<PAGE>
THE GROWTH FUND
OF SPAIN, INC.
SEMIANNUAL REPORT TO SHAREHOLDERS FOR THE PERIOD ENDED MAY 31, 1997
" . . . One objective we had for this period was to bring
our cash down and get the fund more fully invested in the
market. We made that change and now the cash range is
roughly between three and five percent . . . "
[KEMPER FUNDS LOGO]
<PAGE>
CONTENTS
3
Economic Overview
5
Performance Update
7
Largest Holdings
Portfolio Statistics
8
Portfolio of Investments
10
Financial Statements
12
Notes to Financial Statements
15
Financial Highlights
- --------------------------------------------------------------------------------
AT A GLANCE
- --------------------------------------------------------------------------------
TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<CAPTION>
BASED
ON
NET BASED ON
ASSET MARKET
VALUE VALUE
<S> <C> <C>
- --------------------------------------------
THE GROWTH FUND
OF SPAIN, INC. 18.48 % 21.72 %
- --------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NET ASSET VALUE AND MARKET PRICE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/97 11/30/96
<S> <C> <C>
- --------------------------------------------
NET ASSET VALUE $17.39 $ 15.67
- --------------------------------------------
MARKET PRICE $14.125 $ 12.50
- --------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND REVIEW
- --------------------------------------------------------------------------------
DURING THE SIX-MONTH PERIOD, THE FUND MADE THE FOLLOWING DISTRIBUTIONS PER
SHARE:
<TABLE>
<CAPTION>
- ------------------------------------------
<S> <C>
INCOME DIVIDEND $0.17
- ------------------------------------------
SHORT-TERM CAPITAL GAIN $0.32
- ------------------------------------------
LONG-TERM CAPITAL GAIN $0.51
- ------------------------------------------
</TABLE>
Total return measures aggregate change in net asset value/market price assuming
reinvestment of dividends. Returns are historical and do not represent future
performance. Market price, net asset value and returns fluctuate. Additional
information concerning performance is contained in the Financial Highlights
appearing at the end of this report.
- --------------------------------------------------------------------------------
TERMS TO KNOW
MARKET CAPITALIZATION A measure of the size of a publicly traded company, as
determined by multiplying the current price by the number of shares outstanding.
The market capitalization of a company has bearing on its perceived earnings
potential and risk. Small cap companies (less than $1 billion) may present the
potential for greater growth than larger, more established companies. On the
other hand, the stock of small cap companies may be expected to be more volatile
and therefore a greater risk to capital.
MARKET PRICE The last reported price at which a security was sold on an
exchange.
- --------------------------------------------------------------------------------
SHAREHOLDERS' MEETING
ANNUAL SHAREHOLDERS' MEETING
On May 29, 1997, an annual shareholders' meeting was held. The Growth Fund of
Spain, Inc. shareholders were asked to vote on three separate issues: election
of two members to the Board of Directors, ratification of Ernst & Young LLP as
independent auditors and elimination of the fund's current staggered system of
electing directors. Items 1 and 2 were approved by the requisite number of
shareholder votes. Item 3 was not approved by the requisite number of
shareholder votes. Following are the results for each issue:
1) Election of Directors (See back page for a complete list of Directors)
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
James E. Akins 11,757,901 1,158,551
John B. Tingleff 11,693,614 1,222,838
</TABLE>
2) Ratification of the selection of Ernst & Young LLP as independent auditors
for the fund
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
12,569,067 277,493 69,891
</TABLE>
<PAGE>
3) Eliminate the fund's current staggered system of electing directors
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
6,507,893 219,958 98,067
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
ECONOMIC OVERVIEW
[PHOTO] STEPHEN B. TIMBERS IS PRESIDENT, CHIEF EXECUTIVE AND CHIEF
INVESTMENT OFFICER OF ZURICH KEMPER INVESTMENTS, INC. (ZKI). ZKI
AND ITS AFFILIATES MANAGE APPROXIMATELY $80 BILLION IN ASSETS,
INCLUDING $45 BILLION IN RETAIL MUTUAL FUNDS. TIMBERS IS A
GRADUATE OF YALE UNIVERSITY AND HOLDS AN M.B.A. FROM HARVARD
UNIVERSITY.
