clauses (ii) and (iii) above purporting to be given by an
Authorized Person shall be considered Proper Instructions only if the Custodian
reasonably believes such communications to have been given by an Authorized
Person with respect to the transaction involved. Instructions given in the form
of Proper Instructions under clause (i) shall be deemed to be Proper
Instructions if they are reasonably believed by the Custodian to be genuine.
Proper Instructions in the form of oral communications shall be confirmed by the
Fund in the manner set forth in clauses (i) or (iii) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reliance upon such oral instructions prior to the Custodian's receipt of such
confirmation. The Fund, the Custodian and any investment manager or adviser of
the Fund each is hereby authorized to record any telephonic or other oral
communications between the Custodian and any such person. Proper Instructions
may relate to specific transactions or to types or classes of transactions,
provided that Proper Instructions may take the form of standing instructions
only if they are in writing.
(b) Special Instructions. As used in this Agreement, the term
"Special Instructions" shall mean Proper Instructions countersigned or confirmed
in writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, facsimile transmission, mail or courier service or
in such other manner as the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions. Proper
Instructions and Special Instructions shall be delivered to the Custodian at the
address and/or telephone, telecopy or telex number agreed upon from time to time
by the Custodian and the Fund.
3.2. Authorized Persons. Concurrently with the execution of this
Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian a certificate, duly certified by the Secretary or
Assistant Secretary of the Fund, setting forth: (a) the names, titles,
signatures and scope of authority of all persons authorized to give Proper
Instructions or any other notice, request, direction, instruction, certificate
or instrument on behalf of the Fund (each an "Authorized Person"); and (b) the
names, titles and signatures of those persons authorized to issue Special
Instructions. Such certificate may be accepted and relied upon by the Custodian
as conclusive evidence of the facts set forth therein and shall be considered to
be in full force and effect until delivery to
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<PAGE> 19
the Custodian of a similar certificate to the contrary. Upon delivery of a
certificate which deletes the name(s) of a person previously authorized to give
Proper Instructions or to issue Special Instructions, such persons shall no
longer be considered an Authorized Person or authorized to issue Special
Instructions.
3.3. Persons Having Access to Assets of the Fund. Notwithstanding
anything to the contrary in this Agreement, the Custodian shall not deliver any
assets of the Fund held by the Custodian to or for the account of any Authorized
Person, director, officer, employee or agent of the Fund, provided that nothing
in this section 3.3 shall prohibit (a) any Authorized Person from giving Proper
Instructions, or any person authorized to issue Special Instructions from
issuing Special Instructions, provided such action does not result in delivery
of or access to assets of the Fund prohibited by this section 3.3; or (b) the
Fund's independent certified public accountants from examining or reviewing the
assets of the Fund held by the Custodian. The Fund shall provide a list of such
persons to the Custodian, and the Custodian shall be entitled to rely upon such
list and any modifications thereto that are provided to the Custodian from time
to time by the Fund.
3.4. Actions of Custodian Based on Proper Instructions and Special
Instructions. So long as and to the extent that the Custodian acts in accordance
with Proper Instructions or Special Instructions, as the case may be, and the
terms of this Agreement, the Custodian shall not be responsible for the title,
validity or genuineness of any property, or evidence of title thereof, received
or delivered by it pursuant to this Agreement.
ARTICLE IV
SUBCUSTODIANS
The Custodian may, from time to time, in accordance with the
relevant provisions of this Article IV, appoint one or more Domestic
Subcustodians, Foreign Subcustodians and Interim Subcustodians (as such terms
are defined below) to act on behalf of the Fund. For purposes of this Agreement,
all duly appointed Domestic Subcustodians, Foreign Subcustodians and Interim
Subcustodians are referred to collectively as "Subcustodians."
4.1. Domestic Subcustodians. The Custodian may, at any time and from
time to time, at its own expense, appoint any bank as defined in section 2(a)(5)
of the 1940 Act meeting the requirements of a custodian under section 17(f) of
the 1940 Act and the rules and regulations thereunder, to act on behalf of the
Fund as a subcustodian for purposes of holding cash, securities and other assets
of the Fund and performing other functions of the Custodian within the United
States (a "Domestic Subcustodian"), provided that the Custodian shall notify the
Fund in writing of the identity and qualifications of any proposed Domestic
Subcustodian at least 30 days prior to appointment
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of such Domestic Subcustodian, and the Fund may, in its sole discretion, by
written notice to the Custodian executed by an Authorized Person disapprove of
the appointment of such Domestic Subcustodian. If following notice by the
Custodian to the Fund regarding appointment of a Domestic Subcustodian and the
expiration of 30 days after the date of such notice, the Fund shall have failed
to notify the Custodian of its disapproval thereof, the Custodian may, in its
discretion, appoint such proposed Domestic Subcustodian as its subcustodian.
4.2. Foreign Subcustodians and Interim Subcustodians.
(a) Foreign Subcustodians. The Custodian may, at any time and from
time to time, at its own expense, appoint: (i) any bank, trust company or other
entity meeting the requirements of an "eligible foreign custodian" under section
17(f) of the 1940 Act and the rules and regulations thereunder or exempted
therefrom by order of the SEC, or (ii) any bank as defined in section 2(a)(5) of
the 1940 Act meeting the requirements of a custodian under section 17(f) of the
1940 Act and the rules and regulations thereunder to act on behalf of the Fund
as a subcustodian for purposes of holding cash, securities and other assets of
the Fund and performing other functions of the Custodian in countries other than
the United States of America (a "Foreign Subcustodian"); provided that prior to
the appointment of any Foreign Subcustodian, the Custodian shall have obtained
written confirmation of the approval of the Board of Directors of the Fund
(which approval may be withheld in the sole discretion of such Board of
Directors) with respect to (A) the identity and qualifications of any proposed
Foreign Subcustodian, (B) the country or countries in which, and the securities
depositories or clearing agencies (meeting the requirements of an "eligible
foreign custodian" under section 17(f) of the 1940 Act and the rules and
regulations thereunder or exempted therefrom by order of the SEC) through which,
any proposed Foreign Subcustodian is authorized to hold Securities, cash and
other assets of the Fund (each a "Foreign Depository") and (C) the form and
terms of the subcustodian agreement to be entered into between such proposed
Foreign Subcustodian and the Custodian. In addition, the Custodian may utilize
directly any Foreign Depository, provided the Board of Trustees shall have
approved in writing the use of such Foreign Depository by the Custodian. Each
such duly approved Foreign Subcustodian and the countries where and the Foreign
Depositories through which it may hold securities and other assets of the Fund
and the Foreign Depositories that the Custodian may utilize shall be listed in
Appendix B, as it may be amended from time to time in accordance with the
provisions of section 9.3. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be held
in a country in which no Foreign Subcustodian is authorized to act, in order
that there shall be sufficient time for the Custodian to effect the appropriate
arrangements with a proposed Foreign Subcustodian, including obtaining approval
as provided in this section 4.2(a). The Custodian shall not agree to any
material amendment to any subcustodian agreement entered into with a Foreign
Subcustodian, or agree to permit any material
20
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changes thereunder, or waive any material rights under such agreement, except
upon prior approval pursuant to Special Instructions. The Custodian shall
promptly provide the Fund with notice of any such amendment, change, or waiver,
whether or not material, including a copy of any such amendment. For purposes of
this subsection, a material amendment, change or waiver means an amendment,
change or waiver that may reasonably be expected to have an adverse effect on
the Fund in any material way, including but not limited to the Fund's or the
Board's obligations under the 1940 Act, including Rule 17f-5 thereunder.
