Filed With the Securities and Exchange Commission on April 30, 1999
File No. 2-73371
File No. 811-3229
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
------
Post-Effective Amendment No. 28
------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 27
------
Scudder Funds Trust
------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
-----------------
Daniel Pierce
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110
------------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
Immediately upon filing pursuant to paragraph (b)
-------
X On May 1, 1999 pursuant to paragraph (b)
-------
60 days after filing pursuant to paragraph (a)(1)
-------
on pursuant to paragraph (a)(1)
-------
75 days after filing pursuant to paragraph (a)(2)
-------
on _________________pursuant to paragraph (a)(2) of Rule 485
-------
If appropriate, check the following:
this post-effective amendment designates a new effective
------- date for a previously filed post-effective amendment
<PAGE>
SCUDDER FUNDS TRUST
SCUDDER SHORT TERM BOND FUND
1
<PAGE>
BOND/U.S.
U.S. Income Funds
Scudder Short Term Bond Fund
(Fund #022)
Scudder GNMA Fund
(Fund #006)
Scudder Income Fund
(Fund #063)
Scudder Corporate Bond Fund
(Fund #308)
Scudder High Yield Bond Fund
(Fund #047)
Prospectus
May 1, 1999
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Scudder U.S. Income Funds
How the funds work
2 Short Term Bond Fund
6 GNMA Fund
10 Income Fund
14 Corporate Bond Fund
18 High Yield Bond Fund
22 Fund Details
23 Who Manages and Oversees the Funds
26 Financial Highlights
How to invest in the funds
32 How to Buy Shares
33 How to Sell or Exchange Shares
34 Policies You Should Know About
39 Understanding Distributions and Taxes
<PAGE>
How the funds work
These funds invest mainly in bonds and other types of debt
securities.
Taken as a group, they represent a spectrum of approaches to
investing for income, from a conservative approach that
emphasizes stability of share price to a more aggressive (and
more risky) approach that focuses not just on income but total
return. Each fund follows its own goal.
Remember that mutual funds are investments, not bank deposits.
They're not insured or guaranteed by the FDIC or any other
organization. Their share prices will go up and down, so be
aware that you could lose money.
You can access all Scudder fund prospectuses online at:
www.scudder.com
<PAGE>
ticker symbol | SCSTX fund number | 022
Scudder Short Term Bond Fund
Investment approach
The fund seeks to provide high income while managing its
portfolio in a way that is consistent with maintaining a
high degree of stability of shareholders' capital. It does
this by investing mainly in high quality bonds with short
remaining maturities.
The fund can buy many types of income-producing
securities, among them corporate bonds, mortgage- and
asset-backed securities, government securities, and
others. Generally, most are from U.S. issuers, but bonds
of foreign issuers are permitted. Mortgage- and
asset-backed securities may represent a substantial
portion of the fund's assets, because of their potential
to offer high yields while also meeting the fund's quality
policies.
In deciding which types of securities to buy and sell,
the portfolio managers typically weigh a
CREDIT QUALITY POLICIES number of factors against each other, from
economic outlooks and possible interest
This fund normally invests at rate movements to changes in supply and
least 65% of assets in two types demand within the bond market. In choosing
of bonds: U.S. government individual bonds, the managers consider
securities (including those how they are structured and use
issued by agencies and independent analysis.
instrumentalities), and debt
securities in the top two Although the managers may adjust the
grades of credit quality. fund's average weighted maturity (the
effective maturity of the fund's
The fund could put up to 35% portfolio), they generally intend to keep
of assets in bonds of the it below three years. Also, while they're
third and fourth credit grades, permitted to use various types of
which are still considered derivatives (contracts whose value is
investment-grade. It can't based on, for example, indices,
buy any junk bonds. commodities, or securities), the managers
don't intend to use them as principal
investments, and might not use them at
all.
2 | SCUDDER SHORT TERM BOND FUND
<PAGE>
[GRAPHIC]
This fund may make sense for investors who want higher
yield than a money market fund and can accept some risk to
their principal.
Main risks to investors
There are several risk factors that could reduce the yield
you get from the fund, cause you to lose money, or make
the fund perform less well than other investments.
As with most bond funds, the most important factor is
market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the
value of your investment. The fund's relatively short
average weighted maturity should reduce the effect of this
risk, but will not eliminate it. Changes in interest rates
will also affect the fund's yield: when rates fall, fund
yield tends to fall as well.
Mortgage- and asset-backed securities carry additional
risks and may be more volatile than many other types of
debt securities. Any unexpected behavior in interest rates
could hurt the performance of these securities. For
example, a large fall in interest rates could cause these
securities to be paid off earlier than expected, forcing
the fund to reinvest the money at a lower rate. Another
example: if interest rates rise or stay high, these
securities could be paid off later than expected, forcing
the fund to endure low yields. Both of these examples also
involve the risk of capital losses. The result for the
fund could be an increase in the volatility of its share
price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of
economic trends, issuers, industries, or other matters
o a bond could decline in credit quality or go into
default
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard
to value some investments accurately or to get a fair
price for them
SCUDDER SHORT TERM BOND FUND | 3
<PAGE>
[GRAPHIC]
While a fund's past performance isn't necessarily a sign
of how it will do in the future, it can be valuable for an
investor to know. This page looks at fund performance two
different ways: year by year and over time.
The fund's track record
The bar chart shows how much fund returns have varied from
year to year, which may give some idea of risk. The table
shows how the fund's returns over different periods
average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not
have any fees or expenses). All figures on this page
assume reinvestment of dividends and distributions.
---------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
---------------------------------------------------------
[LINE CHART]
'89 = 13.28
'90 = 9.88
'91 = 14.38
'92 = 5.43
'93 = 8.18
'94 = -2.87
'95 = 10.74
'96 = 3.86
'97 = 6.17
'98 = 4.34
1999 Total Return as of March 31: 0.56%
Best Quarter: 6.97%, Q2 '89 Worst Quarter: -1.57%, Q4 '94
---------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
---------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------
Fund 4.34 4.35 7.23
Index 6.95 6.00 7.43
Index: Salomon Brothers Inc. Treasury/Government Sponsored
Corporate Index, an unmanaged index of Treasury,
government sponsored agency, and corporate securities with
maturities of 1-3 years.
Because the fund changed its investment objective on July
3, 1989, its performance before that date would have been
different if its current objective had been in effect.
4 | SCUDDER SHORT TERM BOND FUND
<PAGE>
How much investors pay
Because this is a no-load fund, it doesn't charge you any
shareholder fees. The fund does have annual operating
expenses, that, as a shareholder, you pay indirectly.
---------------------------------------------------------
Fee Table
---------------------------------------------------------
Shareholder Fees (paid directly from your investment)
---------------------------------------------------------
Sales Charges/Redemption Fees None
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------
Management Fee 0.54%
Distribution (12b-1) Fee None
Other Expenses* 0.32%
-----
Total Annual Operating Expenses 0.86%
Expense Reimbursement 0.01%
-----
Net Annual Operating Expenses** 0.85%
* Includes costs of legal and accounting services,
printing and similar expenses, which may vary with fund
size and other factors.
** By contract, expenses are capped at 0.85% through
4/30/00.
---------------------------------------------------------
Expense Example
---------------------------------------------------------
Based on the costs above (including one year of capped
expenses), this example is designed to help you compare
this fund's expenses to those of other funds. The example
assumes you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions, and sold your
shares at the end of each period. Remember that this is
only an example, and that your actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
$88 $274 $477 $1,061
SCUDDER SHORT TERM BOND FUND | 5
<PAGE>
ticker symbol | SGMSX fund number | 006
Scudder GNMA Fund
Investment approach
The fund seeks to provide high income. It does this by
investing mainly in "Ginnie Maes": mortgage-backed
securities that are issued or guaranteed by the Government
National Mortgage Association (GNMA). The fund can also
invest in U.S. Treasury securities. With these types of
securities, the timely payment of interest and principal
is guaranteed by the full faith and credit of the U.S.
Government.
In deciding which types of securities to buy and sell, the
portfolio managers first consider the relative
attractiveness of Ginnie Maes compared to Treasuries and
decide on allocations for each. Their decisions are
generally based on a number of factors, including changes
in supply and demand within the bond market.
In choosing individual bonds, the managers review each
bond's fundamentals, compare the yields of
CREDIT QUALITY POLICIES shorter maturity bonds to those of longer
maturity bonds, and use technical analysis
This fund normally invests at to project prepayment rates and other
least 65% of assets in Ginnie factors that could affect a bond's
Maes (and typically more than attractiveness.
that). To the extent that it
does buy other securities, they The managers may adjust the fund's
generally carry the same "full duration (a measure of sensitivity to
faith and credit" guarantee of interest rate movements), depending on
the U.S. Government. their outlook for interest rates. Also,
while they're permitted to use various
This guarantee doesn't protect types of derivatives (contracts whose
the fund against market-driven value is based on, for example, indices,
declines in the prices or yields commodities, or securities), the managers
of these securities, nor does it don't intend to use them as principal
apply to shares of the fund investments.
itself. But it does guard against
the risk of payment default with
respect to securities that are
guaranteed.
6 | SCUDDER GNMA FUND
<PAGE>
[GRAPHIC]
This fund may interest investors who can accept moderate
volatility and are seeking higher yield than Treasuries,
yet don't want to sacrifice credit quality.
Main risks to investors
There are several risk factors that could reduce the yield
you get from the fund, cause you to lose money, or make
the fund perform less well than other investments.
As with most bond funds, the most important factor is
market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the
value of your investment. (As a rule, a 1% rise in
interest rates means a 1% fall in value for every year of
duration.) An increase in its duration would make the fund
more sensitive to this risk.
Ginnie Maes carry additional risks and may be more
volatile than many other types of debt securities. Any
unexpected behavior in interest rates could hurt the
performance of these securities. For example, a large fall
in interest rates could cause these securities to be paid
off earlier than expected, forcing the fund to reinvest
the money at a lower rate. Another example: if interest
rates rise or stay high, these securities could be paid
off later than expected, forcing the fund to endure low
yields. Both of these examples also involve the risk of
capital losses. The result for the fund could be an
increase in the volatility of its share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of
economic trends, issuers, industries, or other matters
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard
to value some investments accurately or to get a fair
price for them
SCUDDER GNMA FUND | 7
<PAGE>
[GRAPHIC]
While a fund's past performance isn't necessarily a sign
of how it will do in the future, it can be valuable for an
investor to know. This page looks at fund performance two
different ways: year by year and over time.
The fund's track record
The bar chart shows how much fund returns have varied from
year to year, which may give some idea of risk. The table
shows how the fund's returns over different periods
average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not
have any fees or expenses). All figures on this page
assume reinvestment of dividends and distributions.
---------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
---------------------------------------------------------
[LINE CHART]
'89 = 12.84
'90 = 10.14
'91 = 15.01
'92 = 6.96
'93 = 6.00
'94 = -3.11
'95 = 16.57
'96 = 4.20
'97 = 8.39
'98 = 6.92
1999 Total Return as of March 31: 0.23%
Best Quarter: 7.11%, Q2 '89 Worst Quarter: -3.31%, Q1 '94
---------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
---------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------
Fund 6.92 6.40 8.25
Index 6.93 7.34 9.25
Index: Lehman Brothers Mortgage GNMA Index, an unmanaged,
market value-weighted measure of all fixed-rate securities
backed by GNMA mortgage pools.
8 | SCUDDER GNMA FUND
<PAGE>
How much investors pay
Because this is a no-load fund, it doesn't charge you any
shareholder fees. The fund does have annual operating
expenses, that, as a shareholder, you pay indirectly.
---------------------------------------------------------
Fee Table
---------------------------------------------------------
Shareholder Fees (paid directly from your investment)
---------------------------------------------------------
Sales Charges/Redemption Fees None
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------
Management Fee 0.63%
Distribution (12b-1) Fee None
Other Expenses* 0.31%
-----
Total Annual Operating Expenses 0.94%
* Includes costs of legal and accounting services,
printing and similar expenses, which may vary with fund
size and other factors.
---------------------------------------------------------
Expense Example
---------------------------------------------------------
Based on the costs above, this example is designed to help
you compare this fund's expenses to those of other funds.
The example assumes you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions, and
sold your shares at the end of each period. Remember that
this is only an example, and that your actual expenses
will be different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
$96 $300 $520 $1,155
SCUDDER GNMA FUND | 9
<PAGE>
ticker symbol | SCSBX fund number | 063
Scudder Income Fund
Investment approach
The fund seeks to provide high income while managing its
portfolio in a way that is consistent with the prudent
investment of shareholders' capital. It does this by using
a flexible investment program that emphasizes high-grade
bonds.
The fund can buy many types of income-producing
securities, among them corporate bonds (historically the
backbone of the portfolio), U.S. government and agency
bonds, mortgage- and asset-backed securities, and others.
Generally, most are from U.S. issuers, but bonds of
foreign issuers are permitted.
The portfolio managers may shift the proportions of
the fund's holdings, favoring different
types of securities at different times,
CREDIT QUALITY POLICIES while still maintaining variety in terms
of the companies and industries
This fund normally invests at represented. In making their buy and sell
least 65% of assets in bonds of decisions, the managers typically weigh a
the top three grades of credit number of factors against each other, from
quality. economic outlooks and possible interest
rate movements to changes in supply and
The fund could put up to 20% of demand within the bond market.
assets in junk bonds of the fifth
and sixth credit grades (i.e., as In choosing individual bonds, the managers
low as grade B). Compared to use independent analysis to look for bonds
investment-grade bonds, junk that, for example, show improving credit.
bonds generally pay higher
yields and have higher volatility Although the managers may adjust the
and higher risk of default on fund's duration (a measure of sensitivity
payments of interest or principal. to interest rate movements), they
generally intend to keep it between four
and six years. Also, while they're
permitted to use various types of
derivatives (contracts whose value is
based on, for example, indices,
commodities, or securities), the managers
don't intend to use them as principal
investments, and might not use them at
all.
10 | SCUDDER INCOME FUND
<PAGE>
[GRAPHIC]
This fund -- America's oldest no-load mutual fund -- is
designed for investors who are looking for a relatively
high level of income and can accept a moderate level of
risk to their investment.
Main risks to investors
There are several risk factors that could reduce the yield
you get from the fund, cause you to lose money, or make
the fund perform less well than other investments.
As with most bond funds, the most important factor is
market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the
value of your investment. (As a rule, a 1% rise in
interest rates means a 1% fall in value for every year of
duration.) An increase in its duration would make the fund
more sensitive to this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of
economic trends, issuers, industries, or other matters
o a bond could decline in credit quality or go into
default; this risk is greater with junk and foreign
bonds
o some types of bonds could be paid off substantially
earlier than expected, which would hurt the fund's
performance; with mortgage- or asset-backed securities,
any unexpected behavior in interest rates could hurt
performance, increasing the volatility of the fund's
share price and yield
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard
to value some investments accurately or to get a fair
price for them
SCUDDER INCOME FUND | 11
<PAGE>
[GRAPHIC]
While a fund's past performance isn't necessarily a sign
of how it will do in the future, it can be valuable for an
investor to know. This page looks at fund performance two
different ways: year by year and over time.
The fund's track record
The bar chart shows how much fund returns have varied from
year to year, which may give some idea of risk. The table
shows how the fund's returns over different periods
average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not
have any fees or expenses). All figures on this page
assume reinvestment of dividends and distributions.
---------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
---------------------------------------------------------
[LINE CHART]
'89 = 12.75
'90 = 8.32
'91 = 17.32
'92 = 6.74
'93 = 12.58
'94 = -4.43
'95 = 18.54
'96 = 3.41
'97 = 8.66
'98 = 6.11
1999 Total Return as of March 31: -0.53%
Best Quarter: 7.00%, Q2 '89 Worst Quarter: -3.79%, Q1 '94
---------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
---------------------------------------------------------
1 Year 5 Years 10 Years
---------------------------------------------------------
Fund 6.11 6.20 8.81
Index 8.69 7.27 9.26
Index: Lehman Brothers Aggregate Bond Index, an unmanaged,
market value-weighted measure of U.S. Treasury and agency
securities, corporate bond issues, and mortgage-backed
securities.
12 | SCUDDER INCOME FUND
<PAGE>
How much investors pay
Because this is a no-load fund, it doesn't charge you any
shareholder fees. The fund does have annual operating
expenses, that, as a shareholder, you pay indirectly.
---------------------------------------------------------
Fee Table
---------------------------------------------------------
Shareholder Fees (paid directly from your investment)
---------------------------------------------------------
Sales Charges/Redemption Fees None
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------
Management Fee 0.60%
Distribution (12b-1) Fee None
Other Expenses* 0.73%
-----
Total Annual Operating Expenses 1.33%
Expense Reimbursement 0.38%
-----
Net Annual Operating Expenses** 0.95%
* Includes costs of legal and accounting services,
printing and similar expenses, which may vary with fund
size and other factors.
** By contract, expenses are capped at 0.95% through
4/30/00.
---------------------------------------------------------
Expense Example
---------------------------------------------------------
Based on the costs above (including one year of capped
expenses), this example is designed to help you compare
this fund's expenses to those of other funds. The example
assumes you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions, and sold your
shares at the end of each period. Remember that this is
only an example, and that your actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
$101 $388 $696 $1,572
SCUDDER INCOME FUND | 13
<PAGE>
ticker symbol | SCCBX fund number | 308
Scudder Corporate Bond Fund
Investment approach
The fund seeks to provide high income. It does this by
investing mainly in investment-grade corporate bonds.
Generally, most of the fund's bonds are from U.S. issuers,
but bonds of foreign issuers are permitted.
In deciding which securities to buy and sell, the
portfolio managers use independent analysis. In
particular, they look for bonds that show improving credit
or are issued by companies that are well established or
that may be about to undergo some type of positive
restructuring.
Based on their analysis of economic and market trends, the
managers may favor bonds from different segments of the
economy at different times, while still maintaining
variety in terms of the companies and industries
represented.
The fund does have the option of investing in other types
of bonds, such as Treasuries and mortgage-
and asset-backed securities. In the past,
CREDIT QUALITY POLICIES the fund has held few of these securities,
if any. But from time to time, when they
This fund normally invests at are especially attractive relative to
least 65% of assets in bonds of corporate bonds, the fund may invest in
the top four grades of credit them more substantially.
quality.
Although the managers may adjust the
The fund could put up to 35% fund's average weighted maturity (the
of assets in junk bonds, which effective maturity of the fund's
are those below the fourth portfolio), they generally intend to keep
credit grade (i.e., grade BB/Ba it between five and ten years. Also, while
and below). Compared to they're permitted to use various types of
investment-grade bonds, junk derivatives (contracts whose value is
bonds generally pay higher based on, for example, indices,
yields and have higher volatility commodities, or securities), the managers
and higher risk of default on don't intend to use them as principal
payments of interest or investments, and might not use them at
principal. all.
14 | SCUDDER CORPORATE BOND FUND
<PAGE>
[GRAPHIC]
This fund may appeal to investors who want higher yields
and are not as concerned about risk as more conservative
investors.
Main risks to investors
There are several risk factors that could reduce the yield
you get from the fund, cause you to lose money, or make
the fund perform less well than other investments.
As with most bond funds, the most important factor is
market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the
value of your investment. An increase in the fund's
average weighted maturity could make it more sensitive to
this risk.