DEAR SHAREHOLDER,
The consistently good news on the domestic economy and the recent agreement
between the White House and Republican leaders in Congress to balance the
federal budget has provided the basis for strong stock and bond markets. This
progress on balancing the budget, an initiative that the bond market was
anticipating resolution of more than one year ago, has very positive long-term
implications for financial markets.
The next several weeks will find Congress and the Clinton administration
negotiating toward a final agreement. Unlike previous failed proposals that
sought to balance the budget principally by increasing income taxes, the current
plan -- which starts from the base of a relatively small deficit -- proposes to
slow the growth of federal spending. As such, its prospects are promising.
Natural skeptics are waiting to see specific legislation to see if the
agreement has teeth. While we are optimistic, we need to temper our enthusiasm.
Much of the good news associated with a balanced budget has been discounted in
the higher prices in the stock and bond markets.
Of particular interest to equity investors is the agreement to reduce the
maximum tax rate on capital gains. Although details of the reduction are yet to
be known, the prospect of more favorable tax treatment on gains will have the
short-term effect of supporting stocks -- investors can be expected to postpone
selling until they can qualify for the lower tax rate. With equity sales
essentially "frozen" until the effective date is known, the stock market should
have a considerable underpinning. Once an effective date is determined, we would
expect the pent-up selling to occur. However, then we shall enjoy the long-term
positive effect of the lower tax rate on gains.
Talk of a balanced budget has shifted the spotlight away from the Federal
Reserve Board's upward pressure on interest rates. Having declined to raise
rates in May, the Fed may still act again at a later date. However, the economy
seems to be slowing down in the second quarter, after the rapid 5.6 percent
growth in the first quarter of the year. A slower economy would reduce the
threat of inflation and reduce the need for further rate hikes by the Fed.
In fact, a review of the standard measures of the economy shows little to be
concerned about and much to be encouraged by. As has been the pattern for more
than five years, a few strong quarters followed by a few weak quarters have
produced an overall 2 to 3 percent rate of growth in gross domestic product
(GDP). Job creation and the unemployment rate are consistent with a moderately
expanding economy. Corporate profits continue to grow at an expected 4 to 5
percent rate in 1997. The Consumer Price Index continues to track at a 2.5 to
3.0 percent rate.
Leadership in the stock market has been quite narrow and concentrated in the
first half of 1997 in large, multinational companies with familiar consumer
brand names. The recent rally after the announcement of a balanced budget
agreement suggests that valuations of smaller capitalization stocks are
compelling and the market is broadening.
A natural response to increased volatility in the U.S. equity market is to
look abroad. In fact, the valuations of many international markets are more
attractive than the U.S. However, the weak German and Japanese economies make it
difficult to identify many exciting near-term opportunities without careful
research.
3
<PAGE>
- --------------------------------------------------------------------------------
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
Economic activity is a key influence on investment performance and
shareholder decision-making. Periods of recession or boom, inflation, credit
expansion or credit crunch have a significant impact on mutual fund
performance.
The following are some significant economic expansion guideposts and
their investment rationale that may help your investment decision-making.
The 10-year Treasury rate and the prime rate are prevailing interest rates.
The other data report year-to-year percentage changes.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NOW (6/30/97) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <C> <C>
10-year Treasury rate(1) 6.49% 6.58% 6.87% 6.28%
Prime rate(2) 8.50% 8.25% 8.25% 8.80%
Inflation rate(3) 2.30% 3.04% 2.95% 2.76%
The U.S. dollar(4) 5.52% 4.59% 8.35% -7.04%
Capital goods orders(5)* 8.17% 2.23% 2.44% 8.24%
Industrial production(5) 3.84% 4.84% 3.38% 2.36%
Employment growth(6) 2.12% 2.41% 2.18% 2.46%
</TABLE>
(1) Falling interest rates in recent years have been a big plus for
financial assets.
(2) The interest rate that commercial lenders charge their best
borrowers.
(3) Inflation reduces an investor's real return. In the last five years,
inflation has been as high as 6%. The low, moderate inflation of the
last few years has meant high real returns.
(4) Changes in the exchange value of the dollar impact U.S. exporters
and the value of U.S. firms' foreign profits.
(5) These influence corporate profits and equity performance.
(6) An influence on family income and retail sales.
* Data as of May 31, 1997.
SOURCE: ECONOMICS DEPARTMENT, ZURICH KEMPER INVESTMENTS, INC.
Our recommendation to shareholders is to stay the course and to fight the
temptation to try to time when and where you should be invested without help.