(b) Interim Subcustodians. In the event that the Fund shall invest
in a security or other asset to be held in a country in which no Foreign
Subcustodian is authorized to act (whether because the Custodian has not
appointed a Foreign Subcustodian in such country and entered into a subcustodian
agreement with it or because the Board of Directors of the Fund has not approved
the Foreign Subcustodian appointed by the Custodian in such country and the
related subcustodian agreement), the Custodian shall promptly notify the Fund in
writing by facsimile transmission or in such other manner as the Fund and
Custodian shall agree in writing that no Foreign Subcustodian is approved in
such country and the Custodian shall, upon receipt of Special Instructions,
appoint any person designated by the Fund in such Special Instructions to hold
such security or other asset. Any person appointed as a Subcustodian pursuant to
this section 4.2(b) is hereinafter referred to herein as an "Interim
Subcustodian." Each Interim Custodian and the securities or assets of the Fund
that it is authorized to hold shall be set forth in Appendix B.
In the absence of such Special Instructions, such security or other
asset shall be held by such agent as the Custodian may appoint unless and until
the Fund shall instruct the Custodian to move the security or other asset into
the possession of the Custodian or a Subcustodian.
4.3. Termination of a Subcustodian. The Custodian shall (a) cause
each Domestic Subcustodian and Foreign Subcustodian to, and (b) use its best
efforts to cause each Interim Subcustodian to, perform all of its obligations in
accordance with the terms and conditions of the subcustodian agreement between
the Custodian and such Subcustodian. In the event that the Custodian is unable
to cause such Subcustodian to fully perform its obligations thereunder, the
Custodian shall forthwith, upon the receipt of Special Instructions, exercise
its best efforts to recover any Losses (as hereinafter defined) incurred by the
Fund because of such failure to perform from such Subcustodian under the
applicable subcustodian agreement and, if necessary or desirable, terminate such
subcustodian and appoint a replacement Subcustodian in accordance with the
provisions of this Agreement. In addition to the foregoing, the Custodian (i)
may, at any time in its discretion, upon written notification to the Fund,
terminate any Domestic Subcustodian, Foreign Subcustodian or Interim
Subcustodian, and (ii) shall, upon receipt of Special Instructions,
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terminate any Subcustodian with respect to the Fund, in each case in accordance
with the termination provisions of the applicable subcustodian agreement.
4.4. Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank, trust company,
securities depository or clearing agency that is itself qualified to act as a
custodian under the 1940 Act and the rules and regulations thereunder, as its
agent (an "Agent") to carry out such of the provisions of this Agreement as the
Custodian may from time to time direct, provided that the appointment of one or
more Agents (other than an agent appointed to the second paragraph of section
4.2(b)) shall not relieve the Custodian of its responsibilities under this
Agreement. Without limiting the foregoing, the Custodian shall be responsible
for any notices, documents or other information, or any securities, cash or
other assets of the Fund, received by any Agent on behalf of the Custodian or
the Fund as if the Custodian had received such items itself.
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise
reasonable care and diligence in carrying out all of its duties and obligations
under this Agreement, and shall be liable to the Fund for all Losses suffered or
incurred by the Fund resulting from the failure of the Custodian to exercise
such reasonable care and diligence. For purposes of this Agreement, "Losses"
means any losses, damages, and expenses.
(b) Actions Prohibited by Applicable Law, Etc. In no event shall the
Custodian incur liability hereunder if the Custodian or any Subcustodian or
Securities System, or any subcustodian, securities depository or securities
system utilized by any such Subcustodian or the Custodian, or any nominee of the
Custodian or any Subcustodian, is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement provides
shall be performed or omitted to be performed, by reason of: (i) any provision
of any present or future law or regulation or order of the United States of
America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction; or (ii) any act
of God or war or action of any de facto or de jure government or other similar
circumstance beyond the control of the Custodian, unless, in each case, such
delay or nonperformance is caused by the negligence, misfeasance or misconduct
of such person.
(c) Mitigation by Custodian. Upon the occurrence of any event which
causes or may cause any Losses to the Fund (i) the Custodian shall, and shall
cause any applicable Domestic Subcustodian or Foreign Subcustodian to, and (ii)
the Custodian shall use its best
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<PAGE> 23
efforts to cause any applicable Interim Subcustodian to, use all commercially
reasonable efforts and take all reasonable steps under the circumstances to
mitigate the effects of such event and to avoid continuing harm to the Fund.
(d) Advice of Counsel. The Custodian shall be entitled to receive
and act upon advice of counsel on all matters. The Custodian shall be without
liability for any action reasonably taken or omitted in good faith pursuant to
the advice of (i) counsel for the Fund, or (ii) at the expense of the Custodian,
such other counsel as the Fund may agree to, such agreement not to be
unreasonably withheld or delayed; provided that with respect to the performance
of any action or omission of any action upon such advice, the Custodian shall be
required to conform to the standard of care set forth in section 5.1(a).
(e) Expenses. In addition to the liability of the Custodian under
this Article V, the Custodian shall be liable to the Fund for all reasonable
costs and expenses incurred by the Fund in connection with any claim by the Fund
against the Custodian arising from the obligations of the Custodian hereunder
including, without limitation, all reasonable attorneys' fees and expenses
incurred by the Fund in asserting any such claim, and all reasonable expenses
incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim, provided that the Fund has recovered from
the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no
liability in respect of any Losses suffered by the Fund, insofar as such Losses
arise from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Fund by entities
other than the Custodian prior to the Custodian's employment hereunder.
(g) Reliance on Certifications. The Secretary or an Assistant
Secretary of the Fund shall certify to the Custodian the names and signatures of
the officers of the Fund, the name and address of the Shareholder Servicing
Agent, and any instructions or directions to the Custodian by the Fund's Board
of Directors or shareholders. Any such certificate may be accepted and relied
upon by the Custodian as conclusive evidence of the facts set forth therein and
may be considered in full force and effect until receipt of a similar
certificate to the contrary.
5.2. Liability of Custodian for Actions of Other Persons.
(a) Domestic Subcustodians, Foreign Subcustodians and Agents. The
Custodian shall be liable for the actions or omissions of any Domestic
Subcustodian, Foreign Subcustodian or Agent (other than an agent appointed
pursuant to section 4.2(b)) to the same extent as if such action or omission
were performed by the Custodian itself pursuant to this Agreement. In the event
of any Losses suffered or incurred by the Fund caused by or resulting from the
actions or
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omissions of any Domestic Subcustodian, Foreign Subcustodian or Agent (other
than an agent appointed pursuant to section 4.2(b)) for which the Custodian
would be directly liable if such actions or omissions were those of the
Custodian, the Custodian shall promptly reimburse the Fund in the amount of any
such Losses.
(b) Interim Subcustodians. Notwithstanding the provisions of section
5.1 to the contrary, the Custodian shall not be liable to the Fund for any
Losses suffered or incurred by the Fund resulting from the actions or omissions
of an Interim Subcustodian or an agent appointed pursuant to section 4.2(b)
unless such Losses are caused by, or result from, the negligence, misfeasance or
misconduct of the Custodian; provided that in the event of any Losses (whether
or not caused by or resulting from the negligence, misfeasance or misconduct of
the Custodian), the Custodian shall take all reasonable steps to enforce such
rights as it may have against such Interim Subcustodian or agent to protect the
interests of the Fund.
(c) Securities Systems and Foreign Depositories. Notwithstanding the
provisions of section 5.1 to the contrary, the Custodian shall not be liable to
the Fund for any Losses suffered or incurred by the Fund resulting from the use
by the Custodian or any Subcustodian of a Securities System or Foreign
Depository, unless such Losses are caused by, or result from, the negligence,
misfeasance or misconduct of the Custodian; provided that in the event of any
such Losses, the Custodian shall take all reasonable steps to enforce such
rights as it may have against the Securities System or Foreign Depository, as
the case may be, to protect the interests of the Fund.
(d) Reimbursement of Expenses. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under this section 5.2,
provided that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian.
5.3. Indemnification.
(a) Indemnification Obligations. Subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees for all Losses suffered or incurred by the Custodian
or its nominee (including Losses suffered under the Custodian's indemnity
obligations to Subcustodians) caused by or arising from actions taken by the
Custodian in the performance of its duties and obligations under this Agreement,
provided that such indemnity shall not apply to Losses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian or any
Subcustodian, Securities System, Foreign Depository or their respective
nominees. In addition, the Fund agrees to indemnify the Custodian against any
liability incurred by reason of taxes assessed to the Custodian, any
Subcustodian, any Securities System, any Foreign Depository, and their
respective nominees, or other Losses incurred by such persons, resulting from
the fact that
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<PAGE> 25
securities and other property of the Fund are registered in the name of such
persons, provided that in no event shall such indemnification be applicable to
income, franchise or similar taxes which may be imposed or assessed against such
persons.