Because the economy affects corporate bond performance,
the fund will tend to perform less well than other types
of bond funds when the economy is weak. Also, to the
extent that the fund emphasizes bonds from any given
industry, it could be hurt if that industry does not do
well and its securities become less desirable.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of
economic trends, issuers, industries, or other matters
o a bond could decline in credit quality or go into
default; this risk is greater with junk and foreign
bonds
o some types of bonds could be paid off substantially
earlier than expected, which would hurt the fund's
performance; with mortgage- or asset-backed securities,
any unexpected behavior in interest rates could hurt
performance, increasing the volatility of the fund's
share price and yield
o in unusual circumstances, the fund might find it hard
to value some investments accurately or to get a fair
price for them
o some derivatives could produce disproportionate losses
o currency fluctuations could cause foreign investments
to lose value
SCUDDER CORPORATE BOND FUND | 15
<PAGE>
[GRAPHIC]
If you'd like up-to-date information on this fund's
performance since inception, call 1-800-225-5163 or visit
the Scudder web site at www.scudder.com.
The fund's track record
Because this is a new fund, it did not have a full
calendar year of performance to report as of the date of
this prospectus.
16 | SCUDDER CORPORATE BOND FUND
<PAGE>
How much investors pay
Because this is a no-load fund, it doesn't charge you any
shareholder fees. The fund does have annual operating
expenses, that, as a shareholder, you pay indirectly.
Because the fund is new, the annual operating expenses
shown here are an estimate.
---------------------------------------------------------
Fee Table
---------------------------------------------------------
Shareholder Fees (paid directly from your investment)
---------------------------------------------------------
Sales Charges/Redemption Fees None
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------
Management Fee 0.65%
Distribution (12b-1) Fee None
Other Expenses* 1.90%
-----
Total Annual Operating Expenses 2.55%
Expense Reimbursement 2.55%
-----
Net Annual Operating Expenses** 0.00%
* Includes costs of legal and accounting services,
printing and similar expenses, which may vary with fund
size and other factors.
** By contract, expenses are capped at 0.00% through
4/30/00.
---------------------------------------------------------
Expense Example
---------------------------------------------------------
Based on the costs above (including one year of capped
expenses), this example is designed to help you compare
this fund's expenses to those of other funds. The example
assumes you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions, and sold your
shares at the end of each period. Remember that this is
only an example, and that your actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
$0 $549 $1,125 $2,692
SCUDDER CORPORATE BOND FUND | 17
<PAGE>
ticker symbol | SHBDX fund number | 047
Scudder High Yield Bond Fund
Investment approach
The fund seeks to provide high income and, secondarily,
capital appreciation. It does this by investing mainly in
lower rated, higher yielding corporate bonds, often called
junk bonds. Generally, most are from U.S. issuers, but up
to 25% of assets could be in bonds from foreign issuers.
In deciding which securities to buy and sell, the
portfolio managers rely on extensive independent analysis
to look for bonds that may be undervalued. In particular,
they look for bonds from three types of issuers:
o young, growing companies that seem to have good
business prospects and whose credit is gaining strength
o companies that have stable or growing cash flows and
appear able to improve their balance sheets
o established companies that may have been through
setbacks but now look to be regaining their financial
health, perhaps in conjunction with some type of
positive restructuring
Based on their analysis of economic and market trends, the
managers may favor bonds from different
CREDIT QUALITY POLICIES segments of the economy at different
times, while still maintaining variety in
This fund normally invests at terms of the companies and industries
least 65% of assets in U.S. junk represented.
bonds, which are those below
the fourth credit grade (i.e., Although the managers may adjust the
grade BB/Ba and below). fund's duration (a measure of sensitivity
Compared to invest-grade to interest rate movements), they
bonds, junk bonds generally pay generally intend to keep it between four
higher yields and have higher and eight years. Also, while they're
volatility and higher risk of permitted to use various types of
default on payments of interest derivatives (contracts whose value is
or principal. based on, for example, indices,
commodities, or securities), the managers
The fund could put up to 35% don't intend to use them as principal
of assets in bonds with higher investments, and might not use them at
credit quality, but normally all.
invests less in them.
18 | SCUDDER HIGH YIELD BOND FUND
<PAGE>
[GRAPHIC]
This fund is designed for investors who are seeking high
income and can accept higher risk and volatility --
typically investors with longer time horizons in mind.
Main risks to investors
There are several risk factors that could reduce the yield
you get from the fund, cause you to lose money, or make
the fund perform less well than other investments.
For this fund, the main factor is the economy. Because the
companies that issue high yield bonds may be in uncertain
financial health, high yield bond prices can be vulnerable
to bad economic news, or even the expectation of bad news.
This may affect a company, an industry, or the high yield
market as a whole. In some cases, bonds may decline in
credit quality or go into default. This risk is higher
with foreign bonds.
Another factor is market interest rates. A rise in
interest rates generally means a fall in bond prices --
and, in turn, a fall in the value of your investment. (As
a rule, a 1% rise in interest rates means a 1% fall in
value for every year of duration, although with high yield
bond investments the correlation is not as exact.) An
increase in its duration would make the fund more
sensitive to this risk.
Because the economy affects corporate bond performance,
the fund will tend to perform less well than other types
of bond funds when the economy is weak. Also, to the
extent that the fund emphasizes bonds from any given
industry, it could be hurt if that industry does not do
well.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of
economic trends, issuers, industries, or other matters
o some types of bonds could be paid off earlier than
expected, which would hurt the fund's performance
o currency fluctuations could cause foreign investments
to lose value
o some derivatives could produce disproportionate losses
o in unusual circumstances, the fund might find it hard
to value some investments accurately or to get a fair
price for them; this risk can be greater for junk bonds
than for higher quality bonds
SCUDDER HIGH YIELD BOND FUND | 19
<PAGE>
[GRAPHIC]
While a fund's past performance isn't necessarily a sign
of how it will do in the future, it can be valuable for an
investor to know. This page looks at fund performance two
different ways: year by year and over time.
The fund's track record
The bar chart shows how much fund returns have varied from
year to year, which may give some idea of risk. The table
shows how the fund's returns over different periods
average out. For context, the table also includes a
broad-based market index (which, unlike the fund, does not
have any fees or expenses). All figures on this page
assume reinvestment of dividends and distributions.
---------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year
---------------------------------------------------------
[LINE CHART]
'89 =
'90 =
'91 =
'92 =
'93 =
'94 =
'95 =
'96 =
'97 = 14.80
'98 = 4.52
1999 Total Return as of March 31: 3.30%
Best Quarter: 5.28%, Q2 '97 Worst Quarter: -5.05%, Q3 '98
---------------------------------------------------------
Average Annual Total Returns (%) as of 12/31/98
---------------------------------------------------------
Since
1 Year Inception(1)
---------------------------------------------------------
Fund 4.52 11.46
Index 3.66 9.75
Index: Merrill Lynch High Yield Master Index, an unmanaged
index that broadly reflects corporate bonds that are below
investment-grade.
(1) Since 6/28/96.
20 | SCUDDER HIGH YIELD BOND FUND
<PAGE>
How much investors pay
Shareholder fees are charged directly to your account;
this fund has no sales charges, only a short-term
redemption/ exchange fee. The fund does have annual
operating expenses, that, as a shareholder, you pay
indirectly.
---------------------------------------------------------
Fee Table
---------------------------------------------------------
Shareholder Fees (paid directly from your investment)
---------------------------------------------------------
Sales Charges None
Redemption/Exchange Fee, on shares owned less
than one year (see page 37) 1.00%
Annual Operating Expenses (deducted from fund assets)
---------------------------------------------------------
Management Fee 0.70%
Distribution (12b-1) Fee None
Other Expenses* 0.51%
-----
Total Annual Operating Expenses 1.21%
Expense Reimbursement 0.46%
-----
Net Annual Operating Expenses** 0.75%
* Includes costs of legal and accounting services,
printing and similar expenses, which may vary with fund
size and other factors.
** By contract, expenses are capped at 0.75% through
4/30/00.
---------------------------------------------------------
Expense Example
---------------------------------------------------------
Based on the costs above (including one year of capped
expenses), this example is designed to help you compare
this fund's expenses to those of other funds. The example
assumes you invested $10,000, earned 5% annual returns,
reinvested all dividends and distributions, and sold your
shares at the end of each period. Remember that this is
only an example, and that your actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
$77 $339 $621 $1,425
SCUDDER HIGH YIELD BOND FUND | 21
<PAGE>
Fund Details
Other policies and risks
While the fund-by-fund sections on the previous pages
describe the main points of each fund's strategy and
risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, each fund
could change its investment goal and certain other
policies with the approval of its Board of Trustees and
not shareholders.
o These funds may trade more securities than some other
bond funds. This could raise transaction costs (and
lower performance) and could mean higher taxable
distributions.
o As a temporary measure, any of these funds could shift
up to 100% of assets into defensive investments such as
money market securities. This could prevent losses, but
would mean that the fund was not pursuing its goal.
YEAR 2000 READINESS o Scudder Kemper measures credit quality at
the time it buys securities, using
Like all mutual funds, these independent ratings or, for unrated
funds could be affected by the securities, its own credit analysis. If a
inability of some computer security's credit quality changes, the
systems to recognize the year portfolio managers will decide what to do
2000. Scudder Kemper has a with the security, based on their
year 2000 readiness program assessment of what would benefit
designed to address this shareholders most.
problem, and is also
researching the readiness of o This prospectus doesn't tell you about
suppliers and business partners every policy or risk of investing in the
as well as issuers of securities funds. If you want more information on a
the funds own. Still, there's fund's allowable securities and investment
some risk that the year 2000 practices and the characteristics and
problem could materially affect risks of each one, you may want to request
a fund's operations (such as its a copy of the SAI (the back cover has
ability to calculate net asset information on how to do this).
value and process purchases
and redemptions), its
investments, or securities
markets in general.
22 | FUND DETAILS
<PAGE>
Who Manages and Oversees the Funds
The investment adviser
The investment adviser for these funds (the company with
overall responsibility for fund management) is Scudder
Kemper Investments, Inc., located at Two International
Place, Boston, MA 02110. Scudder Kemper has more than 70
years of experience managing mutual funds, and currently
has more than $280 billion in assets under management.
Scudder Kemper takes a team approach to asset management.
Each fund is managed by a team of investment
professionals, who individually represent different areas
of expertise and who together develop investment
strategies and make buy and sell decisions. Supporting the
fund managers are Scudder Kemper's many economists,
research analysts, traders, and other investment
specialists, located in offices across the United States
and around the world.
As payment for serving as investment adviser, Scudder
Kemper receives a management fee from each fund. Below are
the actual rates paid by each fund for the 12 months
through the most recent fiscal year end, as a percentage
of each fund's average daily net assets.
Fund Name Fee Paid
----------------------------------------------------------
Scudder Short Term Bond Fund 0.54%
Scudder GNMA Fund 0.63%
Scudder Income Fund 0.60%
Scudder High Yield Bond Fund 0.70%
For Scudder Corporate Bond Fund, a fund that hasn't been
in operation for a full fiscal year, the rate is 0.65% of
the fund's average daily net assets.
WHO MANAGES AND OVERSEES THE FUNDS | 23
<PAGE>
The portfolio managers
Below are the people who handle the day-to-day management of each fund in this
prospectus.
Scudder Short Term Bond Fund Scudder Income Fund (continued)
Stephen A. Wohler Robert S. Cessine
Lead Portfolio Manager o Began investment career in 1982
o Began investment career in 1979 o Joined the adviser in 1993
o Joined the adviser in 1979 o Joined the fund team in 1998
o Joined the fund team in 1998
Robert S. Cessine Scudder Corporate Bond Fund
o Began investment career in 1982 Stephen A. Wohler
o Joined the adviser in 1993 Lead Portfolio Manager
o Joined the fund team in 1998 o Began investment career in 1979
o Joined the adviser in 1979
Scudder GNMA Fund o Joined the fund team in 1998
Richard L. Vandenberg Kelly D. Babson
Lead Portfolio Manager o Began investment career in 1981
o Began investment career in 1973 o Joined the adviser in 1994
o Joined the adviser in 1996 o Joined the fund team in 1998
o Joined the fund team in 1998 Robert S. Cessine
Scott E. Dolan o Began investment career in 1982
o Began investment career in 1989 o Joined the adviser in 1993
o Joined the adviser in 1989 o Joined the fund team in 1998
o Joined the fund team in 1998
John E. Dugenske Scudder High Yield Bond Fund
o Began investment career in 1990 Kelly D. Babson
o Joined the adviser in 1998 Lead Portfolio Manager
o Joined the fund team in 1998 o Began investment career in 1981
o Joined the adviser in 1994
Scudder Income Fund o Joined the fund team in 1996
Stephen A. Wohler Stephen A. Wohler
Lead Portfolio Manager o Began investment career in 1979
o Began investment career in 1979 o Joined the adviser in 1979
o Joined the adviser in 1979 o Joined the fund team in 1996
o Joined the fund team in 1998
Kelly D. Babson
o Began investment career in 1981
o Joined the adviser in 1994
o Joined the fund team in 1998
24| WHO MANAGES AND OVERSEES THE FUNDS
<PAGE>
Board of Trustees
The Board of Trustees for each fund is responsible for the general oversight of
each fund's business. A majority of the board's members are not affiliated with
Scudder Kemper. The independent trustees have primary responsibility for
assuring that each fund is managed in the best interests of its shareholders.
Daniel Pierce George M. Lovejoy
o Managing Director of Scudder Kemper o President and Director, Fifty
Investments, Inc. Associates (real estate
o President of the fund corporation)
Henry P. Becton, Jr. Wesley W. Marple, Jr.
o President and General Manager, WGBH o Professor of Business
Educational Foundation Administration, Northeastern
Dawn-Marie Driscoll University, College of Business
o Executive Fellow, Center for Business Administration
Ethics, Bentley College Kathryn L. Quirk
o President, Driscoll Associates o Managing Director of Scudder
(consulting firm) Kemper Investments, Inc.
Peter B. Freeman o Vice President and Assistant
o Corporate director and trustee Secretary of the fund
Jean C. Tempel
o Venture Partner, Internet
Capital Corp.
WHO MANAGES AND OVERSEES THE FUNDS | 25
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance over the past five years. The figures in the first half of each
table are for a single share. The total return figures represent the percentage
that an investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by PricewaterhouseCoopers LLP, whose report, along with each fund's financial
statements, is included in that fund's annual report (see "Shareholder reports"
on the back cover).
Scudder Short Term Bond Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended December 31, 1998(a) 1997(a) 1996(a) 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $11.04 $11.05 $11.35 $10.91 $12.01
-----------------------------------------------
Income from investment operations:
Net investment income .66 .73 .74 .71 .81
Net realized and unrealized gain
(loss) on investments (.19) (.07) (.32) .44 (1.15)
-----------------------------------------------
Total from investment transactions .47 .66 .42 1.15 (.34)
Less distributions:
From net investment income (.64) (.67) (.72) (.43) (.64)
From tax return of capital -- -- -- (.28) (.12)
-----------------------------------------------
Total distributions (.64) (.67) (.72) (.71) (.76)
-----------------------------------------------
Net asset value, end of period $10.87 $11.04 $11.05 $11.35 $10.91
-----------------------------------------------
Total Return (%) 4.34(b) 6.17 3.86 10.74 (2.87)
Ratios and Supplemental Data
- -----------------------------------------------------------------------------------
Net assets, end of period ($ millions) 992 1,166 1,468 1,823 2,136
Ratio of operating expenses net,
to average daily net assets (%) .86 .86 .80 .75 .73
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) .86 .86 .80 .75 .73
Ratio of net investment income to
average daily net assets (%) 6.07 6.64 6.66 6.37 6.93
Portfolio turnover rate (%) 95.4 39.4 61.8 101.1 65.3
</TABLE>
(a) Per share amounts have been calculated using weighted average shares
outstanding.
(b) If Scudder Kemper had not reimbursed the fund, the total return for the year
ended December 31, 1998 would have been lower.
26 | FINANCIAL HIGHLIGHTS
<PAGE>
Scudder GNMA Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended December 31, 1999(c) 1998 1997 1996 1995 1994(b)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.81 $14.29 $14.54 $14.07 $14.33 $15.52
------------------------------------------------------
Income from investment
operations:
Net investment income .73 .94 .93 .94 .93 1.12
Net realized and
unrealized gain (loss)
on investment
transactions .12 .52 (.25) .47 (.26) (1.19)
------------------------------------------------------
Total from investment
operations .85 1.46 .68 1.41 .67 (.07)
Less distributions from:
Net investment income (.73) (.94) (.93) (.94) (.92) (1.12)
Tax return of capital -- -- -- -- (.01) --
------------------------------------------------------
Total distributions (.73) (.94) (.93) (.94) (.93) (1.12)
------------------------------------------------------
Net asset value, end of
period $14.93 $14.81 $14.29 $14.54 $14.07 $14.33
------------------------------------------------------
Total Return (%) 5.87** 10.44 4.81 10.20 4.94 (.64)
Ratios and Supplemental Data
- ----------------------------------------------------------------------------------
Net assets, end of period
($ millions) 393 392 383 425 429 544
Ratio of operating
expenses to average daily
net assets (%) .94* 1.02 .96 .94 .95 .87
Ratio of net investment
income to average net
assets (%) 5.87* 6.38 6.44 6.45 6.65 7.35
Portfolio turnover rate (%) 280.8(a)* 197.2(a) 188.0 157.8 220.5(a) 272.1(a)
</TABLE>
(a) The portfolio turnover rates including mortgage dollar roll transactions
were 289.9%, 250.8%, 255.4% and 392.5% for the periods ended January 31,
1999, March 31, 1998, 1995 and 1994, respectively.
(b) Per share amounts have been calculated using monthly average shares
outstanding.
(c) Ten months ended January 31, 1999. On August 10, 1998, the Board of Trustees
of the fund changed the fiscal year end from March 31 to January 31.
* Annualized
** Not annualized
FINANCIAL HIGHLIGHTS | 27
<PAGE>
Financial Highlights (continued)
Scudder Income Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Years ended December 31, 1999(a)(d) 1998(a) 1997(a) 1996(a) 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.24 $13.46 $13.15 $13.61 $12.32 $13.71
------------------------------------------------------
Income from investment
operations:
Net investment income .07 .81 .80 .80 .83 .84
Net realized and unrealized
gain (loss) on investments .05 .00(c) .31 (.36) 1.41 (1.45)
------------------------------------------------------
Total from investment
operations .12 .81 1.11 .44 2.24 (.61)
Less distributions:
From net investment income -- (.79) (.79) (.81) (.92) (.78)
From net realized gains
on investment transactions -- (.24) (.01) (.09) (.03) --
------------------------------------------------------
Total distributions -- (1.03) (.80) (.90) (.95) (.78)
------------------------------------------------------
Net asset value, end of
period $13.36 $13.24 $13.46 $13.15 $13.61 $12.32
------------------------------------------------------
Total Return (%) .91**(b) 6.11(b) 8.66 3.41 18.54 (4.43)
Ratios and Supplemental Data
- ------------------------------------------------------------------------------------
Net assets, end of period
($ millions) 786 806 695 579 578 463
Ratio of operating expenses
to average daily net assets (%) .95* .99 1.18 .98 .99 .97
Ratio of operating expenses
before expense reductions,
to average daily net assets (%) 1.50* 1.33 -- -- -- --
Ratio of net investment
income to average daily net
assets (%) 5.85* 5.98 6.00 6.01 6.35 6.43
Portfolio turnover rate (%) 20.6** 125.7 61.9 66.9 128.3 60.3
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Amount is less than one half of $.01.
(d) One month ended January 31, 1999. On August 10, 1998, the Board of Trustees
of the fund changed the fiscal year end from December 31 to January 31.