Financial assets react much quicker today to events. Volatility has returned to
the market and with it heightened uncertainty. Now is the time to rely on your
financial representative for the expertise and the long-term investing
discipline that he or she can provide.
Sincerely,
[SIGNATURE]
STEPHEN B. TIMBERS
PRESIDENT, CHIEF INVESTMENT AND EXECUTIVE OFFICER
Zurich Kemper Investments, Inc.
July 11, 1997
4
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE UPDATE
THE SPANISH MARKET CONTINUED TO OFFER TOP PERFORMANCE WITH A SIX-MONTH MADRID
STOCK EXCHANGE GENERAL INDEX* RETURN OF 16.92 PERCENT, IN U.S. DOLLAR TERMS. THE
FUND TOPPED THIS PERFORMANCE, WITH AN 18.48 PERCENT RETURN (BASED ON NET ASSET
VALUE) BUT LAGGED ITS PEERS (DUE PARTIALLY TO A LESSER EXPOSURE TO THE FINANCIAL
SECTOR). FOLLOWING, FUND MANAGEMENT DISCUSSES THE MARKET AND THE FUND'S
PERFORMANCE.
[PHOTO]
DENNIS FERRO BECAME PORTFOLIO CO-MANAGER OF THE FUND IN MARCH 1994, WHEN HE
JOINED KEMPER. FERRO HOLDS AN M.B.A IN FINANCE FROM ST. JOHN'S UNIVERSITY IN NEW
YORK AND A BACHELOR'S DEGREE FROM VILLANOVA UNIVERSITY IN PENNSYLVANIA. HE IS
MANAGING DIRECTOR OF INTERNATIONAL EQUITIES FOR ZURICH INVESTMENT MANAGEMENT
LIMITED, A LONDON-BASED AFFILIATE OF ZURICH KEMPER INVESTMENTS, AND A CHARTERED
FINANCIAL ANALYST.
EDUARDO SUAREZ HAS BEEN A PORTFOLIO CO-MANAGER OF THE FUND SINCE ITS INCEPTION
IN FEBRUARY, 1990. HE IS THE CHIEF EXECUTIVE OFFICER OF BSN GESTION DE
PATRIMONIOS, S.A., S.G.C. SUAREZ RECEIVED A LAW DEGREE FROM DEUSTO UNIVERSITY IN
1977 AND A BUSINESS ADMINISTRATION DEGREE FROM ICADE IN 1978.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
- ----
Q
HOW DID YOU POSITION THE FUND DURING THE PERIOD TO ACHIEVE MORE THAN AN 18
PERCENT RETURN (BASED ON NET ASSET VALUE) AND WHAT FACTORS AFFECTED THE FUND'S
PERFORMANCE RELATIVE TO ITS PEERS?
- ----
A
One adjustment we made early on was to our cash position. Last year we held
as much as 15 percent cash in the fund at certain points. One objective we had
for this period was to bring our cash down and get the fund more fully invested
in the market. We made that change and now the cash range is roughly between
three and five percent. We plan to maintain this less defensive posture as long
as the market continues to offer sound investment opportunities and strong
performance. This lower cash position is more in line with the fund's peers.
The banking sector was the top performing sector and a main focus in the fund.
Banco Bilbao Vizcaya, our largest holding, has been a top performer in the
sector. Bankinter and Banco Popular were other banks we held that provided
strong returns.
A second prominent area of the market is the utility sector. Our exposure in
this area was in line with the index. Utilities lagged financials due to
uncertainty created by changes in regulations and in price setting by the
government. We had some very good performers, like Endesa and Sevillana, but we
also had a few laggards.
We have been increasing the fund's exposure to small and mid capitalization
companies because they are doing very well in Spain. We participated in the
Telepizza initial public offering and saw significant gains before taking
profits on the holding. Azkoyen, a manufacturer of vending machines, also showed
strength.
5
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE UPDATE
* Madrid Stock Exchange (MSE) General Index is an
unmanaged group of the most frequently traded
stocks on the Madrid Stock Exchange. The MSE
General Index is comprised of banks and
financials, telecommunications and motorways,
construction, utilities, food, investment
companies, metals and machinery, oil and
chemicals, and miscellaneous.
6
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE UPDATE
- ----
Q
HOW IS THE FUND BENEFITING FROM THE PRIVATIZATION EFFORTS THAT ARE TAKING
PLACE IN SPAIN?