(b) Notice of Litigation, Right to Prosecute, etc. The Fund shall
not be liable for indemnification under this section 5.3 unless the person
seeking indemnification shall have notified the Fund in writing (i) within such
time after the assertion of any claim as is sufficient for such person to
determine that it will seek indemnification from the Fund in respect of such
claim or (ii) promptly after the commencement of any litigation or proceeding
brought against such person, in respect of which indemnity may be sought;
provided that in the case of clause (i) of this section 5.3(b) the Fund shall
not be liable for such indemnification to the extent the Fund is disadvantaged
by any such delay in notification. With respect to claims in such litigation or
proceedings for which indemnity by the Fund may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the Fund
shall be entitled to participate in any such litigation or proceeding and, after
written notice from the Fund to the person seeking indemnification, the Fund may
assume the defense of such litigation or proceeding with counsel of its choice
at its own expense in respect of that portion of the litigation for which the
Fund may be subject to an indemnification obligation, provided that such person
shall be entitled to participate in (but not control) at its own cost and
expense, the defense of any such litigation or proceeding if the Fund has not
acknowledged in writing its obligation to indemnify such person with respect to
such litigation or proceeding. If the Fund is not permitted to participate in or
control such litigation or proceeding under applicable law or by a ruling of a
court of competent jurisdiction, such person shall reasonably prosecute such
litigation or proceeding. A person seeking indemnification hereunder shall not
consent to the entry of any judgment or enter into any settlement of any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment and without the Fund's prior written consent, which
consent shall not be unreasonably withheld or delayed. All persons seeking
indemnification hereunder shall submit written evidence to the Fund with respect
to any cost or expense for which they are seeking indemnification in such form
and detail as the Fund may reasonably request.
5.4. Investment Limitations. If the Custodian has otherwise complied
with the terms and conditions of this Agreement in performing its duties
generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund, and the Fund agrees to indemnify the Custodian and its
nominees, for any Losses suffered or incurred by the Custodian and its nominees
arising out of any violation of any investment or other limitation to which the
Fund is subject.
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<PAGE> 26
5.5. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System, Foreign Depository or other person for Losses
caused the Fund by such Subcustodian, Securities System, Foreign Depository or
other person, and shall be entitled to enforce the rights of the Custodian with
respect to any claim against such Subcustodian, Securities System, Foreign
Depository or other person which the Custodian may have as a consequence of any
such Losses, if and to the extent that the Fund has not been made whole for such
Losses. If the Custodian makes the Fund whole for such Losses, the Custodian
shall retain the ability to enforce its rights directly against such
Subcustodian, Securities System, Foreign Depository or other person. Upon the
Fund's election to enforce any rights of the Custodian under this section 5.5,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the Losses incurred by the
Fund; provided that, so long as the Fund has acknowledged in writing its
obligation to indemnify the Custodian under section 5.3 hereof with respect to
such claim, the Fund shall retain the right to settle, compromise and/or
terminate any action or proceeding in respect of the Losses incurred by the Fund
without the Custodian's consent; and provided further that if the Fund has not
made an acknowledgement of its obligation to indemnify the Custodian, the Fund
shall not settle, compromise or terminate any such action or proceeding without
the written consent of the Custodian, which consent shall not be unreasonably
withheld or delayed. The Custodian agrees to cooperate with the Fund and take
all actions reasonably requested by the Fund in connection with the Fund's
enforcement of any rights of the Custodian. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
connection with the fulfillment of its obligations under this section 5.5,
provided that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian.
ARTICLE VI
RECORDS
6.1. Preparation of Reports. The Custodian shall, as reasonably
requested by the Fund, assist generally in the preparation of reports to Fund
shareholders, regulatory authorities and others, audits of accounts, and other
ministerial matters of like nature. The Custodian shall render statements,
including interim monthly and complete quarterly financial statements, or copies
thereof, from time to time as reasonably requested by Proper Instructions.
6.2. Custodian's Books and Records. The Custodian shall maintain
complete and accurate records with respect to securities and other assets held
for the account of the Fund as required by the rules
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<PAGE> 27
and regulations of the SEC applicable to investment companies registered under
the 1940 Act, including: (a) journals or other records of original entry
containing a detailed and itemized daily record of all receipts and deliveries
of securities (including certificate and transaction identification numbers, if
any), and all receipts and disbursements of cash; (b) ledgers or other records
reflecting (i) securities in physical possession, (ii) securities in transfer,
(iii) securities borrowed, loaned or collateralizing obligations of the Fund,
(iv) monies borrowed and monies loaned (together with a record of the collateral
therefor and substitutions of collateral), and (v) dividends and interest
received; and (c) cancelled checks and bank records related thereto. The
Custodian shall keep such other books and records of the Fund as the Fund shall
reasonably request. All such books and records maintained by the Custodian shall
be maintained in a form acceptable to the Fund and in compliance with the rules
and regulations of the SEC (including, but not limited to, books and records
required to be maintained under Section 31(a) of the 1940 Act and the rules and
regulations from time to time adopted thereunder), and any other applicable
Federal, State and foreign tax laws and administrative regulations. All such
records will be the property of the Fund and in the event of termination of this
Agreement shall be delivered to the successor custodian.
All books and records maintained by the Custodian pursuant to this
Agreement and any insurance policies and fidelity or similar bonds maintained by
the Custodian shall be made available for inspection and audit at reasonable
times by officers of, attorneys for, and auditors employed by, the Fund and the
Custodian shall promptly provide the Fund with copies of all reports of its
independent auditors regarding the Custodian's controls and procedures.
6.3. Opinion of Fund's Independent Certified Public Accountants. The
Custodian shall take all reasonable action as the Fund may request to obtain
from year to year favorable opinions from the Fund's independent certified
public accountants with respect to the Custodian's activities hereunder in
connection with the preparation of any periodic reports to or filings with the
SEC and with respect to any other requirements of the SEC.
6.4. Reports of Custodian's Independent Certified Public
Accountants. At the request of the Fund, the Custodian shall deliver to the Fund
a written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, securities and
other assets, including cash, securities and other assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
the Fund and as may reasonably be obtained by the Custodian.
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<PAGE> 28
6.5. Calculation of Net Asset Value. The Custodian shall compute and
determine the net asset value per share of capital stock of the Fund as of the
close of regular business on the New York Stock Exchange on each day on which
such Exchange is open, unless otherwise directed by Proper Instructions. Such
computation and determination shall be made in accordance with (a) the
provisions of the By-Laws of the Fund and Articles of Incorporation, as they may
from time to time be amended and delivered to the Custodian, (b) the votes of
the Board of Directors of the Fund at the time in force and applicable, as they
may from time to time be delivered to the Custodian, and (c) Proper
Instructions. On each day that the Custodian shall compute the net asset value
per share of the Fund, the Custodian shall provide the Fund with written reports
which permit the Fund to verify that portfolio transactions have been recorded
in accordance with the Fund's instructions.
In computing the net asset value, the Custodian may rely upon any
information furnished by Proper Instructions, including without limitation any
information (i) as to accrual of liabilities of the Fund and as to liabilities
of the Fund not appearing on the books of account kept by the Custodian, (ii) as
to the existence, status and proper treatment of reserves, if any, authorized by
the Fund, (iii) as to the sources of quotations to be used in computing the net
asset value, including those listed in Appendix C hereto, (iv) as to the fair
value to be assigned to any securities or other assets for which price
quotations are not readily available, and (v) as to the sources of information
with respect to "corporate actions" affecting portfolio securities of the Fund,
including those listed in Appendix C. (Information as to "corporate actions"
shall include information as to dividends, distributions, stock splits, stock
dividends, rights offerings, conversions, exchanges, recapitalizations, mergers,
redemptions, calls, maturity dates and similar transactions, including the ex-
and record dates and the amounts or other terms thereof.)