* Annualized
** Not annualized
28 | FINANCIAL HIGHLIGHTS
<PAGE>
Scudder Corporate Bond Fund
- ------------------------------------------------------------------------------
For the period August 31, 1998 to January 31,(b) 1999
- ------------------------------------------------------------------------------
Net asset value, beginning of period $12.00
------
Income from investment operations:
Net investment income .36
Net realized and unrealized gain (loss) on investment transactions .30
------
Total from investment operations .66
Less distributions from:
Net investment income (.36)
Net realized gains from investment transactions (.03)
Total distributions (.39)
------
Net asset value, end of period $12.27
------
Total Return (%) (a) 5.53**
Ratios and Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of period ($ millions) 37
Ratio of operating expenses, net to
average daily net assets (%) 0.00*
Ratio of operating expenses before expense reductions,
to average daily net assets (%) 2.55*
Ratio of net investment income to average daily net assets (%) 6.96*
Portfolio turnover rate (%) 96.7*
(a) Total return would have been lower had expenses not been reduced.
(b) Commencement of operations.
* Annualized
** Not annualized
FINANCIAL HIGHLIGHTS | 29
<PAGE>
Financial Highlights (continued)
Scudder High Yield Bond Fund
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1999(c) 1998(d) 1997(e)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $13.23 $12.77 $12.00
---------------------------------
Income from investment operations:
Net investment income 1.08 1.19 .76
Net realized and unrealized gain (loss)
on investment transactions (.73) .57 .77
---------------------------------
Total from investment operations .35 1.76 1.53
Less distributions from:
Net investment income (1.10) (1.17) (.76)
Net realized gains from investment
transactions (.09) (.14) (.01)
Total distributions (1.19) (1.31) (.77)
---------------------------------
Redemption fees .01 .01 .01
Net asset value, end of period $12.40 $13.23 $12.77
---------------------------------
Total Return (%) (a) 2.98** 14.60 13.23(b)**
Ratios and Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of period ($ millions) 209 176 74
Ratio of operating expenses, net to
average daily net assets (%) .44* .03 0.00
Ratio of operating expenses before expense
reductions, to average daily net assets (%) 1.17* 1.23 1.75*
Ratio of net investment income to
average daily net assets (%) 9.42* 9.28 9.44*
Portfolio turnover rate (%) 83** 113 40*
</TABLE>
(a) Total return would have been lower had certain expenses not been reduced.
(b) Total return does not reflect the effect to the shareholder of the 1%
redemption fee on shares held less than one year.
(c) Eleven months ended January 31, 1999. On August 10, 1998, the Board of
Trustees of the fund changed the fiscal year end from February 28 to January
31.
(d) Year ended February 28, 1998.
(e) For the period June 28, 1996 (commencement of operations) to February 28,
1997.
* Annualized
** Not annualized
30 | FINANCIAL HIGHLIGHTS
<PAGE>
How to invest in the funds
The following pages tell you how to invest with us and what to
expect as a shareholder. If you're investing directly with
Scudder, this information applies to you as it is given here.
If you're investing through a "third party provider" -- for
example, a workplace retirement plan, financial supermarket, or
financial advisor -- your provider may have its own policies or
instructions, and you should follow those.
<PAGE>
How to Buy Shares
Use these instructions to invest directly with Scudder. Make out your check to
"The Scudder Funds."
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
First investment Additional investments
- --------------------------------------------------------------------------------
<S> <C> <C>
$100 or more for regular accounts
$2,500 or more for regular $50 or more for IRAs
accounts
$1,000 or more for IRAs $50 or more with an Automatic
Investment Plan
By mail or o Fill out and sign an o Send a check and a Scudder
express application investment slip to us at the
(see below) appropriate address below
o Send it to us at the o If you don't have an investment
appropriate address below, slip, simply include a letter with your
along with an investment name, account number, the full name of the
check fund, and your investment instructions
By wire o Call 1-800-225-5163 for o Call 1-800-225-5163 for
instructions instructions
In person o Visit one of our Scudder o Drop off your check and
(see below) Investor Centers, where a investment information at any
representative can help you Scudder Investor Center
fill out an application
By phone -- o Call 1-800-225-5163 for
instructions
With an automatic o To set up regular investments
investment plan -- from a bank checking account,
call 1-800-225-5163
Using
QuickBuy -- o Call 1-800-225-5163
</TABLE>
[GRAPHIC]
Regular mail: Express, registered or certified:
The Scudder Funds The Scudder Funds
PO Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184-3839
Scudder Investor Centers: Boca Raton, FL o Boston, MA o
Chicago, IL o New York, NY o San Francisco, CA
32 | HOW TO BUY SHARES
<PAGE>
How to Sell or Exchange Shares
Use these instructions to sell or exchange shares in an account opened directly
with Scudder.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Exchanging into another fund Selling shares
- ----------------------------------------------------------------------------------------
<S> <C> <C>
$2,500 to open a new account with Some transactions, including
an exchange ($1,000 for IRAs) most for over $100,000, can
only be ordered in writing; if
$100 or more for exchanges you're in doubt, see page 36
between existing accounts
By phone or wire o Call 1-800-225-5163 for o Call 1-800-225-5163 for
instructions instructions
Using SAIL(TM) o Call 1-800-343-2890 and o Call 1-800-343-2890 and
follow the instructions follow the instructions
By mail, express Write a letter that includes: Write a letter that includes:
or fax o the fund, class, and account o the fund, class, and account
(see below) number you're exchanging number from which you want to
out of sell shares
o the dollar amount or number o the dollar amount or number
of shares you want to exchange of shares you want to sell
o the fund and class of the o your name(s), signature(s),
fund you want to exchange into and address, as they appear
on your account
o your name(s), signature(s), o a daytime telephone number
and address, as they appear
on your account
o a daytime telephone number
o To set up regular cash
With an automatic -- payments from a Scudder fund
withdrawal plan account, call 1-800-225-5163
Using QuickSell -- o Call 1-800-225-5163
Using Checkwriting -- o Scudder Short Term Bond Fund
only: to set up checkwriting
privileges, call 1-800-225-5163
</TABLE>
[GRAPHIC]
Regular mail: Express, registered or certified:
The Scudder Funds The Scudder Funds
PO Box 2291 66 Brooks Drive
Boston, MA 02107-2291 Braintree, MA 02184-3839
Fax: 1-800-821-6234
HOW TO SELL OR EXCHANGE SHARES | 33
<PAGE>
[GRAPHIC]
Questions? You can speak to a Scudder representative
between 8 a.m. and 8 p.m. eastern time on any fund
business day by calling 1-800-225-5163.
Policies You Should Know About
Along with the instructions on the previous pages, the
policies below may affect you as a shareholder. Some of
this information, such as the section on dividends and
taxes, applies to all investors, including those investing
through investment providers.
If you are investing through an investment provider, check
the materials you got from them. As a general rule, you
should follow the information in those materials wherever
it contradicts the information given here. Please note
that an investment provider may charge its own fees.
Policies about transactions
The funds are open for business whenever the New York
Stock Exchange is open. Each fund calculates its share
price every business day, as of the close of regular
trading on the Exchange (typically 4 p.m. eastern time,
but sometimes earlier, as in the case of scheduled
half-day trading or unscheduled suspensions of trading).
You can place an order to buy or sell shares at any time.
Once your order is received by Scudder Service
Corporation, and they have determined that it is a "good
order," it will be processed at the next share price
calculated.
Because orders placed through investment providers or at a
Scudder Investor Center must be forwarded to Scudder
Service Corporation before they can be processed, you'll
need to allow extra time. A representative of your
investment provider or the Investor Center should be able
to tell you when your order will be processed.
34 | POLICIES YOU SHOULD KNOW ABOUT
<PAGE>
[GRAPHIC]
The Scudder Web site can be a valuable resource for
shareholders with Internet access. Go to www.scudder.com
to get up-to-date information, review balances or even
place orders for exchanges.
Ordinarily, your investment will start to accrue dividends
the next business day after your purchase is processed.
However, with Scudder Short Term Bond Fund and Scudder
GNMA Fund, wire transactions that arrive by 12:00 noon
eastern time will receive that day's dividend.
When selling shares, you'll generally receive the dividend
for the day on which your shares were sold.
SAIL(TM), the Scudder Automated Information Line, is
available 24 hours a day by calling 1-800-343-2890. You
can use SAIL to get information on Scudder funds generally
and on accounts held directly at Scudder. You can also use
it to make exchanges and sell shares.
QuickBuy and QuickSell let you set up a link between a
Scudder account and a bank account. Once this link is in
place, you can move money between the two with a phone
call. You'll need to make sure your bank has Automated
Clearing House (ACH) services. To set up QuickBuy or
QuickSell on a new account, see the account application;
to add it to an existing account, call 1-800-225-5163.
Checkwriting, available on Scudder Short Term Bond Fund,
lets you sell shares of that fund by writing a check. Your
investment keeps earning dividends until your check
clears. Please note that you should not write checks for
less than $100, and that we can't honor any check larger
than your balance at the time the check is presented to
us. It's not a good idea to close out an account using a
check because the account balance could change between the
time you write the check and the time it is presented.
When you ask us to send or receive a wire, please note
that while we don't charge a fee to receive wires, we will
deduct a $5 fee from all wires sent from us to your bank.
It's also possible that your bank may have its own fees
for handling wires. The funds can only accept wires of
$100 or more.
POLICIES YOU SHOULD KNOW ABOUT | 35
<PAGE>
Exchanges among Scudder funds are an option for
shareholders who purchased fund shares directly from
Scudder and many other investors as well. Exchanges are a
shareholder privilege, not a right: we may reject or limit
any exchange order, particularly when there appears to be
a pattern of "market timing" or other frequent purchases
and sales. We may also reject or limit purchase orders,
for these reasons or any other.
When you want to sell more than $100,000 worth of shares,
you'll usually need to place your order in writing and
include a signature guarantee. The only exception is if
you want money wired to a bank account that is already on
file with us; in that case, you don't need a signature
guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other
circumstances.
A signature guarantee is simply a certification of your
signature -- a valuable safeguard against fraud. You can
get a signature guarantee from most brokers and most
banks, savings institutions, and credit unions. Note that
you can't get a signature guarantee from a notary public.
Money from shares you sell is normally sent out within one
business day of when your order is processed (not when it
is received), although it could be delayed for up to seven
days. There are also two circumstances when it could be
longer: when you are selling shares you bought recently by
check and that check hasn't cleared yet (maximum delay: 15
days) or when unusual circumstances prompt the SEC to
allow further delays.
36 | POLICIES YOU SHOULD KNOW ABOUT
<PAGE>
[GRAPHIC]
If you ever have difficulty placing an order by phone or
fax, you can always send us your order in writing.
How the funds calculate share prices
For each fund in this prospectus, the price at which you
buy shares is the net asset value per share, or NAV. To
calculate NAV, the funds use the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
----------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
The price at which you sell shares is also the NAV, except
that Scudder High Yield Bond Fund charges a 1.00%
redemption/exchange fee on shares owned less than one
year. You won't be charged this fee if you're investing in
an employer-sponsored retirement plan that is set up
directly with Scudder. If your employer-sponsored
retirement plan is through a third-party investment
provider, or if you are investing through an IRA or other
individual retirement plan, the fee will apply. Certain
other types of accounts may also be eligible for this
waiver.
We typically use market prices to value securities.
However, when a market price isn't available, or when we
have reason to believe it doesn't represent market
realities, we may value securities instead by using
methods approved by a fund's Board of Trustees. In such a
case, the fund's value for a security is likely to be
different from quoted market values.
To the extent that a fund invests in securities that are
traded primarily in foreign markets, the value of its
holdings could change at a time when you aren't able to
buy or sell fund shares. This is because some foreign
markets are open on days when the fund doesn't price its
shares.
POLICIES YOU SHOULD KNOW ABOUT | 37
<PAGE>
Other rights we reserve
For each fund in this prospectus, you should be aware that
we may do any of the following:
o withhold 31% of your distributions as federal income
tax if you have been notified by the IRS that you are
subject to backup withholding, or if you fail to
provide us with a correct taxpayer ID number or
certification that you are exempt from backup
withholding
o charge you $10 a year if your account balance falls
below $2,500, and close your account and send you the
proceeds if your balance falls below $1,000; in either
case, we will give you 60 days' notice so you can
either increase your balance or close your account
(these policies don't apply to retirement accounts, to
investors with $100,000 or more in Scudder fund shares,
or in any case where a fall in share price created the
low balance)
o pay you for shares you sell by "redeeming in kind,"
that is, by giving you marketable securities (which
typically will involve brokerage costs for you to
liquidate) rather than cash; a redemption in kind may
be for an entire order or only part of an order, but in
any case is unlikely except with orders involving more
than $250,000 or 1% of the fund's assets (Scudder Short
Term Bond Fund and Scudder GNMA Fund do not expect to
make redemptions in kind)
o change, add or withdraw various services, fees and
account policies (for example, we may change or
terminate the exchange privilege at any time).
38 | POLICIES YOU SHOULD KNOW ABOUT
<PAGE>
Understanding Distributions and Taxes
You're entitled to receive your share of the net earnings
of any fund you are invested in. A fund can earn money in
two ways: by receiving interest, dividends or other income
from securities it holds, and by selling securities for
more than it paid for them. (A fund's earnings are
separate from any gains or losses stemming from your own
purchase of shares.) A fund may not always pay a
distribution for a given period.
The funds have regular schedules for paying out any
earnings to shareholders:
o Income and short-term capital gains: declared daily and
paid monthly, except for Scudder Income Fund, which
declares and pays them in March, June, September, and
December
o Long-term capital gains: December, or otherwise as
needed
You can choose how to receive your dividends and
distributions. You can have them all automatically
reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't
indicate a preference, your dividends and distributions
will all be reinvested. For retirement plans, reinvestment
is the only option.
Buying and selling fund shares will usually have tax
consequences for you (except in an IRA or other
tax-advantaged account). Your sales of shares may result
in a capital gain or loss for you; whether long-term or
short-term depends on how long you owned the shares. For
tax purposes, an exchange is the same as a sale.
UNDERSTANDING DISTRIBUTIONS AND TAXES | 39
<PAGE>
[GRAPHIC]
Because each shareholder's tax situation is unique, it's
always a good idea to ask your tax professional about the
tax consequences of your investments, including any state
and local tax consequences.
The tax status of the fund earnings you receive, and your
own fund transactions, generally depends on their type:
Generally taxed as ordinary income
---------------------------------------------------------
o short-term capital gains from selling fund shares
o income dividends you receive from the fund
o short-term capital gains distributions you receive from
the fund
Generally taxed as capital gains
---------------------------------------------------------
o long-term capital gains from selling fund shares
o long-term capital gains distributions you receive from
the fund
Each fund will send you detailed tax information every
January. These statements tell you the amount and the tax
category of any dividends or distributions you received.
They also have certain details on your purchases and sales
of shares. The tax status of dividends and distributions
is the same whether you reinvest them or not. Dividends or
distributions declared in the last quarter of a given year
are taxed in that year, even though you may not receive
the money until the following January.
If you invest right before the fund pays a dividend,
you'll be getting some of your investment back as a
taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In
tax-advantaged retirement accounts you don't need to worry
about this.
Corporations may be able to take a dividends-received
deduction for a portion of income dividends they receive.
40 | UNDERSTANDING DISTRIBUTIONS AND TAXES
<PAGE>
Notes
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from the
fund's management team about recent market conditions and
the effect of the fund's strategies on its performance.
They also have detailed performance figures, a list of
everything the fund owns, and the fund's financial
statements. These reports are mailed automatically to fund
shareholders.
Statements of Additional Information (SAI) -- Each fund's
SAI tells you more about its features and policies,
including additional risk information. The funds' SAIs are
incorporated by reference into this document (meaning that
they're legally part of this prospectus).
If you'd like to ask for copies of these documents, or if
you're a shareholder and have questions, please contact
Scudder or the SEC (see below). Materials you get from
Scudder are free; those from the SEC involve a duplicating
fee. If you like, you can look over these materials in
person at the SEC's Public Reference Room in Washington,
DC.
Fund Name SEC File #
---------------------------------------------------------
Scudder Short Term Bond Fund 811-03229
Scudder GNMA Fund 811-00369
Scudder Income Fund 811-00042
Scudder Corporate Bond Fund 811-00042
Scudder High Yield Bond Fund 811-00042
Scudder Funds SEC
PO Box 2291 450 Fifth Street, N.W.
Boston, MA 02107-2291 Washington, DC 20549-6009
1-800-225-5163 1-800-SEC-0330
www.scudder.com www.sec.gov
[PRINTED WITH SOYINK]
[RECYCLE LOGO] Printed on recycled paper
DB-2-59
PRC006599
<PAGE>
SCUDDER SHORT TERM BOND FUND
A series of Scudder Funds Trust
Diversified Mutual Fund Series which Seeks
to provide high income while managing its portfolio in a way
that is consistent with maintaining a high degree of stability of
shareholders' capital. It does this by investing mainly in
bonds with short remaining maturities.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus
and should be read in conjunction with the prospectus of Scudder Short Term Bond
Fund dated May 1, 1999, as amended from time to time, copies of which may be
obtained without charge by writing to Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders for Scudder Short Term Bond Fund
dated December 31, 1998, is incorporated by reference and is hereby deemed to be
part of this Statement of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES.........................................................................1
Investment Objective and Policies............................................................................1
High Quality Securities......................................................................................2
Master/feeder structure......................................................................................2
Specialized Investment Techniques............................................................................3
Investment Restrictions.....................................................................................17
PURCHASES............................................................................................................19
Additional Information About Opening An Account.............................................................19
Minimum balances............................................................................................19
Additional Information About Making Subsequent Investments..................................................19
Additional Information About Making Subsequent Investments by QuickBuy......................................20
Checks......................................................................................................20
Wire Transfer of Federal Funds..............................................................................20
Share Price.................................................................................................21
Share Certificates..........................................................................................21
Other Information...........................................................................................21
EXCHANGES AND REDEMPTIONS............................................................................................22
Exchanges...................................................................................................22
Redemption by Telephone.....................................................................................22
Redemption By QuickSell.....................................................................................23
Redemption by Mail or Fax...................................................................................23
Redemption by "Write-A-Check"...............................................................................24
Other Information...........................................................................................24
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................24
No-Load Concept.............................................................................................24
Internet access.............................................................................................25
Dividends and Capital Gains Distribution Options............................................................26
Scudder Investor Centers....................................................................................26
Reports to Shareholders.....................................................................................26
Transaction Summaries.......................................................................................27
THE SCUDDER FAMILY OF FUNDS..........................................................................................27
SPECIAL PLAN ACCOUNTS................................................................................................32
Scudder Retirement Plans: Profit-Sharing and Money Purchase Pension Plans for Corporations
and Self-Employed Individuals...............................................................................32
Scudder 401(k): Cash or Deferred Profit-Sharing Plan for Corporations and Self-Employed Individuals.........32
Scudder IRA: Individual Retirement Account.................................................................32
Scudder Roth IRA: Individual Retirement Account............................................................33
Scudder 403(b) Plan.........................................................................................34
Automatic Withdrawal Plan...................................................................................34
Group or Salary Deduction Plan..............................................................................34
Automatic Investment Plan...................................................................................34
Uniform Transfers/Gifts to Minors Act.......................................................................35
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS............................................................................35
PERFORMANCE INFORMATION..............................................................................................35
Average Annual Total Return.................................................................................35
Cumulative Total Return.....................................................................................36
Total Return................................................................................................36
SEC Yields..................................................................................................37
Comparison of Fund Performance..............................................................................37
ORGANIZATION OF THE FUNDS............................................................................................40
Personal Investments by Employees of the Adviser............................................................44
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
TRUSTEES AND OFFICERS................................................................................................45
REMUNERATION.........................................................................................................46
Responsibilities of the Board -- Board and Committee Meetings...............................................46
Compensation of Officers and Trustees.......................................................................47
DISTRIBUTOR..........................................................................................................47
TAXES ...............................................................................................................50
PORTFOLIO TRANSACTIONS...............................................................................................52
Brokerage Commissions.......................................................................................52
Portfolio Turnover..........................................................................................53
NET ASSET VALUE......................................................................................................53
ADDITIONAL INFORMATION...............................................................................................54
Experts.....................................................................................................54
Other Information...........................................................................................54
FINANCIAL STATEMENTS.................................................................................................55
RATINGS OF CORPORATE BONDS...........................................................................................55
GLOSSARY ............................................................................................................57
</TABLE>
ii
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
(See Fund Description in the Fund's prospectus.)