- ----
A
The privatization of state-owned industries has been an ongoing process and
success for the country. Telefonica, a telecommunications company and our second
largest position in the fund, became fully privatized during the period and
recently entered into an agreement with British Telecommunications and MCI
Communications Corp. Our third largest position in the fund is Endesa, the
dominant electricity generator and distributor in Spain. It has been partially
sold with the next portion scheduled to reach the market in the fall. The
listing of Repsol, an oil producer and our fifth largest holding, was completed
in April.
These offerings have been very popular and the government is anxious to fuel
the capitalist spirit that is sweeping the country. At the beginning of this
year the inflow of domestic cash into mutual funds and stocks was very heavy.
This is not surprising considering the kind of performance Spain is providing.
It has been the best performing market in Europe for the past year and on a
year-to-date basis.
- ----
Q
WHAT EFFECTS ARE THE EUROPEAN MONETARY UNION (EMU) EFFORTS HAVING ON SPAIN?
- ----
A
Generally, the country and the markets are benefiting significantly from
the unification initiative. The drive to bring down the budget deficit caused
payments on the deficit to drop. Because interest payments and inflation have
come down, the interest burden for both corporations and individuals has been
reduced dramatically as well.
Also, despite EMU fiscal restraints, gross domestic product growth in Spain
has been much higher than some of the large European countries like France and
Germany. Money that left the country a few years ago because European
corporations were frustrated with the slow level of advance in Spain, is now
coming back into the country.
In addition to EMU, the economy is seeing new strength due to labor market
deregulation. In Spain and throughout Europe, we are seeing a softening in labor
regulations which makes it easier for companies to operate. Deregulation of the
labor market and privatization has also helped the inflation numbers. The latest
inflation number was 1.5 percent in May which is tremendously low for Spain.
Another feature we saw in the markets was banks buying shares of industrial
companies in Spain. This had a positive effect on the share price of those
industries. Banks have made these investments because they have excess liquidity
on their balance sheets. They are taking stakes in several of the newly
privatized utility and energy companies. This is beneficial for the share price
and boosts the financial performance of banks.
- ----
Q
WERE THERE ANY OPPORTUNITIES THAT YOU MISSED DURING THE PERIOD?
- ----
A
While we succeeded in reducing our cash position, we did miss some
opportunities early on because we didn't have those dollars fully invested yet.
- ----
Q
WHAT IS YOUR OUTLOOK FOR THE SPANISH MARKET FOR THE COMING MONTHS?
- ----
A
The Spanish market has been the leading market in Europe and we continue to
be optimistic about its outlook. Real interest rates in Spain are still quite
high so there is a possibility of further rate cuts. We expect the credibility
of the budget policy and strength of the currency to continue to attract new
money to both the bond and the equity markets in Spain. We still think that the
Spanish banks, if you look at their balance sheets and their growth profile, are
the most attractive banks within Europe and the most undervalued ones. For these
reasons, we believe their strength should continue and they will remain a focus
in the fund.
The market in general is fairly valued considering the quality and growth
prospects of the listed companies, therefore investor interest is not likely to
taper off in the near future. We expect inflation levels to remain low. If Spain
is included in the single currency, which seems very likely from a numbers
standpoint, that should give yet another boost to the market.
7
<PAGE>
- --------------------------------------------------------------------------------
LARGEST HOLDINGS
THE FUND'S FIVE LARGEST HOLDINGS*
REPRESENTING 35% OF THE FUND'S TOTAL NET ASSETS ON MAY 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
HOLDINGS PERCENT
- ------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------
1 BANCO BILBAO VIZCAYA (BANKING) 9%
- ------------------------------------------------------------------
2 TELEFONICA DE ESPANA (TELECOMMUNICATIONS) 9%
- ------------------------------------------------------------------
3 ENDESA (UTILITIES) 7%
- ------------------------------------------------------------------
4 BANKINTER (BANKING) 5%
- ------------------------------------------------------------------
5 REPSOL (CHEMICALS) 5%
- ------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PORTFOLIO STATISTICS
PORTFOLIO COMPOSITION*
<TABLE>
<CAPTION>
ON 05/31/97 ON 11/30/96
<S> <C> <C>
SPANISH EQUITIES 95% 89%
- ---------------------------------------------------
SPANISH PESETA TIME
DEPOSITS 2 8
- ---------------------------------------------------
CASH EQUIVALENTS 3 3
- ---------------------------------------------------
100% 100%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ON 5/31/97
<S> <C>
Spanish equities 95%
Spanish peseta time deposits 2%
Cash equivalents 3%
On 11/30/96
Spanish equities 89%
Spanish peseta time deposits 8%
Cash equivalents 3%
</TABLE>
- -------------------------------------------------------------------
* Portfolio holdings and composition are subject to change.