In like manner, the Custodian shall compute and determine the net
asset value as of such other times as the Board of Directors of the Fund, or any
valuation committee thereof, from time to time may reasonably request.
The Custodian shall be held to the standard of care set forth in
Article V with respect to the performance of its responsibilities under this
Article VI. The parties hereto acknowledge, however, that the Custodian's
causing an error or delay in the determination of net asset value may, but does
not in and of itself, constitute negligence, gross negligence or reckless or
willful misconduct. The Custodian's liability for any such negligence, gross
negligence or reckless or willful misconduct which results in an error in
determination of such net asset value shall be limited to the direct,
out-of-pocket loss the Fund, shareholder or former shareholder shall actually
incur, measured by the difference between the actual and the erroneously
computed net asset value, and any expenses
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<PAGE> 29
incurred by the Fund in connection with correcting the records of the Fund
affected by such error (including charges made by the Fund's registrar and
transfer agent for making such corrections), communicating with shareholders or
former shareholders of the Fund affected by such error or responding to or
defending against any inquiry or proceeding with respect to such error made or
initiated by the SEC or other regulatory or self-regulatory body.
Without limiting the foregoing, the Custodian shall not be held
accountable or liable to the Fund, any shareholder or former shareholder thereof
or any other person for any delays or Losses any of them may suffer or incur
resulting from (A) the Custodian's failure to receive timely and suitable
notification concerning quotations or corporate actions relating to or affecting
securities of the Fund or (B) any errors in the computation of the net asset
value based upon or arising out of quotations or information as to corporate
actions if received by the Custodian either (1) from a source which the
Custodian was authorized pursuant to the second paragraph of this section 6.5 to
rely upon, or (2) from a source which in the Custodian's reasonable judgment was
as reliable a source for such quotations or information as the sources
authorized pursuant to that paragraph. Nevertheless, the Custodian will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if the
Custodian has reason to believe that any such information might be incorrect.
In the event of any error or delay in the determination of such net
asset value for which the Custodian may be liable, the Fund and the Custodian
will consult and make good faith efforts to reach agreement on what actions
should be taken in order to mitigate any Losses suffered by the Fund or its
present or former shareholders, in order that the Custodian's exposure to
liability shall be reduced to the extent possible after taking into account all
relevant factors and alternatives. Such actions might include the Fund or the
Custodian taking reasonable steps to collect from any shareholder or former
shareholder who has received any overpayment upon redemption of shares such
overpaid amount or to collect from any shareholder who has underpaid upon a
purchase of shares the amount of such underpayment or to reduce the number of
shares issued to such shareholder. It is understood that in attempting to reach
agreement on the actions to be taken or the amount of the loss which should
appropriately be borne by the Custodian, the Fund and the Custodian will
consider such relevant factors as the amount of the loss involved, the Fund's
desire to avoid loss of shareholder good will, the fact that other persons or
entities could have reasonably expected to have detected the error sooner than
the time it was actually discovered, the appropriateness of limiting or
eliminating the benefit which shareholders or former shareholders might have
obtained by reason of the error, and the possibility that other parties
providing services to the Fund might be induced to absorb a portion of the loss
incurred.
Upon written notice from the Fund to the Custodian, the
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<PAGE> 30
Custodian's responsibilities under this Section 6.5 shall terminate, but this
Agreement shall otherwise continue in full force and effect. Upon such
termination, the fee schedule provided for under Article VII hereof shall be
adjusted by the parties in such manner as they may agree, and the Custodian will
transfer such of the Fund's books and records, and provide such other reasonable
cooperation, as the Fund may request in connection with the transfer of such
responsibilities.
6.6. Information Regarding Foreign Subcustodians and Foreign
Depositories. (a) The Custodian shall use reasonable efforts to assist the Fund
in obtaining the following with respect to any country in which any assets of
the Fund are held or proposed to be held:
(1) information concerning whether, and to what extent, applicable
foreign law would restrict the access afforded the Fund's independent
public accountants to books and records kept by a foreign custodian or
foreign securities depository used, or proposed to be used, in that
country;
(2) information concerning whether, and to what extent, applicable
foreign law would restrict the Fund's ability to recover its assets in the
event of the bankruptcy of a foreign custodian or foreign securities
depository used, or proposed to be used, in that country;
(3) information concerning whether, and to what extent, applicable
foreign law would restrict the Fund's ability to recover assets that are
lost while under the control of a foreign custodian or foreign securities
depository used, or proposed to be used, in that country;
(4) information concerning the likelihood of expropriation,
nationalization, freezes or confiscation of the Fund's assets in that
country;
(5) information concerning whether difficulties in converting the
Fund's cash and cash equivalents held in that country into U.S. Dollars
are reasonably foreseeable, including without limitation as a result of
applicable foreign currency exchange regulations;
(6) information concerning the financial strength, general
reputation and standing and ability to perform custodial services of each
foreign custodian or foreign securities depository used, or proposed to be
used, in that country;
(7) information concerning whether each foreign custodian or foreign
securities depository used, or proposed to be used, in that country would
provide a level of safeguards for maintaining the Fund's assets not
materially different from that provided by the Custodian in maintaining
the Fund's securities in the United
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<PAGE> 31
States;
(8) information concerning whether each foreign custodian or foreign
securities depository used, or proposed to be used, in that country has
offices in the United States in order to facilitate the assertion of
jurisdiction over and enforcement of judgments against such custodian or
depository;
(9) as to each foreign securities depository used, or proposed to be
used, in that country information concerning the number of participants
in, and operating history of, such depository; and
(10) such other information as may be requested by the Fund to
ensure compliance with Rule 17f-5 under the 1940 Act.
(b) During the term of this Agreement, the Custodian shall use
reasonable efforts to provide the Fund with prompt notice of any material
changes in the facts or circumstances upon which any of the foregoing
information or statements were based.
(c) Upon request of the Fund, the Custodian shall deliver to the
Fund a certificate stating: (i) the identity of each Foreign Subcustodian then
acting on behalf of the Custodian; and (ii) the countries in which and the
Foreign Depositories through which each such Foreign Subcustodian or the
Custodian is then holding cash, securities and other assets of the Fund.
ARTICLE VII
CUSTODIAN FEES
The Fund shall pay the Custodian a custody fee based on such fee
schedule as may from time to time be agreed upon in writing by the Custodian and
the Fund. Such fee, together with all amounts for which the Custodian is to be
reimbursed in accordance with the following sentence, shall be billed to the
Fund in such a manner as to permit payment either by a direct cash payment to
the Custodian or by placing Fund portfolio transactions with the Custodian
resulting in an agreed-upon amount of commissions being paid to the Custodian
within an agreed-upon period of time. The Custodian shall be entitled to receive
reimbursement from the Fund on demand for its cash disbursements and expenses
(including cash disbursements and expenses of any Subcustodian or Agent for
which the Custodian has reimbursed such Subcustodian or Agent) permitted by this
Agreement, but excluding salaries and usual overhead expenses, upon receipt by
the Fund of reasonable evidence thereof.
ARTICLE VIII
TERMINATION
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This Agreement shall continue in full force and effect until
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid, to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing. In the event of
termination, the Custodian shall be entitled to receive prior to delivery of the
securities, cash and other assets held by it all accrued fees and unreimbursed
expenses the payment of which is contemplated by Article VII, upon receipt by
the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it is
agreed that the cash, securities and other assets owned by the Fund and held by
the Custodian or any Subcustodian or Agent shall be delivered to the successor
custodian, and the Custodian agrees to cooperate with the Fund in execution of
documents and performance of other actions necessary or desirable in order to
substitute the successor custodian for the Custodian under this Agreement.
ARTICLE IX
MISCELLANEOUS
9.1. Execution of Documents. Upon request, the Fund shall deliver to
the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement.
9.2. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof.