Scudder Funds Trust, a Massachusetts business trust is referred to
herein as the "Trust" of which Scudder Short Term Bond Fund ("Short Term Bond
Fund" or the "Fund") is a diversified, no-load series. The Trust is an open-end
management investment company which continuously offers and redeems its shares
at net asset value. The Fund is a company of the type commonly known as a mutual
fund.
Because of the Fund's investment considerations discussed herein and
its investment policies, investment in shares of the Fund is not intended to
provide a complete investment program for an investor. The value of the Fund's
shares when sold may be higher or lower than when purchased.
Unless otherwise stated, the Fund's objective and policies, are not
fundamental and may be changed without a shareholder vote. There can be no
assurance that the Fund will achieve its investment objective.
Investment Objective and Policies
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Fund may engage (such
as hedging, etc.) or a financial instrument which the Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investments, Inc. (the "Adviser"),
in its discretion, might, but is not required to, use in managing the Fund's
portfolio assets. The Adviser may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have a
material impact on the Fund's performance.
Short Term Bond Fund seeks to provide high income while managing its
portfolio in a way that is consistent with maintaining a high degree of
stability of shareholders' capital. It does this by investing mainly in bonds
with short remaining maturities. The dollar-weighted average effective maturity
of the Fund's portfolio may not exceed three years. Within this limitation, the
Fund may purchase individual securities with remaining stated maturities of
greater than three years.
The Fund invests at least 65% of its net assets in a managed portfolio
of bonds consisting of:
o U.S. Government securities, including bonds, notes and bills issued by
the U.S. Treasury, and securities issued by agencies and
instrumentalities of the U.S. Government;
o Corporate debt securities, such as bonds, notes and
debentures;
o Mortgage-backed securities; and
o Other asset-backed securities.
Other eligible investments for the Fund are as follows:
o Money market instruments which are comprised of commercial
paper, bank obligations (i.e., certificates of deposit and
bankers' acceptances) and repurchase agreements;
o Privately placed obligations (including restricted
securities); and
o Foreign securities, including non-U.S. dollar-denominated
securities and U.S. dollar-denominated debt securities issued
by foreign issuers and foreign branches of U.S. banks.
In addition, the Fund may purchase indexed securities, zero coupon
securities, trust preferred securities, warrants, illiquid securities,
securities on a when-issued or forward delivery basis and may engage in currency
<PAGE>
transactions, reverse repurchase agreements and dollar roll transactions and
strategic transactions. See "Specialized Investment Techniques" and "Investment
Restrictions" for more information.
To meet its objective, the Fund's investment adviser, Scudder Kemper
Investments, Inc. (the "Adviser"), actively manages the Fund's portfolio.
Investment decisions are based on general economic and financial trends, such as
domestic and international economic developments, the outlook for the securities
markets, the level of interest rates and inflation, the supply and demand of
debt securities, and other factors. The composition of the Fund's portfolio is
also determined by individual security analysis. The Adviser's team of
experienced credit analysts actively monitors the credit quality of the
investments of the Fund.
The net asset value of the Fund is expected to fluctuate with changes
in interest rates and bond market conditions, although this fluctuation should
be more moderate than that of a fund with a longer average maturity. The
Adviser, however, will attempt to reduce principal fluctuation through, among
other things, diversification, credit analysis and security selection, and
adjustment of the Fund's average portfolio maturity. The Fund's share price
tends to rise as interest rates decline and decline as interest rates rise. In
periods of rising interest rates and falling bond prices, the Adviser may
shorten the Fund's average maturity to minimize the effect of declining bond
values on the Fund's net asset value. Conversely, during times of falling rates
and rising prices, a longer average maturity of up to three years may be sought.
When the Adviser believes economic or other conditions warrant, for temporary
defensive purposes the Fund may 100% of its assets in money market securities.
It is impossible to accurately predict for how long such alternative strategies
will be utilized.
The Fund's securities generally offer less current yield than
securities of lower quality (rated below BBB/Baa) or longer maturity, but
lower-quality securities generally have less liquidity, and tend to have greater
credit and market risk, and consequently more price volatility.
It is against the Fund's policy to make changes in the portfolio for
short-term trading purposes. However, the Fund may take advantage of
opportunities provided by temporary dislocations in the market to maintain
principal stability or enhance income.
High Quality Securities
The Fund emphasizes high quality investments. At least 65% of the
Fund's net assets will be invested in (1) obligations of the U.S. Government,
its agencies or instrumentalities, and (2) debt securities rated, at the time of
purchase, in one of the two highest ratings categories of Standard & Poor's
Corporation ("S&P") (AAA or AA) or Moody's Investors Service, Inc. ("Moody's")
(Aaa or Aa) or, if not rated, judged to be of comparable quality by the Adviser.
In addition, the Fund will not invest in any debt security rated at the time of
purchase lower than BBB by S&P or Baa by Moody's, or of equivalent quality as
determined by the Adviser. Should the rating of a portfolio security be
downgraded after being purchased by the Fund, the Adviser will determine whether
it is in the best interest of the Fund to retain or dispose of the security.
The U.S. Government securities in which the Fund may invest include (1)
securities issued and backed by the full faith and credit of the U.S.
Government, such as U.S. Treasury bills, notes and bonds; (2) securities,
including mortgage-backed securities, issued by an agency or instrumentality of
the U.S. Government, including those backed by the full faith and credit of the
U.S. Government, such as securities of the Export-Import Bank of the United
States, the General Services Administration and the Government National Mortgage
Association, and those issued by agencies and instrumentalities, such as Federal
Home Loan Banks and the Federal Home Loan Mortgage Corporation which, while
neither direct obligations of nor guaranteed by the U.S. Government, are backed
by the credit of the issuer itself and may be supported as well by the issuer's
right to borrow from the U.S. Treasury; and (3) securities of the U.S.
Government, its agencies or instrumentalities on a when-issued or forward
delivery basis. In addition, the Fund may invest in repurchase agreements with
respect to U.S. Government securities.
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master fund in a
master/feeder fund structure as described below.
2
<PAGE>
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Specialized Investment Techniques
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The Fund may
also invest in mortgage-backed securities, which are interests in pools of
mortgage loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
Fund may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities. When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
price volatility, affecting the price volatility of Fund's shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Because principal may be
prepaid at any time, mortgage-backed securities involve significantly greater
price and yield volatility than traditional debt securities. Some
mortgage-related securities (such as securities issued by the Government
National Mortgage Association) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage-backed securities or to the value of Fund shares.
Also, GNMA securities often are purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-
3
<PAGE>
through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Adviser determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs"). The Fund may invest in CMOs which
are hybrids between mortgage-backed bonds and mortgage pass-through securities.
Similar to a bond, interest and prepaid principal are paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. The Fund may invest in FHLMC CMOs
which are debt obligations of FHLMC issued in multiple classes having different
maturity dates and are secured by the pledge of a pool of conventional mortgage
loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest
on the CMOs are made semiannually, as opposed to monthly. The amount of
principal payable on each semiannual payment date is determined in accordance
with FHLMC's mandatory sinking fund schedule, which, in turn, is equal to
approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum
4
<PAGE>
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. Short Term Bond Fund will limit its purchases of mortgage-backed
securities or any other assets which, in the opinion of the Adviser, are
illiquid, in accordance with the nonfundamental investment restriction on
securities which are not readily marketable discussed below. As new types of
mortgage-related securities are developed and offered to investors, the Adviser
will, consistent with the Fund's investment objective, policies and quality
standards, consider making investments in such new types of mortgage-related
securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with Short Term Bond Fund's investment objectives and
policies, the Fund may invest in these and other types of asset-backed
securities that may be developed in the future. In general, the collateral
supporting these securities is of shorter maturity than mortgage loans and is
less likely to experience substantial prepayments with interest rate
fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust ("Trust") whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage or
loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Fund will not pay any additional or separate fees for
credit support. The
5
<PAGE>
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
The Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will depend on, among other things, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act of 1933 (the "1933 Act") may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Fund to dispose of any then existing holdings of such
securities.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of a Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Funds' net assets. The Trust's Board of Trustees has approved guidelines for use
by the Adviser in determining whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; (iii) in limited quantities after they have been
held for a specified period of time and other conditions are met pursuant to an
exemption from registration. Issuers of restricted securities may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Fund's decision to sell a
restricted or illiquid security and the point at which the Fund is permitted or
able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, a Fund may be required to
bear all or part of the registration expenses. A Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Adviser may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Convertible Securities. The Fund may invest in convertible securities, that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which Short Term Bond Fund may invest are
either fixed income or zero coupon debt securities which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and
6
<PAGE>
equity securities. Although to a lesser extent than with debt securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion or exchange feature, the market
value of convertible securities typically changes as the market value of the
underlying common stocks changes, and, therefore, also tends to follow movements
in the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock, although typically not as much as the underlying
common stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As debt securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all debt securities, there can be no assurance of income or principal
payments because the issuers of the convertible securities may default on their
obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Trust Preferred Securities. The Fund may invest in Trust Preferred Securities,
which are hybrid instruments issued by a special purpose trust (the "Special
Trust"), the entire equity interest of which is owned by a single issuer. The
proceeds of the issuance to the Fund of Trust Preferred Securities are typically
used to purchase a junior subordinated debenture, and distributions from the
Special Trust are funded by the payments of principal and interest on the
subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Fund, would be required to accrue daily for Federal income tax purposes, their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether the Fund receives any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act of 1933, as amended, and, unless and until registered, are
restricted securities; there can be no assurance as to the liquidity of Trust
Preferred Securities and the ability of holders of Trust Preferred Securities,
such as the Fund, to sell their holdings.
Real Estate Investment Trusts. The Fund may invest in REITs. REITs are sometimes
informally characterized as equity REITs, mortgage REITs and hybrid REITs.
Investment in REITs may subject the Fund to risks associated with the direct
ownership of real estate, such as decreases in real estate values, overbuilding,
increased competition and other risks related to local or general economic
conditions, increases in operating costs and property taxes, changes in zoning
laws, casualty or condemnation losses, possible environmental liabilities,
regulatory limitations on rent and fluctuations in rental income. Equity REITs
generally experience these risks directly through fee or leasehold interests,
whereas mortgage REITs generally experience these risks indirectly through
mortgage interests, unless the mortgage REIT forecloses on the underlying real
estate. Changes in interest rates may also affect the value of a Fund's
investment in REITs. For instance, during periods of declining interest rates,
certain mortgage REITs may hold mortgages that the mortgagors elect to prepay,
which prepayment may diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986 as amended (the "Code"), and to maintain exemption from the registration
requirements of the Investment Company Act of 1940 (the "1940 Act"). By
investing in REITs indirectly through the Fund, a shareholder will bear not only
his or her proportionate share of the expenses of the
7
<PAGE>
Fund, but also, indirectly, similar expenses of the REITs. In addition, REITs
depend generally on their ability to generate cash flow to make distributions to
shareholders.
Zero Coupon Securities. The Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon securities which are convertible into common stock offer the opportunity
for capital appreciation as increases (or decreases) in market value of such
securities usually follow the movements in the market value of the underlying
common stock. Zero coupon convertible securities generally are expected to be
less volatile than the underlying common stocks, as they usually are issued with
maturities of 15 years or less and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the Division of Investment
Management of the SEC no longer considers such privately stripped obligations to
be U.S. Government securities, as defined in the 1940 Act.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself (see "TAXES").
Indexed Securities. The Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
8
<PAGE>
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
Dollar Roll Transactions. The Fund may enter into "dollar roll" transactions,
which consist of the sale by the Fund to a bank or broker/dealer (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Fund receives a fee from the counterparty
as consideration for entering into the commitment to purchase. Dollar rolls may
be renewed over a period of several months with a different purchase and
repurchase price fixed and a cash settlement made at each renewal without
physical delivery of securities. Moreover, the transaction may be preceded by a
firm commitment agreement pursuant to which the Fund agrees to buy a security on
a future date.
The Fund will not use such transactions for leveraging purposes and,
accordingly, will segregate cash or other liquid assets in an amount sufficient
to meet its purchase obligations under the transactions. The Fund will also
maintain asset coverage of at least 300% for all outstanding firm commitments,
dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the Investment Company Act of
1940 (the "1940 Act") as borrowings of the Fund because they involve the sale of
a security coupled with an agreement to repurchase. Like all borrowings, a
dollar roll involves costs to the Fund. For example, while the Fund receives a
fee as consideration for agreeing to repurchase the security, the Fund forgoes
the right to receive all principal and interest payments while the counterparty
holds the security. These payments to the counterparty may exceed the fee
received by the Fund, thereby effectively charging the Fund interest on its
borrowing. Further, although the Fund can estimate the amount of expected
principal prepayment over the term of the dollar roll, a variation in the actual
amount of prepayment could increase or decrease the cost of the Fund's
borrowing.
The entry into dollar rolls involves potential risks of loss which are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security which the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
The Trustees of the Trust, on behalf of Short Term Bond Fund, have
adopted guidelines to ensure that those securities received are substantially
identical to those sold. To reduce the risk of default, the Fund will engage in
such transactions only with banks and broker/dealers selected pursuant to such
guidelines.
Repurchase Agreements. The Fund may enter into repurchase agreements with member
banks of the Federal Reserve System or any domestic broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations a Fund may purchase or at least equal to
that of issuers of commercial paper rated within the two highest grades assigned
by Moody's or S&P.
A repurchase agreement provides a means for a Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which a Fund
acquires a security ("Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Obligations subject
to a repurchase agreement are held in a segregated account and the value of such
obligations is kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the Obligation. Obligations will be held by the Funds' custodian or in
the Federal Reserve Book Entry System.
9
<PAGE>
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from a Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to a Fund's investment restriction applicable
to loans. It is not clear whether a court would consider the Obligation
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in the price of the
Obligation. If the court characterizes the transaction as a loan and a Fund has
not perfected a security interest in the Obligation, a Fund may be required to
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt obligation purchased for a Fund, the Adviser seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the Obligation, in which case a Fund
may incur a loss if the proceeds to that Fund of its sale of the securities
underlying the repurchase agreement to a third party are less than the
repurchase price. However, if the market value (including interest) of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), a Fund will direct the seller of the Obligation to
deliver additional securities so that the market value (including interest) of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that a Fund will be unsuccessful in seeking to
impose on the seller a contractual obligation to deliver additional securities.
The Fund may enter into repurchase commitments with any party deemed
creditworthy by the Adviser, including foreign banks and broker/dealers, if the
transaction is entered into for investment purposes and the counterparty's
creditworthiness is at least equal to that of issuers of securities which the
Fund may purchase. Such transactions may not provide the Fund with collateral
marked-to-market during the term of the commitment.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
When-Issued Securities. The Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. The price of such securities, which
is generally expressed in yield terms, is generally fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued or
forward delivery securities take place at a later date. During the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest on the when-issued or forward delivery security accrues to a Fund.
To the extent that assets of a Fund are not invested prior to the settlement of
a purchase of securities, a Fund will earn no income; however, it is intended
that a Fund will 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, it is intended that a Fund will purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes the commitment to
purchase a security on a when-issued or forward delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of 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 their purchase of securities
on a when-issued or forward delivery basis. The Fund will establish a segregated
account for commitments for when-issued or forward delivery securities as
described above.
Euro conversion. The new European currency, the Euro, may result in
uncertainties for European securities and operation of the Fund. The Euro was
introduced on January 1, 1999 by eleven countries of the European Economic and
Monetary Union (EMU). The introduction of the Euro requires the redenomination
of European debt and equity securities over a period of time, which may result
in various accounting differences and/or tax treatments. The Adviser is working
to address Euro-related
10
<PAGE>
issues and understands that other key service providers are taking similar
steps. However, at this time no one knows precisely what the degree of impact
will be. To the extent that the market impact or effect on a fund holdings is
negative, it could hurt the fund's performance. Additional questions are raised
by the fact that certain other European Community members, including the United
Kingdom, did not officially implement the Euro on January 1, 1999.
Foreign Securities. The Fund may invest in securities of foreign issuers.
Investing in foreign issuers involves certain special considerations, including
those set forth below, which are not typically associated with investing in
United States issuers. As foreign companies are not generally subject to uniform
accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may be
less publicly available information about a foreign company than about a
domestic company. Volume and liquidity in most foreign bond markets is less than
in the United States and, at times, volatility of price can be greater than in
the United States. There is generally less government supervision and regulation
of brokers and listed companies than in the United States. Mail service between
the United States and foreign countries may be slower or less reliable than
within the United States, thus increasing the risk of delayed settlements of
portfolio transactions or loss of certificates for portfolio securities.
Securities issued or guaranteed by foreign national governments, their agencies,
instrumentalities, or political subdivisions, may or may not be supported by the
full faith and credit and taxing power of the foreign government. The Fund's
ability and decisions to purchase and sell portfolio securities may be affected
by laws or regulations relating to the convertibility and repatriation of
assets. Further, it may be more difficult for the Fund's agents to keep
currently informed about corporate actions which may affect the prices of
portfolio securities. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect United States
investments in those countries. In addition, it may be more difficult to obtain
and enforce a judgment against a foreign issuer. Foreign securities may be
subject to foreign government taxes which will reduce the yield on such
securities. A shareholder of the Fund will not 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.
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers and are required to be secured continuously by collateral in cash
or liquid assets maintained on a current basis at an amount at least equal to
the market value and accrued interest of the securities loaned. The Fund has the
right to call a loan and obtain the securities loaned on no more than five days'
notice. During the existence of a loan, the Fund will continue to receive the
equivalent of any distributions paid by the issuer on the securities loaned and
will also receive compensation based on investment of the collateral. As with
other extensions of credit there are risks of delay in recovery or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, the loans will be made only to firms deemed by the Adviser to be of
good standing. 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.
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as, hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio, or enhancing potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors or collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of the Fund's assets will be committed to Strategic Transactions entered into
for non-hedging purposes. Any or all of these investment techniques may be used
at any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions.
11
<PAGE>
The ability of the Fund to utilize these Strategic Transactions successfully
will depend on the Adviser's ability to predict pertinent market movements,
which cannot be assured. The Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments.
Strategic Transactions will not be used to alter the fundamental investment
purposes and characteristics of a Fund and the Fund will segregate assets (or as
provided by applicable regulations, enter into certain offsetting positions) to
cover its obligations under options, futures and swaps to limit leveraging of a
Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Short Term Bond Fund assets in special accounts,
as described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
12
<PAGE>
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Fund will engage in OTC option transactions only
with U.S. government securities dealers recognized by the Federal Reserve Bank
of New York as "primary dealers" or broker/dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of A-1 from S&P or
P-1 from Moody's or an equivalent rating from any nationally recognized
statistical rating organization ("NRSRO") or, in the case of OTC currency
transactions, are determined to be of equivalent credit quality by the Adviser.