7
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
THE GROWTH FUND OF SPAIN, INC.
Portfolio of Investments at May 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
NUMBER OF
COMMON STOCKS SHARES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
BANKING--26.4%
Argentaria 180,000 $ 8,982
Banco Bilbao Vizcaya 378,752 26,878
Banco Central Hispano 148,490 4,801
Banco de Andalucia 31,530 5,091
Banco Pastor, S.A. 17,500 1,092
Banco Popular Espanol 67,500 14,357
Bankinter 87,500 14,826
-------------------------------------------------------------------------
76,027
- --------------------------------------------------------------------------------------------------------
CHEMICALS AND ENERGY--5.3%
Cristaleria 8,149 651
Repsol 350,000 14,675
-------------------------------------------------------------------------
15,326
- --------------------------------------------------------------------------------------------------------
CONSTRUCTION AND PROPERTY
DEVELOPMENT--9.3%
Cubiertas, S.A. 26,881 2,915
Fomento de Construcciones y Contratas (FCC) 96,000 10,705
Inmobiliaria Metropolitana Vasco Central,
(Metrovacesa) 30,000 1,168
Vallehermoso 475,000 12,015
-------------------------------------------------------------------------
26,803
- --------------------------------------------------------------------------------------------------------
CONSUMER GOODS--5.2%
Centros Commerciales Pryca 512,500 10,300
Prosegur, Cia de Seguridad, S.A. 150,000 1,965
Vidrala, S.A. 60,000 2,528
-------------------------------------------------------------------------
14,793
- --------------------------------------------------------------------------------------------------------
ELECTRIC AND OTHER
UTILITIES--25.8%
Cantabrico 167,306 6,539
Compania Sevillana de Electricidad 921,811 8,848
Empresa Nacional de Electricidad (ENDESA) 262,500 20,084
Fuerzas Electricas de Cataluna (FECSA) 575,000 5,021
Gas Natural 37,500 7,162
Gas y Electricidad (GESA) 70,000 3,978
Iberdrola 1,190,000 14,638
Union Electrica Fenosa 900,000 7,984
-------------------------------------------------------------------------
74,254
- --------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES--1.2%
Alba 32,154 3,543
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
METALS AND ENGINEERING--9.0%
Acerinox 50,000 8,406
Azkoyen
common stock 44,817 5,650
rights 74,486 2,199
Zardoya Otis 76,316 9,573
-------------------------------------------------------------------------
25,828
- --------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS
AND MOTORWAYS--12.9%
Aumar 375,000 5,432
Autopistas Concesionaria (ACESA) 500,000 6,168
Telefonica de Espana 880,000 25,431
-------------------------------------------------------------------------
37,031
-------------------------------------------------------------------------
TOTAL COMMON STOCKS--95.1%
(Cost: $178,589) 273,605
-------------------------------------------------------------------------
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MONEY MARKET PRINCIPAL
INSTRUMENT--2.0% AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield--5.27%
Due--June 1997
(Cost: $5,885)
(Principal amount in Spanish Pesetas)
Banco Exterior Internacional 845,478,851 $ 5,859
---------------------------------------------------------------------------
TOTAL INVESTMENTS--97.1%
(Cost: $184,474) 279,464
---------------------------------------------------------------------------
CASH AND OTHER ASSETS, LESS LIABILITIES--2.9% 8,243
---------------------------------------------------------------------------
NET ASSETS--100% $287,707
---------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
Based on the cost of investments of $184,474,000 for federal income tax purposes
at May 31, 1997, the gross unrealized appreciation was $95,200,000, the gross
unrealized depreciation was $210,000 and the net unrealized appreciation on
investments was $94,990,000.