9.3. Waivers and Amendments. No provision of this Agreement may be
amended or terminated except by a statement in writing signed by the party
against which enforcement of the amendment or termination is sought, provided
that Appendix B listing the Foreign Subcustodians and Foreign Depositories
approved by the Fund and Appendix C listing quotation and information sources
may be amended from time to time to add or delete one or more of such entities
or sources by delivery to the Custodian of a revised Appendix B or C executed by
an Authorized Person, such amendment to take effect immediately upon execution
of the revised Appendix B or C by the Custodian.
In connection with the operation of this Agreement, the Custodian
and the Fund may agree in writing from time to time on such provisions
interpretative of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
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<PAGE> 33
9.4. Captions. The section headings in this Agreement are for the
convenience of the parties and in no way alter, amend, limit or restrict the
contractual obligations of the parties set forth in this Agreement.
9.5. Governing Law. This instrument shall be governed by and
construed in accordance with the laws of the State of New York.
9.6. Notices. Notices and other writings delivered or mailed postage
prepaid to the Fund addressed to the Fund at 345 Park Avenue, New York, NY 10154
or to such other address as the Fund may have designated to the Custodian in
writing, or to the Custodian at 40 Water Street, Boston, Massachusetts 02109,
Attention: Manager, Securities Department, or to such other address as the
Custodian may have designated to the Fund in writing, shall be deemed to have
been properly delivered or given hereunder to the respective addressee.
9.7. Successors and Assigns. This Agreement shall be binding on and
shall inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that neither party hereto may assign this
Agreement or any of its rights hereunder without the prior written consent of
the other party.
9.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
9.9. Representative Capacity; Nonrecourse Obligations. The Custodian
agrees that any claims by it against the Fund under this Agreement may be
satisfied only from the assets of the Fund; that the person executing this
Agreement has executed it on behalf of the Fund and not individually, and that
the obligations of the Fund arising out of this Agreement are not binding upon
such person or the Fund's shareholders individually but are binding only upon
the assets and property of the Fund; and that no shareholders, directors or
officers of the Fund may be held personally liable or responsible for any
obligations of the Fund arising out of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed in its name and behalf on the day and year first above written.
BROWN BROTHERS HARRIMAN & CO.
per pro _______________________________________
Name:
Title:
Scudder New Europe FUND, INC.
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<PAGE> 34
By: ______________________________________________
Name: Nicholas Bratt
Title: President
APPENDIX A TO THE
CUSTODIAN AGREEMENT BETWEEN
SCUDDER NEW EUROPE FUND, INC. AND
BROWN BROTHERS HARRIMAN & CO.
DATED AS OF May 21, 1995
PROCEDURES RELATING TO CUSTODIAN'S SECURITY INTEREST
As security for any Advances (as defined in the Custodian Agreement)
of the Fund, the Fund shall pledge, assign and grant to the Custodian a security
interest in Collateral (as hereinafter defined), under the terms, circumstances
and conditions set forth in this Appendix A.
Section 1. Defined Terms. As used in this Appendix A the following terms
shall have the following respective meanings:
(a) "Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which the Custodian is closed for business.
(b) "Collateral" shall mean those securities having a fair market value
(as determined in accordance with the procedures set forth in the prospectus for
the Fund) equal to the aggregate of all Advance Obligations of the Fund that are
(i) identified in any Pledge Certificate executed on behalf of the Fund or (ii)
designated by the Custodian for the Fund pursuant to Section 3 of this Appendix
A. Such securities shall consist of marketable securities held by the Custodian
on behalf of the Fund or, if no such marketable securities are held by the
Custodian on behalf of the Fund, such other securities designated by the Fund in
the applicable Pledge Certificate or by the Custodian pursuant to Section 3 of
this Appendix A.
(c) "Advance Obligations" shall mean the amount of any outstanding
Advance(s) provided by the Custodian to the Fund together with all accrued
interest thereon.
(d) "Pledge Certificate" shall mean a Pledge Certificate in the form
attached as Exhibit 1 to this Appendix A, executed by a duly authorized officer
of the Fund and delivered by the Fund to the Custodian by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
(e) "Release Certificate" shall mean a Release Certificate in the form
attached as Exhibit 2 to this Appendix A, executed by a duly authorized officer
of the Custodian and delivered by the Custodian to the Fund by facsimile
transmission or in such other
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<PAGE> 35
manner as the Fund and the Custodian may agree in writing.
(f) "Written Notice" shall mean a written notice executed by a duly
authorized officer of the party delivering the notice and delivered by facsimile
transmission or in such other manner as the Fund and the Custodian shall agree
in writing.
Section 2. Pledge of Collateral. To the extent that any Advance
Obligations of the Fund are not satisfied by the close of business on the first
Business Day following the Business Day on which the Fund receives a Written
Notice requesting security for such Advance Obligation and stating the amount of
such Advance Obligation, the Fund shall pledge, assign and grant to the
Custodian a first priority security interest in Collateral specified by the Fund
by delivering to the Custodian a Pledge Certificate executed by the Fund
describing such Collateral. Such Written Notice may, in the discretion of the
Custodian, be included within or accompany the Notice of Advance (as defined in
the Custodian Agreement) relating to the applicable Advance Obligation.
Section 3. Failure to Pledge Collateral. In the event that the Fund shall
fail (a) to pay the Advance Obligation described in such Written Notice, (b) to
deliver to the Custodian a Pledge Certificate pursuant to Section 2, or (c) to
identify substitute securities pursuant to Section 6 upon the sale or maturity
of any securities identified as Collateral, the Custodian may, by Written Notice
to the Fund, specify Collateral which shall secure the applicable Advance
Obligation. The Fund hereby pledges, assigns and grants to the Custodian a first
priority security interest in any and all Collateral specified in such Written
Notice; provided that such pledge, assignment and grant of security shall be
deemed to be effective only upon receipt by the Fund of such Written Notice, and
provided further that if the Custodian specifies Collateral in which a first
priority security interest has already been granted, the security interest
pledged, assigned and granted hereunder shall be a security interest that is not
a first priority security interest.
Section 4. Delivery of Additional Collateral. If at any time the Custodian
shall notify the Fund by Written Notice that the fair market value of the
Collateral securing any Advance Obligation is less than the amount of such
Advance Obligation, the Fund shall deliver to the Custodian, within one Business
Day following the Fund's receipt of such Written Notice, an additional Pledge
Certificate describing additional Collateral. If the Fund shall fail to deliver
such additional Pledge Certificate, the Custodian may specify Collateral which
shall secure the unsecured amount of the applicable Advance Obligation in
accordance with Section 3 of this Appendix A.
Section 5. Release of Collateral. Upon payment by the Fund
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<PAGE> 36
of any Advance Obligation secured by the pledge of Collateral, the Custodian
shall promptly deliver to the Fund a Release Certificate pursuant to which the
Custodian shall release Collateral from the lien under the applicable Pledge
Certificate or Written Notice pursuant to Section 3 having a fair market value
equal to the amount paid by the Fund on account of such Advance Obligation. In
addition, if at any time the Fund shall notify the Custodian by Written Notice
that the Fund desires that specified Collateral be released and (a) that the
fair market value of the Collateral securing any Advance Obligation exceeds the
amount of such Advance Obligation, or (b) that the Fund has delivered a Pledge
Certificate pursuant to Section 6 substituting Collateral in respect of such
Advance Obligation, the Custodian shall deliver to the Fund, within one Business
Day following the Custodian's receipt of such Written Notice, a Release
Certificate relating to the Collateral specified in such Written Notice.
Section 6. Substitution of Collateral. The Fund may substitute securities
for any securities identified as Collateral by delivery to the Custodian of a
Pledge Certificate executed by the Fund, indicating the securities pledged as
Collateral.
Section 7. Security for Fund Advance Obligations. The pledge of Collateral
by the Fund shall secure only Advance Obligations of the Fund. In no event shall
the pledge of Collateral by the Fund be deemed or considered to be security for
any other types of obligations of the Fund to the Custodian or for the Advance
Obligations or other types of obligations of any other fund.