The staff of the SEC currently takes the position that OTC options purchased by
the Fund, and portfolio securities "covering" the amount of the Fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 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
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities.
13
<PAGE>
The Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio management and return enhancement purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of an option on futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of, the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties which have received (or the guarantors of the
obligations of which have received) a credit rating of
14
<PAGE>
A-1 or P-1 by S&P or Moody's, respectively, or that have an equivalent rating
from a NRSRO or are determined to be of equivalent credit quality by the
Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Adviser considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If the
Fund enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions in which the Fund may
engage 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.
15
<PAGE>
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Fund expects to enter
into these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch the Fund will segregate
assets (or enter into any offsetting position) to cover obligations under swaps,
the Adviser and the Fund believe such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to its borrowing restrictions. The Fund will not enter into any swap,
cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed-income instruments
are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets
16
<PAGE>
equal to the excess of the index value over the exercise price on a current
basis. A put option written by the Fund requires the Fund to segregate cash or
liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate cash or liquid assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
Investment Restrictions
The following restrictions are fundamental policies and may not be
changed with respect to the Fund without the approval of a majority of the
outstanding voting securities of the Fund which, under the 1940 Act and the
rules thereunder and as used in this combined Statement of Additional
Information, means the lesser of (1) 67% or more of the voting securities of the
Fund present at such meeting, if the holders of more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy, or (2) more
than 50% of the outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified series of an
open-end management investment company. In addition, as a matter of fundamental
policy, the Fund may not:
17
<PAGE>
(1) borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(3) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(4) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(5) purchase physical commodities or contracts relating to
physical commodities;
(6) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
and
(7) concentrate its investments in a particular industry, as that
term is used in the 1940 Act, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time.
The Trustees of the Trust have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without requiring prior notice to or approval
of shareholders.
As a matter of non-fundamental policy the Fund does not currently
intend to:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
(2) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(3) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(4) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts 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); and
(6) lend portfolio securities in an amount greater than 5% of its
total assets.
Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of available
cash consistent with the Fund's repurchase agreement procedures, not repurchase
commitments entered into for general investment purposes. In addition, for the
Fund's policy regarding its investments
18
<PAGE>
in the securities of issuers having their principal business activities in the
same industry, collateralized mortgage obligations and asset-backed securities
are considered to be separate industries.
PURCHASES
(See "How to Buy Shares" in the Fund's prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid to the
Fund) for any non-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of the
account. The Fund will mail the proceeds of the redeemed account to the
shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
19
<PAGE>
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Fund or
the principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
20
<PAGE>
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal underwriter,
each has the right to limit the amount of purchases by, and to refuse to sell
to, any person. The Trustees and the Distributor may suspend or terminate the
offering of shares of the Fund at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
21
<PAGE>
EXCHANGES AND REDEMPTIONS
(See "How to Sell or Exchange Shares" in a Fund's prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange may be
either an additional investment into an existing account or may involve opening
a new account in the other fund. When an exchange involves a new account, the
new account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line"(SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges to a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration, tax
identification number, address, and account options/features as the account of
origin. Exchanges into an existing account must be for $100 or more. If the
account receiving the exchange proceeds is different in any respect, the
exchange request must be in writing and must contain an original signature
guarantee as described under "Policies You Should Know About -- Signature
guarantees" in a Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day will ordinarily be executed at respective net asset
values determined on that day. Exchange orders received after the close of
trading will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund through Scudder's Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the telephone or in writing. Automatic Exchanges will continue
until the shareholder requests by telephone or in writing to have the feature
removed, or until the originating account is depleted. The Trust and the
Transfer Agent each reserves the right to suspend or terminate the privilege of
the Automatic Exchange Program at any time.
No commission is charged to the shareholder for any exchange described
above. An exchange into another Scudder fund is a redemption of shares, and
therefore may result in tax consequences (gain or loss) to the shareholder, and
the proceeds of such exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Trust employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Trust does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Trust will not be liable for acting upon
instructions communicated by telephone that it reasonably believes to be
genuine. The Trust, the Funds and the Transfer Agent each reserves the right to
suspend or terminate the privilege of exchanging by telephone or fax at any
time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from the Distributor a prospectus of the Scudder fund
into which the exchange is being contemplated. The exchange privilege may not be
available for certain Scudder funds or classes thereof. For more information,
please call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption by Telephone
Shareholders currently receive the right, automatically without having
to elect it, to redeem by telephone up to $100,000 and have the proceeds mailed
to their address of record. Shareholders may also request to have the proceeds
mailed or wired to their predesignated bank account. In order to request wire
redemptions by telephone, shareholders must have completed and returned to the
Transfer Agent the application, including the designation of a bank account to
which the redemption proceeds are to be sent.
22
<PAGE>
(a) NEW INVESTORS wishing to establish telephone redemption to a
designated bank account must complete the appropriate section
on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) planholders) who wish to establish telephone redemption
to a designated bank account or who want to change the bank
account previously designated to receive redemption payments
should either return a Telephone Redemption Option Form
(available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. An original signature and an original
signature guarantee are required for each person in whose name
the account is registered.
Telephone redemption is not available with respect to shares
represented by share certificates or shares held in IRA accounts.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating that a savings bank receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their banks and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
Redemption requests by telephone (technically a repurchase by agreement
between a Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared.
Redemption By QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of a Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4:00 p.m. eastern time, shares will be redeemed at the net
asset value per share calculated at the close of trading on the day of your
call. QuickSell requests received after the close of regular trading on the
Exchange will begin their processing and be redeemed at the net asset value
calculated the following business day. QuickSell transactions are not available
for Scudder IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
Redemption by Mail or Fax
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor/executrix, certificates of corporate authority and waivers of tax
(required in some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to redemptions to ensure
that all necessary documents accompany the request. When shares are held in the
name of a corporation, trust, fiduciary agent, attorney or partnership, the
Transfer Agent requires, in addition to the stock power, certified evidence of
authority to sign. These procedures are for the protection of shareholders and
should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within five business days after receipt by the Transfer Agent of a
request for
23
<PAGE>
redemption that complies with the above requirements. Delays in payment of more
than seven days of payment for shares tendered for redemption may result but
only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information please call 1-800-225-5163.
Redemption by "Write-A-Check"
All new investors and existing shareholders of the Fund who apply to
the Custodian for checks may use them to pay any person, provided that each
check is for at least $100 and not more than $5 million. By using the checks,
the shareholder will receive daily dividend credit on his or her shares until
the check has cleared the banking system. Investors who purchased shares by
check may write checks against those shares only after they have been on the
Fund's books for seven business days. Shareholders who use this service may also
use other redemption procedures. No shareholder may write checks against
certificated shares. Short Term Bond Fund pays the bank charges for this
service. However, the Fund will review the cost of operation periodically and
reserves the right to determine if direct charges to the persons who avail
themselves of this service would be appropriate. The Trust, on behalf of Short
Term Bond Fund, the Transfer Agent and the Custodian each reserves the right at
any time to suspend or terminate the "Write-A-Check" procedure. Checks will be
returned by the Custodian if there are insufficient shares to meet the
withdrawal amount. Potential fluctuations in the per share value of Short Term
Bond Fund should be considered in determining the amount of the check. An
investor should not attempt to close an account by check, because the exact
balance at the time the check clears will not be known when the check is
written.
Other Information
If the shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed may be more or less than a shareholder's cost depending upon the net
asset value at the time the redemption is made. The Trust does not impose a
redemption charge, although a wire charge may be applicable for redemption
proceeds wired to an investor's bank account. Redemption of shares, including an
exchange into another Scudder fund, may result in tax consequences (gain or
loss) to the shareholder, and the proceeds of such redemptions may be subject to
backup withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
The determination of net asset value, and a shareholder's right to
redeem shares and to receive payment therefore may be suspended at times during
which (a) the Exchange is closed, other than customary weekend and holiday
closings, (b) trading on said Exchange is restricted, (c) an emergency exists as
a result of which disposal by a Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for a Fund fairly to determine
the value of its net assets, or (d) a governmental body having jurisdiction over
the Trust may by order permit such a suspension for the protection of the
Trust's shareholders; provided that applicable rules and regulations of the
Securities and Exchange Commission ("SEC") (or any succeeding governmental
authority) shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "How to invest in the funds" in a Fund's prospectus.)
No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or
24
<PAGE>
maintenance of shareholder accounts. Asset-based sales charges and service fees
are typically paid pursuant to distribution plans adopted under 12b-1 under the
1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase pure no- load
to distinguish Scudder funds from other no-load mutual funds. Scudder pioneered
the no-load concept when it created the nation's first no-load fund in 1928, and
later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds pure no-load fund over investing
the same amount in a load fund that collects an 8.50% front-end load, a load
fund that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund
charging only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the
chart show the value of an account assuming a constant 10% rate of return over
the time periods indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
No-Load Fund with
Years Scudder 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1
No-Load Fund 12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://www.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
The Adviser has communicated with shareholders and other interested
parties on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
25
<PAGE>
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See
"Purchases" in the Funds' prospectuses for the address.
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Purchases" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities,
26
<PAGE>
operations, changes in net assets and financial highlights. The Trust presently
intends to distribute to shareholders informal quarterly reports during the
intervening quarters, containing a statement of the investments of the Funds.
Transaction Summaries
Annual summaries of all transactions in the Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
Scudder Money Market Series+ seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series+ seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series+ seeks to provide investors with
as high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
- --------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
27
<PAGE>
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide high income while
managing its portfolio in a way that is consistent with maintaining a
high degree of stability of shareholders' capital. It does this by
investing mainly in bonds with short remaining maturities.
Scudder GNMA Fund seeks to provide high income. It does this by
investing mainly in "Ginnie Maes": mortgage-backed securities that are
issued or guaranteed by the Government National Mortgage Association
(GNMA).
28
<PAGE>
Scudder Income Fund seeks to provide high income while managing its
portfolio in a way that is consistent with the prudent investment of
shareholders' capital. It does this by using a flexible investment
program that emphasizes high-grade bonds.
Scudder Corporate Bond Fund seeks to provide high income. It does this
by investing mainly in corporate bonds.
Scudder High Yield Bond Fund seeks to provide high income and,
secondarily, capital appreciation . It does this by investing mainly in
lower rated, higher yielding corporate bonds, often called junk bonds.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
investment approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder Select 500 Fund seeks to provide long-term growth and income
through investment in selected stocks of companies in the S&P 500
Index.
29
<PAGE>
Scudder 500 Index Fund seeks to provide investment results that, before
expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's
500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Select 1000 Growth Fund seeks to provide long-term growth of
capital through investment in selected stocks of companies in the
Russell 1000 Growth Index.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
- --------
** Only the Scudder Shares are part of the Scudder Family of Funds.
30
<PAGE>
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
- --------
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
31
<PAGE>
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor .
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
32
<PAGE>
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
<TABLE>
<CAPTION>
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ----------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
<TABLE>
<CAPTION>
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ---------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
33
<PAGE>
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Policies You Should Know About -- Signature guarantees" in the
Fund's prospectus. Any such requests must be received by the Fund's transfer
agent ten days prior to the date of the first automatic withdrawal. An Automatic
Withdrawal Plan may be terminated at any time by the shareholder, the Trust or
its agent on written notice, and will be terminated when all shares of the Fund
under the Plan have been liquidated or upon receipt by the Trust of notice of
death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the [Trust, Corporation] and its agents reserve the right to establish
a maintenance charge in the future depending on the services required by the
investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of
34
<PAGE>
regular investment program may be suitable for various investment goals such as,
but not limited to, college planning or saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Understanding Distributions and Taxes" in a Fund's prospectus.)
The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income (defined under "GLOSSARY") which
includes any excess of net realized short-term capital gains over net realized
long-term capital losses. A Fund may follow the practice of distributing the
entire excess of net realized long-term capital gains over net realized
short-term capital losses. However, the Fund may retain all or part of such gain
for reinvestment, after paying the related income taxes for which shareholders
may then be asked to claim a credit against their federal income tax liability.
(See "TAXES.") If the Fund does not distribute an amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, it may be subject to such a tax. (See "TAXES.") In certain circumstances,
the Fund may determine that it is in the interest of shareholders to distribute
less than such amount or less than substantially all of its investment company
taxable income.
Dividends will be declared daily and distributions of net investment
income will be made monthly. Distributions of net realized capital gains, if
any, will be made in November or December to prevent application of a federal
excise tax. An additional distribution may be made, if necessary. Any dividends
or capital gains distributions declared in October, November or December with a
record date in such a month and paid during the following January will be
treated by shareholders for federal income tax purposes as if received on
December 31 of the calendar year declared. Both types of distributions will be
made in shares of the Fund and confirmations will be mailed to each shareholder
unless a shareholder has elected to receive cash, in which case a check will be
sent.
PERFORMANCE INFORMATION
(See "Financial Highlights" in the Fund's prospectus.)
From time to time, quotations of the Funds' performances may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Average Annual Total Return
Average annual total return is the average annual compounded rate of
return for the periods of one year, five years, and ten years, all ended on the
last day of a recent calendar quarter. Average annual total return quotations
reflect changes in the price of a Fund's shares and assume that all dividends
and capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of the
applicable period.
35
<PAGE>
Average Annual Total Return for periods ended December 31, 1998
One Year Five Years Ten Years
Short Term Bond Fund 4.34%* 4.35% 7.23%(1)
(1) The foregoing average annual total return includes the period
prior to July 3, 1989, during which the Fund operated under
the investment objective and policies of Scudder Target Fund
General 1994 Portfolio. Average annual total return figures
for the periods prior to July 3, 1989 should not be considered
representative of the present Fund. Since adopting its current
objective, the Fund's average annual return is 6.77%.
* If the Adviser had not maintained expenses, the average annual
total return for the one year period would have been lower.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is
the value, at the end of the
applicable period, of a
hypothetical $1,000 investment
made at the beginning of the
applicable period.
Cumulative Total Return for periods ended December 31, 1998
One Year Five Years Ten Years
Short Term Bond Fund 6.95%* 6.00% 7.43%(1)
(1) The foregoing cumulative total return includes the period
prior to July 3, 1989, during which the Fund operated under
the investment objective and policies of Scudder Target Fund
General 1994 Portfolio. Cumulative total return figures for
the periods prior to July 3, 1989 should not be considered
representative of the present Fund. Since adopting its current
objective, the Fund's cumulative return is 86.39%.
* If the Adviser had not maintained expenses, the average annual
total return for the one year period would have been lower.
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
36
<PAGE>
SEC Yields
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield, sometimes
referred to as the Fund's "SEC yield," is calculated by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
<TABLE>
<CAPTION>
<S> <C> <C>
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
The SEC net annualized yield for the 30-day period ended March 31, 1999
was 5.19%.
Quotations of a Fund's performance are based on historical earnings and
are not intended to indicate future performance of a Fund. An investor's shares
when redeemed may be worth more or less than their original cost. Performance of
a Fund will vary based on changes in market conditions and the level of a Fund's
expenses. In periods of declining interest rates a Fund's quoted yield will tend
to be somewhat higher than prevailing market rates, and in periods of rising
interest rates a Fund's quoted yield will tend to be somewhat lower.
Comparison of Fund PerformanceComparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 1000 Growth Index, the Russell 2000 Index, and
statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Funds, the Funds' portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Funds. In addition, the amount of assets that the Adviser has under management
in various geographical areas may be quoted in advertising and marketing
materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
37
<PAGE>
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
38
<PAGE>
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
39
<PAGE>
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
ORGANIZATION OF THE FUNDS
(See "Who Manages the Funds" in a Fund's prospectus.)
The Fund is a diversified series of Scudder Funds Trust, a
Massachusetts business trust established under a Declaration of Trust dated July
24, 1981, as amended. The name of the Trust was changed, effective July 3, 1989,
from Scudder Target Fund to Scudder Funds Trust. On December 23, 1987 the par
value of the shares of beneficial interest of the Trust was changed from no par
value to $.01 par value per share. The Trust's authorized capital consists of an
unlimited number of shares of beneficial interest of $.01 par value, issued in
separate series. Each share of each series represents an equal proportionate
interest in that series with each other share of that series. Shareholders have
one vote for each share held on matters on which they are entitled to vote.
Effective as of July 3, 1989, two series of the Trust, the General 1990
Portfolio and U.S. Government 1990 Portfolio, sold their assets to another
series of the Trust, the General 1994 Portfolio, in exchange for shares of the
1994 Portfolio, as approved by shareholders on June 26, 1989. Effective as of
the same date, the General 1994 Portfolio changed its name to Scudder Short Term
Bond Fund and changed its investment objectives from current income, capital
preservation and possible capital appreciation to its current investment
objective.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with such a share of the general
liabilities of the Trust. If a series were unable to meet its obligations, the
assets of all other series may in some circumstances be available to creditors
for that purpose, in which case the assets of such other series could be used to
meet liabilities which are not otherwise properly chargeable to them. Expenses
with respect to any two or more series are to be allocated in proportion to the
asset value of the respective series except where allocations of direct expenses
can otherwise be fairly made. The officers of the Trust, subject to the general
supervision of the Trustees, have the power to determine which liabilities are
allocable to a given series, or which are general or allocable to two or more
series. In the event of the dissolution or liquidation of the Trust or any
series, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such shares available for distribution to
shareholders.
40
<PAGE>
Shares of the Trust entitle their holders to one vote per share;
however, separate votes are taken by each series on matters affecting an
individual series. For example, a change in investment policy for a series would
be voted upon only by shareholders of the series involved. Additionally,
approval of the investment management agreement is a matter to be determined
separately by each series. Approval by the shareholders of one series is
effective as to that series whether or not enough votes are received from the
shareholders of the other series to approve such agreement as to the other
series.
The Trustees have the authority to designate additional series and to
designate the relative rights and preferences as between the different series.
All shares issued and outstanding will be fully paid and non-assessable by the
Trust, and redeemable as described in this Statement of Additional Information
and in each Fund's prospectus.
The Trustees, in their discretion, may authorize the division of shares
of a Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability 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
or her office.
INVESTMENT ADVISER
(See "Who Manages the Funds" in the Fund's prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928 it introduced the first no-load mutual fund to
the public. In 1953 the Adviser introduced Scudder International Fund, Inc., the
first mutual fund available in the U.S. investing internationally in securities
of issuers in several foreign countries. The predecessor firm reorganized from a
partnership to a corporation on June 28, 1985. On June 26, 1997, Scudder,
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which Scudder and Zurich agreed to form
an alliance. On December 31, 1997, Zurich acquired a majority interest in
Scudder, and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part
of Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder International Fund, Inc., Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free
Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc. and The
Japan Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
41
<PAGE>
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLinkSM Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLinkSM Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA InvestmentLinkSM
is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Funds may invest, the conclusions and
investment decisions of the Adviser with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a Fund and also for other
clients advised by the Adviser. Investment decisions for a Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a Fund. Purchase and sale orders for a Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The transaction between Scudder and Zurich resulted in the assignment
of the Funds' investment management agreements with Scudder, those agreements
were deemed to be automatically terminated at the consummation of the
transaction. In anticipation of the transaction, however, the Trustees approved
new investment management agreements between the Funds and the Adviser on August
6, 1997. At the special meeting of the Funds' shareholders held on October 27,
1997, the shareholders also approved the investment management agreements. The
investment management agreements became effective as of December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreements with Scudder Kemper were deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with Scudder Kemper, which is substantially
identical to the current investment management agreement, except for the dates
of execution and termination. The Agreement became effective September 7, 1998,
upon the termination of the then current investment management agreement and was
approved at a shareholder meeting held on December 15, 1998.