See accompanying Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- ---------------------------------------------------
ASSETS
- ---------------------------------------------------
Investments, at value
(Cost: $184,474) $279,464
- ---------------------------------------------------
Cash (including foreign currency of
$10,514 with a cost of $10,565) 10,607
- ---------------------------------------------------
Receivable for:
Investments sold 365
- ---------------------------------------------------
Dividends and interest 393
- ---------------------------------------------------
TOTAL ASSETS 290,829
- ---------------------------------------------------
- ---------------------------------------------------
LIABILITIES AND NET ASSETS
- ---------------------------------------------------
Payable for:
Investments purchased 2,871
- ---------------------------------------------------
Management fee 242
- ---------------------------------------------------
Directors' fees and other 9
- ---------------------------------------------------
Total liabilities 3,122
- ---------------------------------------------------
NET ASSETS $287,707
- ---------------------------------------------------
- ---------------------------------------------------
ANALYSIS OF NET ASSETS
- ---------------------------------------------------
Paid-in capital $183,648
- ---------------------------------------------------
Accumulated net realized gain on
investments and foreign currency
transactions 9,265
- ---------------------------------------------------
Net unrealized appreciation on
investments and assets and liabilities
in foreign currencies 93,204
- ---------------------------------------------------
Undistributed net investment income 1,590
- ---------------------------------------------------
NET ASSETS APPLICABLE TO SHARES
OUTSTANDING $287,707
- ---------------------------------------------------
NET ASSET VALUE PER SHARE, $.01 PAR
VALUE
($287,707 DIVIDED BY 16,545 shares
outstanding) $ 17.39
- ---------------------------------------------------
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
Six months ended May 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
- --------------------------------------------------
NET INVESTMENT INCOME
- --------------------------------------------------
Dividends $ 3,358
- --------------------------------------------------
Interest 399
- --------------------------------------------------
3,757
- --------------------------------------------------
Less foreign taxes withheld 419
- --------------------------------------------------
Total investment income 3,338
- --------------------------------------------------
Expenses:
Management fee 1,320
- --------------------------------------------------
Custodian and transfer agent fees and
related expenses 79
- --------------------------------------------------
Professional fees 89
- --------------------------------------------------
Directors' fees and other 61
- --------------------------------------------------
Total expenses 1,549
- --------------------------------------------------
NET INVESTMENT INCOME 1,789
- --------------------------------------------------
- --------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
- --------------------------------------------------
Net realized gain on sales of
investments and foreign currency
transactions 9,794
- --------------------------------------------------
Change in net unrealized appreciation
on investments and assets and
liabilities in foreign currencies 32,686
- --------------------------------------------------
Net gain on investments 42,480
- --------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $44,269
- --------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, 1997 NOVEMBER 30, 1996
<S> <C> <C>
- ---------------------------------------------------------------------------
OPERATIONS, DIVIDENDS AND CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------
Net investment income $ 1,789 5,849
- ---------------------------------------------------------------------------
Net realized gain 9,794 11,311
- ---------------------------------------------------------------------------
Change in net unrealized appreciation 32,686 33,898
- ---------------------------------------------------------------------------
Net increase in net assets resulting
from operations 44,269 51,058
- ---------------------------------------------------------------------------
Distribution from net investment
income (2,854) (7,157)
- ---------------------------------------------------------------------------
Distribution from net realized gain (13,931) (4,942)
- ---------------------------------------------------------------------------
Total dividends to shareholders (16,785) (12,099)
- ---------------------------------------------------------------------------
Payment for shares repurchased
(295 shares and 259 shares,
respectively) (3,712) (3,021)
- ---------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 23,772 35,938
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
NET ASSETS
- ---------------------------------------------------------------------------
Beginning of period 263,935 227,997
- ---------------------------------------------------------------------------
END OF PERIOD
(including undistributed net investment
income of $1,590 and $2,654,
respectively) $ 287,707 263,935
- ---------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF FUND. The Fund is registered under
the Investment Company Act of 1940 as a
diversified, closed-end management investment
company.
INVESTMENT VALUATION. Investments are stated at
value. All securities that are traded on a Spanish
securities exchange and for which market quotations
are readily available are valued at the closing
value on the principal exchange on which the
securities are traded on the day of valuation or,
if no such closing price is available, at the last
bid price quoted on such day. If there are no
quotations available for the day of valuation, the
last available closing price will be used. Fixed
income securities are valued by using market
quotations, or independent pricing services that
use prices provided by market makers or estimates
of market values obtained from yield data relating
to instruments or securities with similar
characteristics. Equity options are valued at the
last sale price unless the bid price is higher or
the asked priced is lower, in which event such bid
or asked price is used. Financial futures and
options thereon are valued at the settlement price
established each day by the exchange on which they
are traded. Over-the-counter traded options are
valued based upon current prices provided by market
makers. Forward foreign currency contracts and
foreign currencies are valued at the forward and
current exchange rates, respectively, prevailing on
the day of valuation. Other securities and assets
are valued at fair value as determined in good
faith by the Board of Directors.