Section 8. Custodian's Remedies. Upon (a) the Fund's failure to pay any
Advance Obligation of the Fund within thirty days after receipt by the Fund of a
Written Notice demanding security therefor, and (b) one Business Day's prior
Written Notice to the Fund, the Custodian may elect to enforce its security
interest in the Collateral securing such Advance Obligation, by taking title to
(at the then prevailing fair market value), or selling in a commercially
reasonable manner, so much of the Collateral as shall be required to pay such
Advance Obligation in full. Notwithstanding the provisions of any applicable
law, including, without limitation, the Uniform Commercial Code, the remedy set
forth in the preceding sentence shall be the only right or remedy to which the
Custodian is entitled with respect to the pledge and security interest granted
pursuant to any Pledge Certificate or Section 3. Without limiting the foregoing,
the Custodian hereby waives and relinquishes all contractual and common law
rights of set-off to which it may now or hereafter be or become entitled with
respect to any obligations of the Fund to the Custodian arising under this
Appendix A to the Custodian Agreement.
IN WITNESS WHEREOF, each of the parties has caused this
36
<PAGE> 37
Appendix A to be executed in its name and behalf on the day and year first above
written.
BROWN BROTHERS HARRIMAN & CO.
per pro _______________________________________
Name:
Title:
Scudder New Europe FUND, INC.
By: ___________________________________________
Name: Nicholas Bratt
Title: President
37
<PAGE> 38
EXHIBIT 1
TO
Appendix A
PLEDGE CERTIFICATE
This Pledge Certificate is delivered pursuant to the Custodian
Agreement dated as of _____________________ (the "Agreement"), between
_____________________ (the "Fund") and Brown Brothers Harriman & Co. (the
"Custodian"). Capitalized terms used herein without definition shall have the
respective meanings ascribed to them in the Agreement. Pursuant to [Section 2 or
Section 4] of Appendix A attached to the Agreement, the Fund hereby pledges,
assigns and grants to the Custodian a first priority security interest in the
securities listed on Schedule A attached to this Pledge Certificate
(collectively, the "Pledged Securities"). Upon delivery of this Pledge
Certificate, the Pledged Securities shall constitute Collateral, and shall
secure all Advance Obligations of the Fund described in that certain Written
Notice dated _______, 19__, delivered by the Custodian to the Fund. The pledge,
assignment and grant of security in the Pledged Securities hereunder shall be
subject in all respects to the terms and conditions of the Agreement, including,
without limitation, Sections 7 and 8 of Appendix A attached hereto.
IN WITNESS WHEREOF, the Fund has caused this Pledge Certificate to
be executed in its name, on behalf of the Fund this _______ day of __________,
19__.
By: _____________________
Name: _____________________
Title: _____________________
38
<PAGE> 39
SCHEDULE A
TO
PLEDGE CERTIFICATE
<TABLE>
<CAPTION>
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ----------------- ------
<S> <C> <C> <C>
</TABLE>
39
<PAGE> 40
EXHIBIT 2
TO
Appendix A
RELEASE CERTIFICATE
This Release Certificate is delivered pursuant to the Custodian Agreement
dated as of _________, 199_ (the "Agreement"), between _______________________
(the "Fund") and Brown Brothers Harriman & Co. (the "Custodian"). Capitalized
terms used herein without definition shall have the respective meanings ascribed
to them in the Agreement. Pursuant to Section 5 of Appendix A attached to the
Agreement, the Custodian hereby releases the securities listed on Schedule A
attached to this Release Certificate from the lien under the [Pledge Certificate
dated __________, 19 or the Written Notice delivered pursuant to Section 3 of
Appendix A dated ___________, 19 ].
IN WITNESS WHEREOF, the Custodian has caused this Release Certificate to
be executed in its name and on its behalf this ____ day of 19__.
Brown Brothers Harriman & Co.
By: _____________________
Name: _____________________
Title: _____________________
40
<PAGE> 41
SCHEDULE A
TO
RELEASE CERTIFICATE
<TABLE>
<CAPTION>
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ----------------- ------
<S> <C> <C> <C>
</TABLE>
41
<PAGE> 42
AMENDMENT TO THE
CUSTODIAN AGREEMENT
AMENDMENT entered into as of this 30th day of September, 1997 to the
Custodian Agreement among SCUDDER NEW EUROPE FUND, INC. (the "Fund")and BROWN
BROTHERS HARRIMAN & CO. (the "Custodian") dated as of May 21, 1995 (the
"Agreement").
In consideration of the mutual covenants herein contained, the Fund and
the Custodian agree that the Agreement is hereby amended as follows:
1. The first paragraph of Section 2.13, Bank Accounts, is replaced in its
entirety with the following:
"The Custodian shall open and operate one or more accounts on the
Custodian's books, in the name of the Fund, subject only to draft or order by
the Custodian, and to hold in such account or accounts all deposits denominated
in U.S. and foreign currency, received for the account of the Fund, other than
deposits with Banking Institutions held in accordance with the last paragraph of
this Section 2.13. The responsibilities of the Custodian to the Fund for
deposits accepted on the Custodian's books and denominated in U.S. currency
shall be that of a U.S. bank for a similar deposit. The obligation of the
Custodian for any deposit denominated in any foreign currency shall have the
benefit of and be subject to the provisions of the last paragraph of Section
5.1(b) hereof, and accordingly in the event and to the extent the Custodian
shall be unable to make payment in currency in which a certain deposit is
denominated due to an act of God, sovereign event or other factor beyond its
control, the Custodian's obligation to pay the Fund in respect of such foreign
currency obligation shall be deferred or relieved until and to the extent the
Custodian is able to make payment in such currency and accordingly shall not be
payable on demand in U.S. currency."
<PAGE> 43
2. Section 2.14, Interest-Bearing Deposits, is amended by the addition of
the following paragraph at the end of the present Section:
"The obligation of the Custodian for any interest-bearing deposit
denominated in any foreign currency shall have the benefit of and be subject to
the provisions of the last paragraph of Section 5.1(b) hereof, and accordingly
in the event and to the extent the Custodian shall be unable to make payment in
the currency in which a certain deposit is denominated due to an act of God,
sovereign event or other factor or event beyond its control, the Custodian's
obligation to pay the Fund in respect of such foreign currency obligation shall
be deferred or relieved until and to the extent the Custodian is able to make
payment in such currency and accordingly shall not be payable on demand in U.S.
currency."
Except as amended above, all the provisions of the Agreement as heretofore
in effect shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
Name: Nicholas Bratt
Title: President
BROWN BROTHERS HARRIMAN & CO.
Name:
Title:
<PAGE> 44
BROWN BROTHERS HARRIMAN & CO.
April, 1994
SCUDDER FEE SCHEDULE
SCHEDULE A
<TABLE>
<CAPTION>
MARKET ASSET CHARGE (BP) TRANSACTION CHARGE
------ ----------------- ------------------
<S> <C> <C>
GROUP 1
United States 1.0 on first $100 million DTC: $10
.5 on all over $100 million Physical and Same Day
Money Market Transaction: $25
GROUP 2
Euroclear and Cedel* 3 35
GROUP 3
Canada 4 20
GROUP 4
Germany 5 30
Japan 5 30
Switzerland 5 50
United Kingdom 5 45
GROUP 5
Australia 6 50
Denmark 6 50
France 6 60
Netherlands 6 75
New Zealand 6 50
Sweden 6 60
GROUP 6
Belgium 8 50
Finland 8 60
Hong Kong 8 75
Ireland 8 50
Italy 8 60
Luxembourg 8 50
Norway 8 75
Singapore 8 75
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
MARKET ASSET CHARGE (BP) TRANSACTION CHARGE
------ ----------------- ------------------
<S> <C> <C>
GROUP 7
Austria 10 60
Malaysia 10 75
Spain 10 60
GROUP 8
Indonesia 15 75
Mexico 15 50
Thailand 15 75
EMERGING MARKETS
Argentina 27 75
Brazil 21 50
Chile 35 75
China 35 60
Colombia 45 100
Greece 50 150
India 40 100 per partial
Israel 25 150
Korea 22 50
Pakistan 35 100
Philippines 25 50
Poland 50 50
Portugal 25 125
Sri Lanka 20 50
Taiwan 25 75
Turkey 35 75
Uruguay 50 150
Venezuela 35 75
</TABLE>
2
<PAGE> 46
CUSTODY ONLY FEE SCHEDULE
BROWN BROTHERS HARRIMAN & CO.