The Agreements dated September 7, 1998 were approved by the Trustees on
August 10, 1998. The Agreements will continue in effect until September 30, 1999
and from year to year thereafter only if their continuance is approved annually
by the vote of a majority of those Trustees who are not parties to such
Agreements or interested persons of the
42
<PAGE>
Adviser or the Trust, cast in person at a meeting called for the purpose of
voting on such approval, and either by a vote of the Trust's Trustees or of a
majority of the outstanding voting securities of the respective Fund. The
Agreements may be terminated at any time without payment of penalty by either
party on sixty days' written notice and automatically terminate in the event of
their assignment.
Under the Agreement, the Adviser regularly provides the Fund with
continuing investment management for the Fund's portfolio consistent with the
Fund's investment objective, policies and restrictions and determines what
securities shall be purchased, held or sold, and what portion of the Fund's
assets shall be held uninvested, subject always to the provisions of the Trust's
Declaration of Trust and By-Laws, the 1940 Act, the Internal Revenue Code of
1986 and the Fund's investment objectives, policies and restrictions, as each
may be amended, and subject further to such policies and instructions as the
Trustees of the Trust may from time to time establish. The Adviser also advises
and assists the officers of the Trust in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committee of the Trustees regarding the conduct of the business of the Trust.
Under the Agreement, the Adviser also renders significant
administrative services (not otherwise provided by third parties) necessary for
the Fund's operations as an open-end investment company including, but not
limited to, preparing reports and notices to the Trustees and shareholders;
supervising, negotiating contractual arrangements with, and monitoring various
third-party service providers to the Fund (such as the Fund's transfer agent,
pricing agents, custodian, accountants and others); preparing and making filings
with the SEC and other regulatory agencies; assisting in the preparation and
filing of the Fund's federal, state and local tax returns; preparing and filing
each Fund's federal excise tax returns; assisting with investor and public
relations matters; monitoring the valuation of securities and the calculation of
net asset value; monitoring the registration of shares of the Fund under
applicable federal and state securities laws; maintaining the Fund's books and
records to the extent not otherwise maintained by a third party; assisting in
establishing accounting policies for the Fund; assisting in the resolution of
accounting and legal issues; establishing and monitoring the Fund's operating
budget; processing the payment of the Fund's bills; assisting the Fund in, and
otherwise arranging for, the payment of distributions and dividends and
otherwise assisting a Fund in the conduct of its business, subject to the
direction and control of the Trustees.
The Adviser pays the compensation and expenses of the Trust except
those for attending Board and committee meetings outside New York, New York or
Boston, Massachusetts of all Trustees, officers and executive employees of the
Trust affiliated with the Adviser and makes available, without expense to a
Fund, the services of the Adviser's directors, officers and employees as may
duly be elected officers, subject to their individual consent to serve and to
any limitations imposed by law, and provides the Trust's office space and
facilities and provides investment advisory, research and statistical facilities
and all clerical services relating to research, statistical and investment work.
For these services, Short Term Bond Fund pays the Adviser a fee at an
annual rate of 0.60% of the first $500 million of average daily net assets,
0.50% of the next $500 million of such assets, 0.45% of the next $500 million of
such assets, 0.40% of the next $500 million of such assets, 0.375% of the next
$1 billion of such assets and 0.35% of such assets in excess of $3 billion. For
the fiscal years ended December 31, 1996 and 1997 the investment management fees
for Short Term Bond Fund amounted to $8,232,708 and $6,769,577, respectively.
Effective October 1, 1998, the Adviser had agreed not to impose all or a portion
of the Fund's management fee until September 30, 1999 in order to maintain the
annualized expenses of the Fund at not more than 0.85% of average daily net
assets. For the fiscal year ended December 31, 1998, the Adviser did not impose
a portion of its management fee amounting to $6,802, and the amount imposed was
$5,843,775. This was equivalent to an annualized effective rate of 0.54% of the
Fund's daily net assets. During the year ended December 31, 1998, the Adviser
reimbursed the Fund $12,808,543 for losses incurred in connection with certain
portfolio transaction, and in addition $150,000 has been credited to capital and
is due from the Adviser at December 31, 1998.
The fees are payable monthly, provided the Fund will make such interim
payments as may be requested by the Adviser not to exceed 75% of the amount of
the fee then accrued on the books of a Fund and unpaid.
The yield on shares of a Fund will be increased to the extent that the
Adviser maintains a Fund's expenses, and thereafter will be reduced to the
extent that full payment by a Fund of the fee and expenses is instituted.
Under the Agreement, the Fund is responsible for all of its other
expenses including: fees and expenses incurred in connection with membership in
investment company organizations; brokerage commissions; legal, auditing
43
<PAGE>
or accounting expenses; taxes or governmental fees; the fees and expenses of the
Transfer Agent; and any other expenses, including clerical expense, of issue,
redemption or repurchase of shares; the expenses of and fees for registering or
qualifying securities for sale; the fees and expenses of the Trustees, officers
and employees of the Trust who are not affiliated with the Adviser; the cost of
printing and distributing reports and notices to shareholders; and the fee or
disbursements of custodians. The Fund may arrange to have third parties assume
all or part of the expenses of sale, underwriting and distribution of shares of
the Fund. The Fund is also responsible for its expenses incurred in connection
with litigation, proceedings and claims and the legal obligation it may have to
indemnify officers and Trustees of the Trust with respect thereto.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Fund, has the non-exclusive
right to use and sublicense the Scudder name and marks as part of its name, and
to use the Scudder Marks in the Trust's investment products and services.
In reviewing the terms of the Agreements and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Trust or the Adviser are represented by independent counsel at the Fund's
expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Funds that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers may have dealings with the Funds as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Funds.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Funds. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
44
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
<S> <C> <C> <C>
Daniel Pierce (65)*#+ President and Managing Director of Scudder Director, Vice
Trustee Kemper Investments, Inc. President and Assistant
Treasurer
Henry P. Becton, Jr. (55) Trustee President and General Manager, --
125 Western Ave. WGBH Educational Foundation
Allston, MA 02134
Dawn-Marie Driscoll (52) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
Peter B. Freeman (66) Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
George M. Lovejoy, Jr. (69)# Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Suite 543 investment trust)
Boston, MA 02109
Wesley W. Marple, Jr. (67)# Trustee Professor of Business --
Northeastern University Administration
413 Hayden Hall Northeastern University, College
360 Huntington Ave. of Business Administration
Boston, MA 02115
Kathryn L. Quirk (46)*#++ Trustee, Vice Managing Director of Scudder Director, Senior Vice
President and Kemper Investments, Inc. President, Chief Legal
Assistant Secretary Officer and Assistant
Clerk
Jean C. Tempel (56) Trustee Venture Partner, Internet --
Internet Capital Group Capital Group Corp.
Ten Post Office Square
Suite 1325
Boston, MA 02109-4603
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Thomas W. Joseph (59)+ Vice President Senior Vice President of Scudder Director, Vice
Kemper Investments, Inc. President, Treasurer
and Assistant Clerk
45
<PAGE>
Position with
Underwriter,
Name, Age Position Principal Scudder Investor
and Address with Trust Occupation** Services, Inc.
- ----------- ---------- ------------ --------------
Ann M. McCreary (42)++ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Caroline Pearson (37)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.,
Associate, Dechert Price &
Rhoads (law firm) 1989-1997
Steven A. Wohler (50)+ Vice President Managing Director of Scudder --
Kemper Investments, Inc.
* Mr. Pierce and Ms. Quirk are considered by the Trust and its counsel to be Trustees who are "interested
persons" of the Adviser or of the Trust, within the meaning of the 1940 Act.
** Unless otherwise stated, all Officers and Trustees have been associated with their respective company
for more than five years but not necessarily in the same capacity.
# Messrs. Lovejoy, Marple and Pierce and Ms. Quirk are members of the Executive Committee, which may
exercise all of the powers of the Trustees when the Trustees are not in session.
+ Address: Two International Place, Boston, Massachusetts 02110
++ Address: 345 Park Avenue, New York, New York 10154
</TABLE>
As of March 31, 1999, all Trustees and officers of Short Term Bond Fund
as a group owned beneficially (as that term is defined under Section 13(d) of
the Securities Exchange Act of 1934) less than 1% of the outstanding shares of
the Fund.
Certain accounts for which the Adviser acts as investment adviser owned
4,671,920 shares of Short Term Bond Fund in the aggregate or 5.38% of the
outstanding shares on March 31, 1999. The Adviser may be deemed to be the
beneficial owner of such shares, but disclaims any beneficial interest in such
shares.
To the knowledge of the Fund, as of March 31, 1999, no person owned
beneficially more than 5% of Short Term Bond Fund's outstanding shares except as
stated above.
The Trustees and officers of the Trust also serve in similar capacities
with respect to other Scudder funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper Investments, Inc. These "Independent Trustees" have primary
responsibility for assuring that the Fund is managed in the best interests of
its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to ensure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have
46
<PAGE>
established and served on task forces and subcommittees focusing on particular
matters such as investment, accounting and shareholder service issues.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from the
Funds of Scudder Portfolio Trust: an annual Trustee's fee of $2,400 for a Fund
in which total net assets do not exceed $100 million; $4,800 for a Fund in which
total net assets exceed $100 million but do not exceed $1 billion and $7,200 for
a Fund in which total net assets exceed $1 billion; a fee of $150 for attendance
at each board meeting, audit committee meeting or other meeting held for the
purposes of considering arrangements between the Trust on behalf of the Fund and
the Adviser or any affiliate of the Adviser; $75 for all other committee
meetings; and reimbursement of expenses incurred for travel to and from Board
Meetings. The Independent Trustee who serves as lead or liaison trustee receives
an additional annual retainer fee of $500 from each Fund. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at trustees' educational seminars or conferences, service on industry
or association committees, participation as speakers at trustees' conferences or
service on special trustee task forces or subcommittees. Independent Trustees do
not receive any employee benefits such as pension or retirement benefits or
health insurance. Notwithstanding the schedule of fees, the Independent Trustees
have in the past and may in the future waive a portion of their compensation.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1998 from the Trust and from all of the Scudder funds as a group.
In 1998, the Trustees of Scudder Funds Trust met ten times.
<TABLE>
<CAPTION>
Name Scudder Funds Trust* All Scudder Funds
---- -------------------- -----------------
<S> <C> <C>
Henry Becton, Jr., $12,046 $135,000 (28 funds)
Trustee
Dawn-Marie Driscoll, $12,900 $145,000 (28 funds)
Trustee
Peter B. Freeman, $12,142 $172,425 (45 funds)
Trustee
George M. Lovejoy, Jr., $12,046 $148,600 (29 funds)
Trustee
Wesley W. Marple, Jr., $12,046 $135,000 (28 funds)
Trustee
Jean C. Tempel, Trustee $12,058 $135,000 (29 funds)
</TABLE>
* Scudder Funds Trust consisted of two Funds in 1998: Scudder Short Term
Bond Fund and Scudder Zero Coupon 2000 Fund. Scudder Zero Coupon 2000
Fund was reorganized into Scudder Short Term Bond Fund on April 9,
1999.
Members of the Board of Trustees who are employees of Scudder or its
affiliates receive no direct compensation from the Trust, although they are
compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
No fees were incurred by the Funds with respect to the alliance with B.A.T.
DISTRIBUTOR
The Trust, on behalf of the Fund, has an underwriting agreement with
Scudder Investor Services, Inc., Two International Place, Boston, MA 02110 (the
"Distributor"), a Massachusetts corporation, which is a subsidiary of the
47
<PAGE>
Adviser, a Delaware corporation. The Trust's underwriting agreement dated
September 7, 1998 remains in effect from year to year thereafter only if its
continuance is approved annually by a majority of the Trustees who are not
parties to such agreement or interested persons of any such party and either by
vote of a majority of the Trustees or a majority of the outstanding voting
securities of the Trust. The continuance of the underwriting agreement was most
recently approved by the Trustees on August 10, 1998 and will continue in effect
until September 30, 1999.
Under the underwriting agreement, the Trust is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of the Trust's registration statement and prospectus and any
amendments and supplements thereto; the registration and qualification of shares
for sale in the various states, including registering the Trust as a
broker/dealer in the various states as required; the fees and expenses of
preparing, printing and mailing prospectuses (see below for expenses relating to
prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications (including newsletters) to shareholders of the Fund; the
cost of printing and mailing confirmations of purchases of shares and the
prospectuses accompanying such confirmations; any issue taxes or any initial
transfer taxes; a portion of shareholder toll-free telephone charges and
expenses of shareholder service representatives; the cost of wiring funds for
share purchases and redemption's (unless paid by the shareholder who initiates
the transaction); the cost of printing and postage of business reply envelopes;
and a portion of the cost of computer terminals used by both the Trust and the
Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of Fund shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Fund to the public.
The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
service representatives, a portion of the cost of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Trust.
Note: Although the Fund does not have a 12b-1 Plan and shareholder
approval would be required in order to adopt one, the
underwriting agreement provides that the Fund will also pay
those fees and expenses permitted to be paid or assumed by the
Fund pursuant to a 12b-1 Plan, if any, adopted by the Fund,
notwithstanding any other provision to the contrary in the
underwriting agreement, and the Fund or a third party will pay
those fees and expenses not specifically allocated to the
Distributor in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states. The underwriting agreement provides
that the Distributor accepts orders for shares at net asset value as no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of the Fund.
TAXES
(See "Understanding Distributions and Taxes" in a Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, or a predecessor statute and has qualified as
such since its inception. The Fund intends to continue to qualify for such
treatment. Such qualification does not involve governmental supervision or
management of investment practices or policy.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of a Fund's ordinary income for the calendar year, at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) realized during the one-year period ending October 31
during such year, and all ordinary income and capital gains for prior years that
were not previously distributed.
48
<PAGE>
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains , will be able to claim a proportionate share of federal income taxes paid
by the Fund on such gains as a credit against the shareholder's federal income
tax liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between such reported gains and the
shareholder's tax credit. If a Fund makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Dividends from domestic corporations are not expected to comprise a
substantial part of either of the Fund's gross income. If any such dividends
constitute a portion of a Fund's gross income, a portion of the income
distributions of a Fund may be eligible for the 70% deduction for dividends
received by corporations. Shareholders will be informed of the portion of
dividends which so qualify. The dividends-received deduction is reduced to the
extent the shares of the Fund with respect to which the dividends are received
are treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of a Fund are deemed to have been held by the
Fund or the shareholder, as the case may be, for less than 46 days during the
90-day period beginning 45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gains , regardless of the length of time the shares of the
Fund have been held by such shareholders. Such distributions are not eligible
for the dividends-received deduction. Any loss realized upon the redemption of
shares held at the time of redemption for six months or less will be treated as
a long-term capital loss to the extent of any amounts treated as distributions
of long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
An individual may make a deductible IRA contribution of up to $2,000
or, if less, the amount of the individual's earned income for any taxable year
only if (i) neither the individual nor his or her spouse (unless filing separate
returns) is an active participant in an employer's retirement plan, or (ii) the
individual (and his or her spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA ($2,000 per
individual for married couples if only one spouse has earned income) for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
49
<PAGE>
Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
Investor income received by a Fund from sources outside the U.S. may be
subject to withholding and other taxes imposed by such foreign jurisdictions.
Tax conventions between certain countries and the U.S. may reduce or eliminate
those foreign taxes, however, and foreign countries generally do not impose
taxes on capital gains in respect of investments by foreign investors.
Over-the-counter options on debt securities written or purchased by the
Fund will be subject to tax under Section 1234 of the Code. In general, no loss
will be 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 the exercise of a put option, on the Fund's holding period for the underlying
property. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of any property
in the Fund's portfolio similar to the property underlying the put option. If
the Fund writes an option, no gain is recognized upon its receipt of a premium.
If a call option lapses or is closed out, any gain or loss is treated as
short-term capital gain or loss. If the option is exercised, the character of
the gain or loss depends on the holding period of the underlying stock.
Many futures and forward contracts entered into by a Fund and listed
nonequity options written or purchased by a Fund (including options on debt
securities, options on futures contracts, options on securities indices and
options on currencies), will be governed by Section 1256 of the Code. Absent a
tax election to the contrary, gain or loss attributable to the lapse, exercise
or closing out of any such position generally will be treated as 60% long-term
and 40% short-term capital gain or loss, and on the last trading day of the
Fund's fiscal year, all outstanding Section 1256 positions will be marked to
market (i.e., treated as if such positions were closed out at their closing
price on such day), with any resulting gain or loss recognized as 60% long-term
and 40% short-term capital gain or loss. Under Section 988 of the Code,
discussed below, foreign currency gain or loss from foreign currency-related
forward contracts, certain futures and options and similar financial instruments
entered into or acquired by a Fund will be treated as ordinary income or loss.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures or forward contract or nonequity option
or other position governed by Section 1256 which substantially diminishes 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, the operation of which may cause deferral of losses,
adjustments in the holding periods of securities and conversion of short-term
capital losses into long-term capital losses, certain tax elections exist for
them which reduce or eliminate the operation of these rules. The Fund will
monitor its transactions in options, foreign currency futures and forward
contracts and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may
require a Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
50
<PAGE>
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in a foreign currency and the time 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
and forward contracts, gains or losses attributable to fluctuations in the value
of foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
If the Fund invests in stock of certain foreign investment companies,
the Fund may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each day of the Fund's holding period for the stock. The distribution
or gain so allocated to any taxable year of the Fund, other than the taxable
year of the excess distribution or disposition, would be taxed to the Fund at
the highest ordinary income rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
The Fund may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Fund would report as ordinary income the amount by which the fair market value
of the foreign company's stock exceeds the Fund's adjusted basis in these
shares; any mark-to-market losses and any loss from an actual disposition of
shares would be deductible as ordinary 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 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.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to a Fund each year, even though the Fund will not receive cash interest
payments from these securities. This original issue discount imputed income will
comprise a part of the investment company taxable income of the Fund which must
be distributed to shareholders in order to maintain the qualification of the
Fund as a regulated investment company and to avoid federal income tax at the
Fund's level.
Gain derived by a Fund from the disposition of any market discount
bonds (i.e., bonds purchased other than at original issue, where the face value
of the bonds exceeds their purchase price), including tax-exempt market discount
bonds, held by the Fund will be taxed as ordinary income to the extent of the
accrued market discount on the bonds, unless the Fund elects to include the
market discount in income as it accrues.
The Fund will be required to report to the Internal Revenue Service
(the "IRS") all distributions of investment company taxable income and capital
gains as well as gross proceeds from the redemption or exchange of Fund shares,
except in the case of certain exempt shareholders. Under the backup withholding
provisions of Section 3406 of the Code, distributions of investment company
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Fund is notified
by the IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Shareholders of a Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
51
<PAGE>
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 advisers about the application of
the provisions of tax law described in this statement of additional information
in light of their particular tax situations.
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes 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 brokerage and research services to the Adviser or the
Fund. The term "research services" 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, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services 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 the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
52
<PAGE>
The Trustees review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
Portfolio Turnover
The portfolio turnover rate is defined by the SEC as the ratio of the
lesser of sales or purchases to the monthly average value of such securities
owned during the year, excluding all securities with maturities at time of
acquisition of one year or less. The portfolio turnover rate for Short Term Bond
Fund was 39.4% and 95.4% for the fiscal years ended December 31, 1997 and 1998,
respectively.