CURRENCY TRANSLATION. The books and records of the
Fund are maintained in U.S. dollars. All assets and
liabilities initially expressed in Spanish pesetas
are converted into U.S. dollar values at the mean
between the bid and offered quotations of that
currency against U.S. dollars as last quoted by a
recognized dealer. If such quotations are not
readily available, the rate of exchange is
determined in good faith by the Board of Directors.
Income and expenses and purchases and sales of
investments are translated into U.S. dollars at the
rate of exchange prevailing on the respective dates
of such transactions. The Fund includes that
portion of the results of operations resulting from
changes in foreign exchange rates with net realized
and unrealized gain (loss) on investments, as
appropriate.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME.
Investment transactions are accounted for on the
trade date (date the order to buy or sell is
executed). Dividend income is recorded on the
ex-dividend date, except that certain dividends
from foreign securities are recorded as soon as the
information is available to the Fund. Interest
income is recorded on the accrual basis and
includes discount amortization on money market
instruments. Realized gains and losses from
investment transactions are reported on an
identified cost basis.
FEDERAL INCOME TAXES. The Fund has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the six
months ended May 31, 1997.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of any net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions, such as
12
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
foreign currency transactions, differently from
generally accepted accounting principles.
- --------------------------------------------------------------------------------
2 TRANSACTIONS WITH
AFFILIATES
The Fund has a management agreement with Zurich
Kemper Investments, Inc. (ZKI), and pays a
management fee at an annual rate of 1% of average
weekly net assets. The Fund incurred a management
fee of $1,320,000 for the six months ended May 31,
1997.
ZKI utilizes the investment management services of
BSN Gestion de Patrimonios, S.A., S.G.C. (the
Spanish Adviser) pursuant to a sub-advisory
agreement entered into between ZKI and the Spanish
Adviser. For services provided under the
sub-advisory agreement, ZKI pays a fee at an annual
rate of .35% of the Fund's average weekly net
assets to the Spanish Adviser. During the six
months ended May 31, 1997, ZKI incurred fees of
$462,000 to the Spanish Adviser.
Pursuant to a services agreement with the Fund's
transfer agent, Zurich Kemper Service Company
(ZKSvC) (formerly known as Kemper Service Company)
is the shareholder service agent of the Fund. Under
the agreement, ZKSvC received shareholder services
fees of $12,000 for the six months ended May 31,
1997.
The Fund has a custodian agreement with Banco
Santander, an affiliate of the Spanish Adviser, for
custody of the Fund's Spanish securities. For the
six months ended May 31, 1997, the Fund incurred
custody fees of $67,000 to Banco Santander.
Brokerage commissions paid on securities
transactions to BSN Sociedad de Valores y Bolsa, an
affiliate of the Spanish Adviser, amounted to
$51,000 for the six months ended May 31, 1997.
Certain officers or directors of the Fund are also
officers or directors of ZKI. During the six months
ended May 31, 1997, the Fund made no payments to
its officers and incurred directors' fees of
$12,000 to independent directors.
- --------------------------------------------------------------------------------
3 INVESTMENT
TRANSACTIONS
For the six months ended May 31, 1997, investment
transactions (excluding short-term instruments) are
as follows (in thousands):
<TABLE>
<S> <C>
Purchases $45,416
Proceeds from sales 51,231
</TABLE>
- --------------------------------------------------------------------------------
4 REPURCHASE OF
SHARES
The Board of Directors of the Fund has authorized
the open market repurchase and retirement of up to
three million shares (1,464,000 repurchased to
date) of the Fund's outstanding stock. Shares
repurchased during each of the last two periods are
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MAY 31, NOVEMBER 30,
1997 1996
---------------- ------------
<S> <C> <C>
Number of shares 295,000 259,000
Weighted average discount to net asset
value 19% 19%
</TABLE>
13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5 FORWARD FOREIGN
CURRENCY CONTRACTS
In order to protect itself against a decline in the
value of the Spanish peseta against the U.S.