<PAGE> 47
BROWN BROTHERS HARRIMAN & CO.
- - Annual Minimum Custody Fee: $10,000 per account
- - Automation: This schedule assumes machine readable trade instructions.
- - For The Korea Fund, BBH&Co. will charge 14.5 basis points.
Out-of-Pocket Expenses
Out-of-pocket expenses including but not limited to communication
expenses, wire charges, telex, legal, telephone, postage and direct expenses
including but not limited to stamp duties, commissions, dividend and income
collection charges, taxes, certificate fees, special handling, transfer and
registration fees would be additional.
<PAGE> 48
BROWN BROTHERS HARRIMAN CO.
SCUDDER COMPLEX OF FUNDS
SCHEDULE A
FUND
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
<S> <C>
International Portfolio 4/15/96
Global Discovery Portfolio 5/1/96
AARP GROWTH TRUST
AARP Global Growth Fund 2/1/96
SCUDDER GLOBAL FUND, INC.
Scudder Emerging Markets Income Fund 2/1/96
Scudder Global Fund 3/14/95
Scudder Global Bond Fund 11/29/95
Scudder Global Discovery Fund 6/15/95
Scudder International Bond Fund 8/31/95
SCUDDER INTERNATIONAL FUND, INC.
Scudder Emerging Markets Growth Fund 5/8/96
Scudder Greater Europe Growth Fund 10/10/94
Scudder International Fund 4/12/95
Scudder International Growth and Income Fund 6/30/97
Scudder Latin America Fund 5/17/95
Scudder Pacific Opportunities Fund 5/5/95
SCUDDER INSTITUTIONAL FUND, INC.
Institutional International Equity Portfolio 4/3/96
The Argentina Fund, Inc. 6/13/95
The Brazil Fund, Inc. 6/6/95
The Korea Fund Inc. 8/21/95
The First Iberian Fund, Inc. 2/21/95
Scudder New Asia Fund, Inc. 7/26/95
Scudder New Europe Fund Inc. 11/29/95
The Latin American Dollar Income Fund, Inc. 1/15/96
Scudder World Income Opportunities Fund, Inc. 1/5/96
</TABLE>
<PAGE> 49
AMENDMENT TO THE CUSTODIAN AGREEMENT
AMENDMENT entered into as of this 10 day of July, 1998 to the
Custodian Agreement between Scudder New Europe Fund, Inc., (the "Fund") and
BROWN BROTHERS HARRIMAN & CO. (the "Custodian") dated as of May 21, 1995, (the
"Agreement").
In consideration of the Custodian's offering subcustodial
services to the Fund in Russia, the Fund and the Custodian agree that the
Agreement is hereby amended as follows:
1. Section 2.1, Safekeeping, is amended by the addition of the
following phrase at the end of said Section:
"provided, however, that the Custodian's responsibility for
safekeeping equity securities of Russian issuers ("Russian
Equities") hereunder shall be limited to the safekeeping of
relevant share extracts from the share registration books
maintained by the entities providing share registration
services to issuers of Russian Equities (each a "Registrar")
indicating an investor's ownership of such securities either
directly or through a Subcustodian's nominee (each a "Share
Extract")."
2. Section 2.3, Registered Name; Nominees, is amended by the addition
of the following at the end of said Section:
"However, with respect to Russian Equities, the Custodian
shall instruct a Subcustodian to assure that registration
thereof shall be reflected on the books of the issuer's
Registrar by obtaining a Share Extract for each Russian
Equity, subject to the following conditions, but shall,
provided it has exercised the standard of care set forth
herein, in no event be liable for losses or costs incurred as
a result of delays or failures in the registration process,
including without limitation the inability to enforce relevant
Share Extracts. Such registration may be in the name of a
nominee of a Subcustodian. In the event registration is in the
name of a Fund, such Fund hereby acknowledges that only the
Custodian or Subcustodian may give instructions to the
Registrar to transfer or engage in other transactions
involving the Russian Equities so registered.
<PAGE> 50
A Subcustodian will from time to time enter into
contracts with Registrars with respect to the registration of
Russian Equities ("Registrar Contracts"). Such Registrar
Contracts will provide for (i) regular (as determined by
applicable SEC notices and announcements for investment
companies registered under the Investment Company Act of 1940)
share confirmations by the Subcustodian, (ii) reregistrations
within 72 hours of receiving necessary documentation, (iii)
use of a Subcustodian's nominee name, (iv) direct access by
auditors of the Subcustodian or its clients to share
registers, and (v) specification of the Registrar's
responsibilities as to distributions and corporate actions;
liabilities as established under the regulations applicable to
the share registration systems; and the procedures for making
a claim against and receiving compensation from the registrar
in the event a loss is incurred. It is hereby acknowledged and
agreed that the Custodian does not represent or warrant that
such Registrar Contracts are enforceable.
If a Fund instructs the Custodian to settle a
purchase of a Russian Equity, the Custodian will instruct a
Subcustodian to endeavor on a best efforts basis to reregister
the Russian Equity and obtain a Share Extract in a timely
manner; provided that neither the Custodian, the Subcustodian
nor their agents or nominees shall pay for securities
purchased until the Share Extract has been obtained. After
completion of reregistration of a Russian Equity in respect of
which a Subcustodian has entered into a Registrar Contract,
the Custodian shall instruct the Subcustodian to monitor such
registrar on a best efforts basis and to promptly notify the
Custodian upon the Subcustodian's obtaining knowledge of the
occurrence of any of the following events ("Registrar
Events"): (i) a Registrar has eliminated a shareholder from
the register or has altered registration records; (ii) a
Registrar has refused to register securities in the name of a
particular purchaser and the purchaser or seller has alleged
that the registrars refusal to so register was unlawful; (iii)
a Registrar holds for its own account shares of an issuer for
which it serves as registrar; (iv) a Registrar notifies the
Subcustodian that it will no longer be able materially to
comply with the terms of the Registrar Contract; or (v) a
Registrar has materially breached such Contract. The Custodian
shall promptly inform the Funds of the occurrence of a
Registrar Event provided the Custodian has in fact received
notice thereof from the Subcustodian.
It shall be the sole responsibility of each Fund to
contact the Custodian prior to executing any transaction in a
Russian Equity to determine whether a
2
<PAGE> 51
Registrar Contract exists in respect of such issuer. This contract as
amended contemplates custody of Russian Equities and Ministry of
Finance bonds only. Custody of any other Russian security may require
additional documentation and or amendments as custody and settlement
practices may differ from those set forth herein."
3. Section 2.4. Purchases by the Fund, is amended by the addition of
the following at the end of said Section:
"Without limiting the generality of the foregoing, the
following provisions shall apply with respect to settlement of
purchases of securities in Russia. Unless otherwise instructed by
Proper Instructions, the Custodian shall only authorize a Subcustodian
to make payment for purchases of Russian Equities upon receipt of the
relevant Share Extract in respect of the Fund's purchases. With respect
to securities other than Russian Equities, settlement of purchases
shall be made in accordance with the prevailing securities processing
or settlement practices for companies registered under the Investment
Company Act of 1940 that invest in Russia."
4. Section 2.5, Exchanges of Securities, is amended by inserting after
the word "exchange" in the second line thereof, the following phrase:
", in accordance with the registration procedures described in
Section 2.3 of this Agreement,"
5. Section 2.6, Sales of Securities, is amended by the addition of the
following at the end of said Section:
"Without limiting the generality of the foregoing, the
following provisions shall apply with respect to settlement of sales of
securities in Russia. Unless otherwise expressly instructed by Proper
Instructions, settlement of sales of Russian Equities shall, occur in
the following manner: Russian Equities sold by the Fund will be
re-registered in the buyer's name prior to receipt of payment therefor
and accordingly, provided the Custodian has exercised the standard of
care set forth herein, risk of payment after re-registration of shares
or delivery to the buyer shall be for the account of the Fund. With
respect to securities other than Russian Equities, settlement of sales
shall be made in accordance with the prevailing securities processing
or settlement practices for companies
3
<PAGE> 52
registered under the Investment Company Act of 1940 that invest in
Russia. Provided the Custodian has exercised the standard of care set
forth herein, the Custodian shall not be responsible for any securities
delivered from the premises of the Subcustodian from the time they
leave such premises."