Purchases and sales are made for the Fund whenever necessary, in
management's opinion, to meet the Fund's objective.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system will be valued at its most recent sale
price on such system as of the Value Time. Lacking any sales, the security will
be valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at
prices supplied by the Fund's pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Money market
instruments with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio
53
<PAGE>
asset is taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial highlights of the Fund included in the Fund's prospectus
and the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. PricewaterhouseCoopers LLP
is responsible for performing annual audits of the financial statements and
financial highlights of the Fund in accordance with generally accepted auditing
standards, and the preparation of federal tax returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Trust property or the
acts, obligations or affairs of the Trust and a disclaimer stating that each
series shall not be liable for the obligations of any other series. The
Declaration of Trust also provides for indemnification out of the Trust's
property of any shareholder held personally liable for the claims and
liabilities to which a shareholder may become subject by reason of being or
having been a shareholder. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust itself would be unable to meet its obligations.
Other Information
Short Term Bond Fund's CUSIP number is 810902-20-5.
The Fund has a fiscal year ending on December 31.
Portfolio securities of the Fund are held separately, pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 255 Franklin Street, Boston, Massachusetts 02101.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
PricewaterhouseCoopers LLP, One Post Office Square, Boston, MA 02109,
serves as independent accountants to the Trust.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of the Adviser, is responsible for
determining the daily net asset value per share and maintaining the portfolio
and general accounting records of the Funds.
Short Term Bond Fund pays Scudder Fund Accounting Corporation an annual
fee equal to .025% of the first $150 million of average daily net assets, .0075%
of such assets in excess of $150 million up to $1 billion and .0045% of such
assets in excess of $1 billion, plus transaction holding charges.
For the fiscal year ended December 31, 1996, 1997 and 1998 Short Term
Bond Fund incurred charges of $199,888, $173,925 and $158,205, respectively, of
which $11,816 was unpaid on December 31, 1998.
54
<PAGE>
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts
02107-2291, a subsidiary of the Adviser, is the transfer, dividend-paying and
shareholder service agent for the Fund. The Fund pays Scudder Service
Corporation an annual fee for the account maintained as a participant. Short
Term Bond Fund pays Scudder Service Corporation an annual fee of $26.00 for each
account maintained for a shareholder.
For the fiscal year ended December 31, 1996, 1997 and 1998 Short Term
Bond Fund incurred charges of $2,258,259, $1,966,378 and $1,628,687,
respectively, of which $120,576 was unpaid on December 31, 1998.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are generally
held in an omnibus account.
Scudder Trust Company, an affiliate of the Adviser, provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. Annual service fees are paid by a Fund to
Scudder Trust Company for such accounts. Short Term Bond Fund pays Scudder Trust
Company a fee of $29.00 for each account maintained.
For the fiscal year ended December 31, 1996, 1997 and 1998 Short Term
Bond Fund incurred charges of $564,119, $611,127 and $561,842, respectively, of
which $43,732 was unpaid on December 31, 1998.
The name "Scudder Funds Trust" is the designation of the Trust for the
time being under a Declaration of Trust dated June 24, 1981, as amended from
time to time, and all persons dealing with the Trust must look solely to the
property of the Trust for the enforcement of any claims against the Trust as
neither the Trustees, officers, agents nor shareholders assume any personal
liability for obligations entered into on behalf of the Trust. Upon the initial
purchase of shares, the shareholder agrees to be bound by the Trust's
Declaration of Trust, as amended from time to time. The Declaration of Trust is
on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts. All persons dealing with a Fund must look only to the assets of a
Fund for the enforcement of any claims against a Fund as no other series of the
Trust assumes any liabilities for obligations entered into on behalf of a Fund.
SCUDDER FUNDS TRUST, Two International Place, Boston, Massachusetts
02110, has filed with the U.S. Securities and Exchange Commission, Washington,
D.C. 20549, a Registration Statement under the 1933 Act, as amended, with
respect to the shares of Short Term Bond Fund offered by the Fund's prospectus.
The Fund's prospectus and this Statement of Additional Information do not
contain all of the information set forth in the Registration Statement and its
amendments which the Trust has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statement for further
information with respect to the Funds and the securities offered hereby. The
Registration Statement and its amendments, may be inspected at the principal
office of the SEC at 450 Fifth Street, N.W., Washington and copies thereof may
be obtained from the SEC at prescribed rates.
FINANCIAL STATEMENTS
Scudder Short Term Bond Fund
The financial statements, including the Investment Portfolio of Scudder
Short Term Bond Fund, together with the Report of Independent Accountants,
Financial Highlights and notes to financial statements, attached hereto in the
Annual Report to the Shareholders of the Fund dated December 31, 1998, are
incorporated by reference herein and are hereby deemed to be a part of this
Statement of Additional Information.
RATINGS OF CORPORATE BONDS
The two highest ratings of Moody's for corporate bonds are Aaa and Aa.
Bonds rated Aaa are judged by Moody's 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 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. Aa bonds 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
55
<PAGE>
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities. Bonds which
are rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future. Moody's Baa
rated bonds are considered 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 may have speculative
characteristics as well.
The two highest ratings of S&P for corporate bonds are AAA and AA.
Bonds rated AAA have the highest rating assigned by S&P to a debt obligation.
Capacity to pay interest and repay principal is extremely strong. Bonds rated AA
have a very strong capacity to pay interest and repay principal and differ from
the highest rated issues only in a 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 securities. S&P's BBB rated bonds, or
medium-grade category bonds, are between sound obligations and those where the
speculative elements begin to predominate. Although these bonds have adequate
asset coverage and normally are protected by satisfactory earnings, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and principal.
56
<PAGE>
GLOSSARY
1. Bond
A contract by an issuer (borrower) to repay the owner of the contract
(lender) the face amount of the bond on a specified date (maturity
date) and to pay a stated rate of interest until maturity. Interest is
generally paid semi-annually in amounts equal to one-half the annual
interest rate.
2. Debt Obligation
A general term which includes fixed income and variable rate
securities, obligations issued at a discount and other types of
securities which evidence a debt.
3. Discount and Premium
(a) Market Discount and Premium - A discount (premium) bond is a bond
selling in the market at a price lower (higher) than its face value.
The amount of the market discount (premium) is the difference between
market value and face value.
(b) Original Issue Discount - An original issue discount is the
discount from face value at which the bond is first offered to the
public.
4. Face Value
The value of a bond that appears on the face of the bond, unless the
value is otherwise specified by the issuing company. Face value is
ordinarily the amount the issuing company promises to pay at maturity.
Face value is not an indication of market value.
5. Fixed Income Obligation
An instrument under which the lender agrees to pay interest, either at
a stated rate or according to a specified formula, over the life of the
instrument, as well as to repay principal at maturity.
6. Investment Company Taxable Income
The investment company taxable income of a Fund includes dividends,
interest (including original issue discount) and net short-term capital
gains in excess of long-term capital losses, less expenses.
7. Liquidation
The process of converting securities or other property into cash.
8. Maturity
The date on which the principal amount of a debt obligation comes due
by the terms of the instrument.
9. Maturity Date
Zero Coupon Fund will mature on the third Friday in December 2000 and
proceeds of the liquidation of the Fund will be distributed shortly
thereafter.
10. Net Asset Value Per Share
The value of the share of a Fund for purposes of sales and redemptions.
(See "NET ASSET VALUE.")
57
<PAGE>
11. Net Investment Income
The net investment income of a Fund is comprised of its interest
income, including amortizations of original issue and certain market
discounts, less amortizations of premiums and expenses paid or accrued.
12. Par Value
Par value of a bond is a dollar amount representing the denomination
and assigned value of the bond. It signifies the dollar value on which
interest on the bonds is computed and is usually the same as face value
and maturity value for an individual bond. For example, most bonds are
issued in $1,000 denominations and they have a face value, maturity
value and par value of $1,000. Their market price can of course vary
significantly from $1,000 during their life between issuance and
maturity.
13. Target or Target Year
See Maturity Year.
14. Target Date
See Maturity Date.
15. Zero Coupon Security
A non-interest (non-cash) paying debt obligation which is issued at a
substantial discount from its face value. Income is accrued over the
life of the obligation, and cash equal to the face value is due at
maturity.
Compound Interest Table^1
The table below shows the return on $100 over 5, 10 and 15 year periods
assuming interest rates of 5%, 7%, 9%, 11% and 13%.
<TABLE>
<CAPTION>
Years
-----
Interest Rate 5 10 15
<S> <C> <C> <C>
5% $128.0 $163.8 $209.7
7% 141.0 198.9 280.6
9% 155.2 241.1 374.5
11% 170.8 291.7 498.3
13% 187.7 352.3 661.4
</TABLE>
1 Compounded semiannually at one-half the annual rate similar to normal
bond calculation of yield-to-maturity. The calculation is different
from a calculation of anticipated growth which involves additional
assumptions. (See "THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES --
Management of Reinvestment Risk and Anticipated Growth of _______ Fund"
and "DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.")
58
<PAGE>
SCUDDER FUNDS TRUST
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits:
- --------
<S> <C>
(a) (a)(1) Amended and Restated Declaration of Trust dated December 21, 1987.
(Incorporated by reference to Exhibit 1(a) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(2) Instrument dated September 17, 1982 Establishing and Designating Series of
Shares.
(Incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(3) Instrument dated September 17, 1982 Establishing and Designating an
Additional Series of Shares.
(Incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(4) Instrument dated March 21, 1984 Establishing and Designating an Additional
Series of Shares.
(Incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(5) Certificate of Amendment of Declaration of Trust dated June 29, 1989.
(Incorporated by reference to Exhibit 1(e) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(6) Amendment of Establishment and Designation of Additional Series of Shares
dated June 29, 1989.
(Incorporated by reference to Exhibit 1(f) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(7) Abolition of series by the Registrant dated June 29, 1989 on behalf of the
U.S. Government 1990 Portfolio.
(Incorporated by reference to Exhibit 1(g) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(8) Abolition of series by the Registrant dated June 29, 1989 on behalf of the
General 1990 Portfolio.
(Incorporated by reference to Exhibit 1(h) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(9) Abolition of series by the Registrant on behalf of the Scudder Zero Coupon
1995 Fund, dated July 15, 1992.
(Incorporated by reference to Exhibit 1(i) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(10) Redesignation of Series of Registrant dated March 7, 1990.
(Incorporated by reference to Exhibit 1(j) to Post-Effective Amendment No.
24 to the Registration Statement.)
(a)(11) Certificate of Amendment of Declaration of Trust dated July 2, 1991.
(Incorporated by reference to Exhibit 1(k) to Post-Effective Amendment No.
24 to the Registration Statement.)
Part C- Page 1
<PAGE>
(b) (b)(1) By-Laws of the Registrant dated as of September 17, 1982.
(Incorporated by reference to Exhibit 2(a) to Post-Effective Amendment No.
24 to the Registration Statement.)
(b)(2) Amendment to the By-Laws of Registrant as of March 5, 1984.
(Incorporated by reference to Exhibit 2(b) to Post-Effective Amendment No.
24 to the Registration Statement.)
(b)(3) Amendment to the By-Laws of Registrant as of October 1, 1984.
(Incorporated by reference to Exhibit 2(c) to Post-Effective Amendment No.
24 to the Registration Statement.)
(b)(4) Amendment to the By-Laws of Registrant as of December 12, 1991.
(Incorporated by reference to Exhibit 2(d) to Post-Effective Amendment No.
24 to the Registration Statement.)
(b)(5) Amendment to the By-Laws of the Registrant dated September 17, 1992.
(Incorporated by reference to Exhibit 2(e) to Post-Effective Amendment No.
24 to the Registration Statement.)
(c) Inapplicable.
(d) (d)(1) Investment Management Agreement between the Registrant, on behalf of
Scudder Short Term Bond Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998 is filed herein
(d)(2) Investment Management Agreement between the Registrant, on behalf of
Scudder Zero Coupon 2000 Fund, and Scudder Kemper Investments, Inc. dated
September 7, 1998 is filed herein.
(e) (e)(1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc. dated September 7, 1998.
(f) Inapplicable.
(g) (g)(1) Custodian Agreement between the Registrant and State Street Bank and Trust
Company ("State Street Bank") dated December 17, 1982.
(Incorporated by reference to Exhibit 8(a)(1) to Post-Effective Amendment
No. 24 to the Registration Statement.)
(g)(2) Fee schedule for Custodian Agreement between the Registrant and State
Street Bank.
(Incorporated by reference to Exhibit 8(a)(2) to Post-Effective Amendment
No. 24 to the Registration Statement.)
(g)(3) Amendment to the Custodian Agreement between the Registrant and State
Street Bank dated September 14, 1987.
(Incorporated by reference to Exhibit 8(a)(3) to Post-Effective Amendment
No. 24 to the Registration Statement.)
(g)(4) Amendment to the Custodian Agreement between the Registrant and State
Street Bank dated September 16, 1988.
(Incorporated by reference to Exhibit 8(a)(4) to Post-Effective Amendment
No. 24 to the Registration Statement.)
Part C- Page 2
<PAGE>
(g)(5) Amendment to the Custodian Agreement between the Registrant and State
Street Bank dated December 13, 1990.
(Incorporated by reference to Exhibit 8(a)(5) to Post-Effective Amendment
No. 24 to the Registration Statement.)
(h) (h)(1) Transfer Agency and Service Agreement with fee schedule between the
Registrant and Scudder Service Corporation dated October 2, 1989.
(Incorporated by reference to Exhibit 9(a) to Post-Effective Amendment No.
24 to the Registration Statement.)
(h)(2) Revised fee schedule dated October 1, 1995 for Exhibit 9(a).
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.)
(h)(3) Revised fee schedule dated October 1, 1996 for Exhibit 9(a).
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.)
(h)(4) COMPASS Service Agreement with Scudder Trust Company dated October 1, 1995.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(h)(5) Revised fee schedule dated October 1, 1996 for Exhibit 9(h)(4).
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement.)
(h)(6) Shareholder Services Agreement between the Registrant and Charles Schwab &
Co., Inc. dated June 1, 1990.
(Incorporated by reference to Exhibit 9(c) to Post-Effective Amendment No.
24 to the Registration Statement.)
(h)(7) Fund Accounting Services Agreement between the Registrant, on behalf of
Scudder Short Term Bond Fund, and Scudder Fund Accounting Corporation
dated July 19, 1995.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement.)
(h)(8) Agreement and Plan of Reorganization dated November 9, 1998 by and between
the Registrant and Scudder Short Term Bond Fund and Scudder Zero Coupon
2000 Fund.
(i) Consent of Legal Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Financial Data Schedule is filed herein.
(o) Inapplicable.
</TABLE>
Part C- Page 3
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
- -------- --------------------------------------------------------------
None
<TABLE>
<CAPTION>
Item 25. Indemnification.
- -------- ----------------
<S> <C>
A policy of insurance covering Scudder Kemper Investments, Inc., its subsidiaries including Scudder
Investor Services, Inc., and all of the registered investment companies advised by Scudder Kemper
Investments, Inc. insures the Registrant's Trustees and officers and others against liability
arising by reason of an alleged breach of duty caused by any negligent act, error or accidental
omission in the scope of their duties.
Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of Trust provide as follows:
Section 4.1 No Personal Liability of Shareholders, Trustees, Etc.
----------- -----------------------------------------------------
No Shareholder shall be subject to any personal liability whatsoever to any Person in
connection with Trust Property or the acts, obligations or affairs of the Trust. No
Trustee, officer, employee or agent of the Trust shall be subject to any personal liability
whatsoever to any Person, other than to the Trust or its Shareholders, in connection with
Trust Property or the affairs of the Trust, save only that arising from bad faith, willful
misfeasance, gross negligence or reckless disregard of his duties with respect to such
Person; and all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is made a party
to any suit or proceeding to enforce any such liability of the Trust, he shall not, on
account thereof, be held to any personal liability. The Trust shall indemnify and hold
each Shareholder harmless from and against all claims and liabilities, to which such
Shareholder may become subject by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder for all legal and other expenses reasonably incurred by
him in connection with any such claim or liability. The indemnification and reimbursement
required by the preceding sentence shall be made only out of the assets of the one or more
series of which the Shareholder who is entitled to indemnification or reimbursement was a
Shareholder at the time the act or event occurred, which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this Section 4.1
shall not impair any other right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically provided herein.
Section 4.2 Non-Liability of Trustees, Etc.
----------- -------------------------------
No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, its
Shareholders, or to any Shareholder, Trustee, officer, employee, or agent thereof for any
action or failure to act (including without limitation the failure to compel in any way any
former or acting Trustee to redress any breach of trust) except for his own bad faith,
willful misfeasance, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Section 4.3 Mandatory Indemnification.
----------- --------------------------
(a) Subject to the exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or officer of the Trust shall be
indemnified by the Trust to the fullest extent permitted by law against all
liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes involved
Part C- Page 4
<PAGE>
as a party or otherwise by virtue of his being or having been a Trustee or officer
and against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply to all
claims, actions, suits or proceedings (civil, criminal, administrative, or other,
including appeals), actual or threatened; and the words "liability" and "expenses"
shall include, without limitation, attorneys' fees, costs, judgments, amounts paid
in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust, a series thereof, or the Shareholders by
reason of a final adjudication by a court or other body before which a proceeding
was brought that he engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not involving a final
adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in a payment by
a Trustee or officer, unless there has been a determination that such Trustee or
officer did not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office;
(A) by the court or other body approving the settlement or other
disposition; or
(B) based upon a review of readily available facts (as opposed to a full
trial-type inquiry) by (x) vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter) or (y) written
opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured against by policies
maintained by the Trust, shall be severable, shall not affect any other rights to
which any Trustee or officer may now or hereafter be entitled, shall continue as
to a person who has ceased to be such Trustee or officer and shall inure to the
benefit of the heirs, executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to indemnification to which
personnel of the Trust other than Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim, action, suit
or proceeding of the character described in paragraph (a) of this Section 4.3 may
be advanced by the Trust prior to final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4.3 provided that either:
(i) such undertaking is secured by a surety bond or some other appropriate
security provided by the recipient, or the Trust shall be insured against losses
arising out of any such advances: or
(ii) a majority of the Disinterested Trustees acting on the matter (provided that
a majority of the Disinterested Trustees act on the matter) or an independent
legal counsel in a written opinion shall determine, based upon a review of readily
Part C- Page 5
<PAGE>
available facts (as opposed to a full trial-type inquiry), that there is reason to
believe that the recipient ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is not (i) an "Interested
Person" of the Trust (including anyone who has been exempted from being an "Interested
Person" by any rule, regulation or order of the Commission), or (ii) involved in the claim,
action, suit or proceeding.
</TABLE>
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such
have corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Part C- Page 6
<PAGE>
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
Part C- Page 7
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
Part C- Page 8
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
(c)
<TABLE>
(1) (2) (3) (4) (5)
<S> <C> <C> <C> <C>
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage
Underwriter Commissions and Repurchases Commissions Other Compensation
----------- ----------- --------------- ------------ -------------------
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments, Two International Place, Boston, MA 02110.
Part C- Page 9
<PAGE>
Records relating to the duties of the Registrant's custodian
are maintained by State Street Bank and Trust Company,
Heritage Drive, North Quincy, Massachusetts. Records relating
to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
Part C- Page 10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Boston, and
Commonwealth of Massachusetts on April 26, 1999.
SCUDDER FUNDS TRUST
By /s/Daniel Pierce
------------------------------------
Daniel Pierce, President and Trustee
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Henry Becton, Jr.