Dollar, the Fund has entered into a forward
contract to deliver pesetas in exchange for U.S.
Dollars. The Fund bears the market risk that arises
from changes in foreign exchange rates, and
accordingly, the unrealized gain (loss) on this
contract is reflected in the accompanying financial
statements. The Fund also bears the credit risk if
the counterparty fails to perform under the
contract. At May 31, 1997, the Fund had entered
into a forward contract to deliver SP 19 billion
with a U.S. Dollar contract amount of $132,000,000.
The settlement date of the contract occurs July,
1997, and the unrealized loss amounted to
$1,709,000 at May 31, 1997.
14
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, --------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 15.67 13.33 12.40 10.67 8.99
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .11 .36 .37 .32 .40
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain 2.61 2.69 1.01 1.41 1.28
- --------------------------------------------------------------------------------------------
Total from investment operations 2.72 3.05 1.38 1.73 1.68
- --------------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .17 .42 .45 -- --
- --------------------------------------------------------------------------------------------
Distribution from net realized gain .83 .29 -- -- --
- --------------------------------------------------------------------------------------------
Total dividends 1.00 .71 .45 -- --
- --------------------------------------------------------------------------------------------
Net asset value, end of period $ 17.39 15.67 13.33 12.40 10.67
- --------------------------------------------------------------------------------------------
Market value, end of period $ 14.13 12.50 10.88 10.00 9.63
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED)
- --------------------------------------------------------------------------------------------
Based on net asset value 18.48% 24.12 11.62 16.21 18.69
- --------------------------------------------------------------------------------------------
Based on market value 21.72% 22.38 13.88 3.90 28.33
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- --------------------------------------------------------------------------------------------
Expenses 1.17% 1.25 1.22 1.23 1.22
- --------------------------------------------------------------------------------------------
Net investment income 1.36% 2.46 2.89 2.57 3.97
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------
Net assets at end of period (in
thousands) $ 287,707 263,935 227,997 213,972 184,884
- --------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 35% 45 69 85 50
- --------------------------------------------------------------------------------------------
</TABLE>
Average commmission rates paid per share on stock transactions for the six
months ended May 31, 1997 and the year ended November 30, 1996 were $.0681 and
$.0609, respectively.
- --------------------------------------------------------------------------------
NOTE: Total return based on net asset value reflects changes in the Fund's net
asset value during the period. Total return based on market value reflects
changes in market value. Each figure includes reinvestment of dividends.
These figures will differ depending upon the level of any discount from or
premium to net asset value at which the Fund's shares trade during the
period.
15
<PAGE>
- --------------------------------------------------------------------------------
TRUSTEES&OFFICERS
DIRECTORS
STEPHEN B. TIMBERS
President and Trustee
JAMES E. ATKINS
Director
ARTHUR R. GOTTSCHALK
Director
FREDERICK T. KELSEY
Director
DOMINIQUE P. MORAX
Director
FRED B. RENWICK
Director
JOHN B. TINGLEFF
Director
JOHN G. WEITHERS
Director
OFFICERS
DENNIS H. FERRO
Vice President
CHARLES R. MANZONI, JR.
Vice President
JOHN E. NEAL
Vice President
STEVEN H. REYNOLDS
Vice President
PHILIP J. COLLORA
Vice President
and Secretary
JEROME L. DUFFY
Treasurer
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, Illinois 60601
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICE AGENT ZURICH KEMPER SERVICE COMPANY
P.O. Box 419066
Kansas City, MO 64141
- ------------------------------------------------------------------------------
CUSTODIAN AND TRANSFER AGENT INVESTORS FIDUCIARY TRUST COMPANY
127 West 10th Street
Kansas City, MO 64105
- ------------------------------------------------------------------------------
FOREIGN CUSTODIAN BANCO SANTANDER
Madrid, Spain
- ------------------------------------------------------------------------------
INDEPENDENT AUDITORS ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
- ------------------------------------------------------------------------------
INVESTMENT MANAGER ZURICH KEMPER INVESTMENTS, INC.
222 South Riverside Plaza Chicago, IL
60606
www.kemper.com
[LOGO]
Printed on recycled paper.
Printed in the U.S.A.
GSP-3 (7/97) 1035310 [LOGO]