6. Section 2.8, Exercise of Rights; Tender Offers, is modified by the
addition of the following at the end of said section:
"Section 2.8, Exercise of Rights Tender Offers -- With respect
to Russian securities, upon timely receipt of Proper Instructions, the
Custodian shall take any action required by the terms of a rights
offer, tender offer, put, call, merger, consolidation, reorganization
or other corporate action affecting securities held on behalf of a
Fund. The Custodian shall use reasonable efforts to act on such Proper
Instructions but will not be held liable for any losses or costs
incurred as a result of such actions or as a result of the Custodian's
inability for reasons beyond its control to take the actions requested
by such Proper Instructions."
7. Section 2.9, Stock Dividends, Rights, Etc., is modified by the
addition of the following paragraph at the end of said Section:
"With respect to Russian Equities, to request a Subcustodian
to endeavor to obtain a Share Extract with respect to all Russian
Equities issued by reason of a stock dividend, bonus issue or other
distribution resulting from a corporate action not requiring
instructions from the shareholder of the security, provided that the
Custodian shall not be responsible for its inability after exercising
its best efforts to obtain any such Share Extract or for the failure of
a Registrar or any agent thereof to record the Fund's ownership on the
issuer's records after the Subcustodian used its best efforts to cause
such action."
8. Section 4.2(a) Foreign Subcustodians, is modified by the insertion
of the following at the end of the section:
"With respect to Russia, each Fund hereby expressly
acknowledges that a Subcustodian for Russian securities may from time
to time delegate any of its
4
<PAGE> 53
duties and responsibilities to any securities depository, clearing
agency, share registration agent of the issuer or sub-subcustodian that
is not under the control of the Custodian or Subcustodian
(collectively, "Russian Agent") in Russia, including without limitation
Rosvneshtorgbank (also called Vneshtorgbank RF) ("VTB"). Each Fund
acknowledges that the rights of the Subcustodian against any such
Russian Agent may consist only of a contractual claim against the
Russian Agent. Notwithstanding any provision of this Agreement to the
contrary, provided it has exercised the standard of care set forth
herein, neither the Custodian nor the Subcustodian shall be responsible
or liable to a Fund or its shareholders for the acts or omissions of
any such Russian Agent. In the event of a loss of securities or cash
held on behalf of a Fund through any Russian Agent, provided it, and
the Subcustodian have exercised the standard of care set forth herein,
the Custodian shall not be responsible to a Fund or its shareholders
unless and to the extent it in fact recovers from the Subcustodian."
9. Sections 5.1(a)&(b), Standard of Care are modified by the insertion
of the following:
"Section 5.1(a) Standard of Care-- The Custodian shall be held
only to the exercise of reasonable care in carrying out the provisions
of this Agreement, provided that the Custodian shall not thereby be
required to take any action which is in contravention of any applicable
law, rule or regulation or any order or judgment of any court of
competent jurisdiction. With respect to securities for settlement in
Russia, reasonable care shall mean reasonable practices under the
circumstances as measured by prevailing custodial practices among
companies registered under the Investment Company Act of 1940 that
invest in Russia, and negligence as used herein shall mean the failure
to exercise reasonable care as defined in this sentence. The Custodian
shall supply to the Fund Market Practice Manuals, daily Global Updates
and other materials which describe the settlement and custody
conventions in Russia.
"Notwithstanding the Custodian shall have no liability in
respect of any loss, damage or expense suffered by a Fund or any
shareholder of a Fund insofar as such loss, damage or expense arises
from investment risk inherent in investing in capital markets or in
holding assets in Russia including without limitation, (i) political,
legal, economic, settlement and custody infrastructure, and currency
and exchange rate risks; (ii) investment and repatriation restrictions;
(iii) a
5
<PAGE> 54
Fund's inability to protect and enforce any local legal rights
including rights of title and beneficial ownership; (iv) corruption and
crime in the local market; (v) unreliable information which emanates
from the local market; (vi) volatility of banking and financial systems
and infrastructure; (vii) bankruptcy and insolvency risks of any and
all local banking agents, counterparties to cash and securities
transactions or registrars or transfer agents; and (vii) risk of issuer
insolvency or default.
"It is understood that no Registrar, whether or not any such
Registrar has entered into a contract or other arrangement with a
Subcustodian or Foreign Depository, is or shall be considered or deemed
to be a Foreign Depository or an agent of the Custodian or any
Subcustodian, and accordingly neither the Custodian nor the
Subcustodian shall be responsible for or liable to a Fund or to the
shareholders of a Fund for the acts or omissions of any such Registrar
provided that the Custodian has exercised the standard of care as set
forth herein."
10. Section 5.1, Standard of Care is further amended by the insertion
of a new section (h) Taxes and Related Expenses at the end of the current
section (g):
"(h) Taxes and Related Expenses -- It is also agreed that each
Fund shall be responsible for preparation and filing of tax returns,
reports and other documents on any activities it undertakes in Russia
which are to be filed with any relevant governmental or other authority
and for the payment of any taxes, levies, duties or similar liability
the Fund incurs in respect of property held or sold in Russia or of
payments or distributions received in respect thereof in Russia.
Accordingly, provided that the Custodian has exercised the standard of
care as set forth herein, each Fund hereby agrees to indemnify and hold
harmless the Custodian from any loss, cost or expense resulting from
the imposition or assessment of any such tax, duty, levy or liability
or any expenses related to the Fund's Property in Russia."
11. Section 5.2, Liability of Custodian for Actions of Other Persons
Subsection (a) Domestic Subcustodians, Foreign Subcustodians and Agents is
amended by inserting the following paragraph at the end of the current section:
6
<PAGE> 55
"With respect to Russia, the Custodian shall be liable for the
actions or omissions of the Foreign Subcustodian or agent (other than
an agent appointed pursuant to Section 4.2(b) of the Agreement or any
Russian Agent) to the same extent as if such action or omission were
performed by the Custodian itself pursuant to this Agreement as hereby
amended."
12. Section 5.3, Indemnification, Subsection (a) Indemnification
Obligations is amended by inserting the following paragraph at the end of the
current section:
"With respect to Russia, and subject to the limitations set
forth in this Agreement, the Fund agrees to indemnify and hold harmless
the Custodian and its nominees for all Losses suffered or incurred by
the Custodian or its nominee (including Losses suffered under the
Custodian's indemnity obligations to Subcustodians) caused by or
arising from actions taken by the Custodian in the performance of its
duties and obligations under this Agreement as amended, provided that
the Custodian and Subcustodian have exercised the standard of care set
forth herein."
13. A new Section 10, Risk Disclosure Acknowledgment, is added at the
end of the present Section 9.9:
"Each Fund hereby acknowledges that it has received, has read
and has understood the Custodian's Risk Disclosure Statement, a copy of
which is attached hereto and is incorporated herein by reference. The
Fund acknowledges that the Risk Disclosure Statement is not
comprehensive. The parties hereto acknowledge that the Custodian's
offering subcustodial services in Russia is not intended to and shall
not be construed to be a recommendation by the Custodian that
investment in Russia is appropriate or inappropriate for the Fund."
Except as amended above, all the provisions of the Agreement as
heretofore effect shall remain in full force and effect.
7
<PAGE> 56
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first set forth above.
Scudder New Europe Fund, Inc. BROWN BROTHERS HARRIMAN & CO.
/s/Stokley P. Towles
- ----------------------------- -------------------------
Name: Name: Stokley P. Towles
Title: Title: Partner
8