- --------------------------------------
Henry Becton, Jr.* Trustee April 26, 1999
/s/Dawn-Marie Driscoll
- --------------------------------------
Dawn-Marie Driscoll* Trustee April 26, 1999
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee April 26, 1999
/s/George M. Lovejoy, Jr.
- --------------------------------------
George M. Lovejoy, Jr.* Trustee April 26, 1999
/s/Wesley W. Marple, Jr.
- --------------------------------------
Wesley W. Marple, Jr.* Trustee April 26, 1999
/s/Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk* Trustee, Vice President and April 26, 1999
Assistant Secretary
<PAGE>
/s/Jean C. Tempel
- --------------------------------------
Jean C. Tempel Trustee April 26, 1999
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and April 26, 1999
Accounting Officer)
</TABLE>
*By: /s/Sheldon A. Jones
-----------------------------
Sheldon A. Jones**
** Attorney-in-fact pursuant to powers of attorney for
Thomas J. Devine, Peter B. Freeman and Wilson Nolen
contained in the signature page of Post-Effective
Amendment No. 12 to the Registration Statement
filed March 3, 1989, for Daniel Pierce in the
signature page of Post-Effective Amendment No. 21
to the Registration Statement filed April 17, 1995
for Sheryle J. Bolton in the signature page of
Post-Effective Amendment No. 22 to the Registration
Statement filed April 30, 1996 and for William T.
Burgin in the signature page of Post-Effective
Amendment No. 24 and for Henry P. Becton,
Dawn-Marie Driscoll, George M. Lovejoy, Jr., and
Wesley W. Marple, Jr. in the signature page of
Post-Effective Amendment No. 25.
2
<PAGE>
File No. 2-73371
File No. 811-3229
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 28
-----
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 27
-----
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER FUNDS TRUST
<PAGE>
SCUDDER FUNDS TRUST
EXHIBIT INDEX
Exhibit (d)(1)
Exhibit (d)(2)
Exhibit (h)(8)
Exhibit (i)
Exhibit (j)
Exhibit (n)
Exhibit (d)(1)
Scudder Funds Trust
345 Park Avenue
New York, New York 10154
September 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder Short Term Bond Fund
Ladies and Gentlemen:
Scudder Funds Trust (the "Trust") has been established as a
Massachusetts business trust to engage in the business of an investment company.
Pursuant to the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees has divided the Trust's shares of
beneficial interest, par value $0.01 per share, (the "Shares") into separate
series, or funds, including Scudder Short Term Bond Fund (the "Fund"). Series
may be abolished and dissolved, and additional series established, from time to
time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the sole
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the Fund
agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Trust's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act of
1940, as amended, (the "1940 Act") and the Securities Act of 1933, as amended.
Copies of the documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you with copies
properly certified or authenticated of each of the following additional
documents related to the Trust and the Fund:
(a) The Declaration dated December 21, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of the
Fund selecting you as investment manager and approving the form of this
Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial
Interest dated March 21, 1984 relating to the Fund.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of
the rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Trust's name
(the "Fund Name"), and (ii) the Scudder Marks in connection with the Trust's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Trust's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Trust shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Trust further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable request, the Trust
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust, or you no longer are a
licensee of the Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name indicating
that it is advised by, managed by or otherwise connected with you (or any
organization which shall have succeeded to your business as investment manager)
or the Trademark Owner. In no event shall the Trust use the Scudder Marks or any
other name or mark confusingly similar thereto (including, but not limited to,
any name or mark that includes the name "Scudder") if this Agreement or any
other investment advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable efforts to manage
the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel
2
<PAGE>
to the Trust or counsel to you. You shall also make available to the Trust
promptly upon request all of the Fund's investment records and ledgers as are
necessary to assist the Trust in complying with the requirements of the 1940 Act
and other applicable laws. To the extent required by law, you shall furnish to
regulatory authorities having the requisite authority any information or reports
in connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Trust are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Fund and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Fund policies as expressed in the Registration Statement. You shall determine
what portion of the Fund's portfolio shall be invested in securities and other
assets and what portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on
the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Trust's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Trust administrative services
on behalf of the Fund necessary for operating as an open-end investment company
and not provided by persons not parties to this Agreement including, but not
limited to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents and
pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; assisting in establishing the accounting policies of the Fund;
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and otherwise assisting
3
<PAGE>
the Trust as it may reasonably request in the conduct of the Fund's business,
subject to the direction and control of the Trust's Board of Trustees. Nothing
in this Agreement shall be deemed to shift to you or to diminish the obligations
of any agent of the Fund or any other person not a party to this Agreement which
is obligated to provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your directors,
officers and employees as may duly be elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law. You
shall provide at your expense the portfolio management services described in
section 3 hereof and the administrative services described in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Fund's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund: organization
expenses of the Fund (including out-of-pocket expenses, but not including your
overhead or employee costs); fees payable to you and to any other Fund advisors
or consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Fund (or some
other party) shall assume some or all of such expenses. You shall be required to
pay such of the foregoing sales expenses as are not required to be paid by the
principal
4
<PAGE>
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Fund (or some other party) pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the
Trust on behalf of the Fund shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.60 of 1 percent of the average daily net assets as defined below of the Fund
for such month; provided that, for any calendar month during which the average
of such values exceeds $500 million, the fee payable for that month based on the
portion of the average of such values in excess of $500 million shall be 1/12 of
0.50 of 1 percent of such portion; and provided that, for any calendar month
during which the average of such values exceeds $1 billion, the fee payable for
that month based on the portion of the average of such values in excess of $1
billion shall be 1/12 of 0.45 of 1 percent of such portion; and provided that,
for any calendar month during which the average of such values exceeds $1.5
billion the fee payable for that month based on the portion of the average of
such values in excess of $1.5 billion shall be 1/12 of 0.40 of 1 percent of such
portion; and provided that, for any calendar month during which the average of
such values exceeds $2 billion, the fee payable for that month based on the
portion of the average of such values in excess of $2 billion shall be 1/12 of
0.375 of 1 percent of such portion; provided that, for any calendar month during
which the average of such values exceeds $3.0 billion, the fee payable for that
month based on the portion of the average of such values in excess of $3.0
billion shall be 1/12 of 0.35 of 1 percent of such portion over any compensation
waived by you from time to time (as more fully described below). You shall be
entitled to receive during any month such interim payments of your fee hereunder
as you shall request, provided that no such payment shall exceed 75 percent of
the amount of your fee then accrued on the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of
the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on
each day on which the net asset value of the Fund is determined consistent with
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund shall always be
determined pursuant to the applicable provisions of the Declaration and the
Registration Statement. If the determination of net asset value does not take
place for any particular day, then for the purposes of this section 6, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of its net assets as of 4:00 p.m. (New York time), or as of such other time as
the value of the net assets of the Fund's portfolio may be lawfully determined
on that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 6.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any
5
<PAGE>
advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Trust. Whenever the
Fund and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Fund recognizes that in some cases this procedure may adversely
affect the size of the position that may be acquired or disposed of for the
Fund.
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any liability to
the Trust, the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Fund shall be deemed, when
acting within the scope of his or her employment by the Fund, to be acting in
such employment solely for the Fund and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1999, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Trust's Board of Trustees on 60 days'
written notice to you, or by you on 60 days' written notice to the Trust. This
Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
6
<PAGE>
11. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Scudder
Funds Trust" refers to the Trustees under the Declaration collectively as
Trustees and not as individuals or personally, and that no shareholder of the
Fund, or Trustee, officer, employee or agent of the Trust, shall be subject to
claims against or obligations of the Trust or of the Fund to any extent
whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed by
the Trust on behalf of the Fund pursuant to this Agreement shall be limited in
all cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Trust on behalf of the
Fund.
7
<PAGE>
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER FUNDS TRUST, on behalf of
Scudder Short Term Bond Fund
By: /s/Thomas F. McDonough
-------------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
-------------------------------
Managing Director
8
Exhibit (d)(2)
Scudder Funds Trust
345 Park Avenue
New York, New York 10154
September 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Scudder Zero Coupon 2000 Fund
Ladies and Gentlemen:
Scudder Funds Trust (the "Trust") has been established as a
Massachusetts business trust to engage in the business of an investment company.
Pursuant to the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees has divided the Trust's shares of
beneficial interest, par value $0.01 per share, (the "Shares") into separate
series, or funds, including Scudder Zero Coupon 2000 Fund (the "Fund"). Series
may be abolished and dissolved, and additional series established, from time to
time by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the sole
investment manager of the Fund and to provide certain other services, as more
fully set forth below, and you have indicated that you are willing to act as
such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Trust on behalf of the Fund
agrees with you as follows:
1. Delivery of Documents. The Trust engages in the business of
investing and reinvesting the assets of the Fund in the manner and in accordance
with the investment objectives, policies and restrictions specified in the
currently effective Prospectus (the "Prospectus") and Statement of Additional
Information (the "SAI") relating to the Fund included in the Trust's
Registration Statement on Form N-1A, as amended from time to time, (the
"Registration Statement") filed by the Trust under the Investment Company Act of
1940, as amended, (the "1940 Act") and the Securities Act of 1933, as amended.
Copies of the documents referred to in the preceding sentence have been
furnished to you by the Trust. The Trust has also furnished you with copies
properly certified or authenticated of each of the following additional
documents related to the Trust and the Fund:
(a) The Declaration dated December 21, 1987, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders of the Fund
selecting you as investment manager and approving the form of this
Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated June 30, 1986 relating to the Fund.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements, if any, to the
foregoing, including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Trust a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Trust's name
(the "Fund Name"), and (ii) the Scudder Marks in connection with the Trust's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Trust,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Trust agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Trust's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Trust shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Trust further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Trust rendered during the one-year period preceding
the date of this Agreement are acceptable. At your reasonable request, the Trust
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Trust as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Trust, or you no longer are a
licensee of the Scudder Marks, the Trust shall (to the extent that, and as soon
as, it lawfully can) cease to use the Fund Name or any other name indicating
that it is advised by, managed by or otherwise connected with you (or any
organization which shall have succeeded to your business as investment manager)
or the Trademark Owner. In no event shall the Trust use the Scudder Marks or any
other name or mark confusingly similar thereto (including, but not limited to,
any name or mark that includes the name "Scudder") if this Agreement or any
other investment advisory agreement between you (or your successor) and the Fund
is terminated.
3. Portfolio Management Services. As manager of the assets of the Fund,
you shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue Code of 1986, as amended, (the "Code") relating to regulated
investment companies and all rules and regulations thereunder; and all other
applicable federal and state laws and regulations of which you have knowledge;
subject always to policies and instructions adopted by the Trust's Board of
Trustees. In connection therewith, you shall use reasonable efforts to manage
the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 3, you shall
be entitled to receive and act upon advice of counsel to the Trust or counsel to
you. You shall also make available to the Trust promptly upon request all of the
Fund's investment records and
2
<PAGE>
ledgers as are necessary to assist the Trust in complying with the requirements
of the 1940 Act and other applicable laws. To the extent required by law, you
shall furnish to regulatory authorities having the requisite authority any
information or reports in connection with the services provided pursuant to this
Agreement which may be requested in order to ascertain whether the operations of
the Trust are being conducted in a manner consistent with applicable laws and
regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Fund and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Fund policies as expressed in the Registration Statement. You shall determine
what portion of the Fund's portfolio shall be invested in securities and other
assets and what portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on
the investment performance of the Fund and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Trust's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Fund such office space and facilities in the United States as the
Fund may require for its reasonable needs, and you (or one or more of your
affiliates designated by you) shall render to the Trust administrative services
on behalf of the Fund necessary for operating as an open-end investment company
and not provided by persons not parties to this Agreement including, but not
limited to, preparing reports to and meeting materials for the Trust's Board of
Trustees and reports and notices to Fund shareholders; supervising, negotiating
contractual arrangements with, to the extent appropriate, and monitoring the
performance of, accounting agents, custodians, depositories, transfer agents and
pricing agents, accountants, attorneys, printers, underwriters, brokers and
dealers, insurers and other persons in any capacity deemed to be necessary or
desirable to Fund operations; preparing and making filings with the Securities
and Exchange Commission (the "SEC") and other regulatory and self-regulatory
organizations, including, but not limited to, preliminary and definitive proxy
materials, post-effective amendments to the Registration Statement, semi-annual
reports on Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act;
overseeing the tabulation of proxies by the Fund's transfer agent; assisting in
the preparation and filing of the Fund's federal, state and local tax returns;
preparing and filing the Fund's federal excise tax return pursuant to Section
4982 of the Code; providing assistance with investor and public relations
matters; monitoring the valuation of portfolio securities and the calculation of
net asset value; monitoring the registration of Shares of the Fund under
applicable federal and state securities laws; maintaining or causing to be
maintained for the Fund all books, records and reports and any other information
required under the 1940 Act, to the extent that such books, records and reports
and other information are not maintained by the Fund's custodian or other agents
of the Fund; assisting in establishing the accounting policies of the Fund;
assisting in the resolution of accounting issues that may arise with respect to
the Fund's operations and consulting with the Fund's independent accountants,
legal counsel and the Fund's other agents as necessary in connection therewith;
establishing and monitoring the Fund's operating expense budgets; reviewing the
Fund's bills; processing the payment of bills that have been approved by an
authorized person; assisting the Fund in determining the amount of dividends and
distributions available to be paid by the Fund to its shareholders, preparing
and arranging for the printing of dividend notices to shareholders, and
providing the transfer and dividend paying agent, the custodian, and the
accounting agent with such information as is required for such parties to effect
the payment of dividends and distributions; and otherwise assisting the Trust as
it may reasonably request in the conduct of the Fund's business, subject to the
direction and control of the Trust's Board of Trustees.
3
<PAGE>
Nothing in this Agreement shall be deemed to shift to you or to diminish the
obligations of any agent of the Fund or any other person not a party to this
Agreement which is obligated to provide services to the Fund.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Trust (including the Fund's
share of payroll taxes) who are affiliated persons of you, and you shall make
available, without expense to the Fund, the services of such of your directors,
officers and employees as may duly be elected officers of the Trust, subject to
their individual consent to serve and to any limitations imposed by law. You
shall provide at your expense the portfolio management services described in
section 3 hereof and the administrative services described in section 4 hereof.
You shall not be required to pay any expenses of the Fund other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Fund's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Fund: organization
expenses of the Fund (including out-of-pocket expenses, but not including your
overhead or employee costs); fees payable to you and to any other Fund advisors
or consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent, custodians,
subcustodians, transfer agents, dividend disbursing agents and registrars;
payment for portfolio pricing or valuation services to pricing agents,
accountants, bankers and other specialists, if any; expenses of preparing share
certificates and, except as provided below in this section 5, other expenses in
connection with the issuance, offering, distribution, sale, redemption or
repurchase of securities issued by the Fund; expenses relating to investor and
public relations; expenses and fees of registering or qualifying Shares of the
Fund for sale; interest charges, bond premiums and other insurance expense;
freight, insurance and other charges in connection with the shipment of the
Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; costs of
shareholders' and other meetings; and travel expenses (or an appropriate portion
thereof) of Trustees and officers of the Trust who are directors, officers or
employees of you to the extent that such expenses relate to attendance at
meetings of the Board of Trustees of the Trust or any committees thereof or
advisors thereto held outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Fund if and to the extent
that (i) such expenses are required to be borne by a principal underwriter which
acts as the distributor of the Fund's Shares pursuant to an underwriting
agreement which provides that the underwriter shall assume some or all of such
expenses, or (ii) the Trust on behalf of the Fund shall have adopted a plan in
conformity with Rule 12b-1 under the 1940 Act providing that the Fund (or some
other party) shall assume some or all of such expenses. You shall be required to
pay such of the foregoing sales expenses as are not required to be paid by the
principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund (or some other party) pursuant to such a plan.
4
<PAGE>
6. Management Fee. For all services to be rendered, payments to be made
and costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the
Trust on behalf of the Fund shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.60 of 1 percent of the average daily net assets as defined below of the Fund
for such month over any compensation waived by you from time to time (as more
fully described below). You shall be entitled to receive during any month such
interim payments of your fee hereunder as you shall request, provided that no
such payment shall exceed 75 percent of the amount of your fee then accrued on
the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of
the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on
each day on which the net asset value of the Fund is determined consistent with
the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully
determines the value of its net assets as of some other time on each business
day, as of such time. The value of the net assets of the Fund shall always be
determined pursuant to the applicable provisions of the Declaration and the
Registration Statement. If the determination of net asset value does not take
place for any particular day, then for the purposes of this section 6, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of its net assets as of 4:00 p.m. (New York time), or as of such other time as
the value of the net assets of the Fund's portfolio may be lawfully determined
on that day. If the Fund determines the value of the net assets of its portfolio
more than once on any day, then the last such determination thereof on that day
shall be deemed to be the sole determination thereof on that day for the
purposes of this section 6.
You may waive all or a portion of your fees provided for hereunder and
such waiver shall be treated as a reduction in purchase price of your services.
You shall be contractually bound hereunder by the terms of any publicly
announced waiver of your fee, or any limitation of the Fund's expenses, as if
such waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be
deemed to be exclusive and it is understood that you may render investment
advice, management and services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Trust. Whenever the
Fund and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Fund recognizes that in some cases this procedure may adversely
affect the size of the position that may be acquired or disposed of for the
Fund.
5
<PAGE>
8. Limitation of Liability of Manager. As an inducement to your
undertaking to render services pursuant to this Agreement, the Trust agrees that
you shall not be liable under this Agreement for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates, provided that nothing in this Agreement
shall be deemed to protect or purport to protect you against any liability to
the Trust, the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of your
obligations and duties hereunder. Any person, even though also employed by you,
who may be or become an employee of and paid by the Fund shall be deemed, when
acting within the scope of his or her employment by the Fund, to be acting in
such employment solely for the Fund and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall
remain in force until September 30, 1999, and continue in force from year to
year thereafter, but only so long as such continuance is specifically approved
at least annually (a) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Trustees of the Trust, or by the vote of a majority of the
outstanding voting securities of the Fund. The aforesaid requirement that
continuance of this Agreement be "specifically approved at least annually" shall
be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Fund or by the Trust's Board of Trustees on 60 days'
written notice to you, or by you on 60 days' written notice to the Trust. This
Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of
which, together with all amendments thereto, is on file in the Office of the
Secretary of the Commonwealth of Massachusetts, provides that the name "Scudder
Funds Trust" refers to the Trustees under the Declaration collectively as
Trustees and not as individuals or personally, and that no shareholder of the
Fund, or Trustee, officer, employee or agent of the Trust, shall be subject to
claims against or obligations of the Trust or of the Fund to any extent
whatsoever, but that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability
as set forth in the Declaration and you agree that the obligations assumed by
the Trust on behalf of the Fund pursuant to this Agreement shall be limited in
all cases to the Fund and its assets, and you shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Fund or any
other series of the Trust, or from any Trustee, officer, employee or agent of
the Trust. You understand that the rights and obligations of each Fund, or
series, under the Declaration are separate and distinct from those of any and
all other series.
6
<PAGE>
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
In interpreting the provisions of this Agreement, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions of
"affiliated person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the SEC by any rule, regulation or
order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or
management agreements entered into between you and the Trust on behalf of the
Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
SCUDDER FUNDS TRUST, on behalf of
Scudder Zero Coupon 2000 Fund
By: /s/Thomas F. McDonough
----------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
----------------------------
Managing Director
7
Exhibit (e)(1)
SCUDDER FUNDS TRUST
Two International Place
Boston, MA 02110
September 7, 1998
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Underwriting Agreement
----------------------
Dear Ladies and Gentlemen:
Scudder Funds Trust (hereinafter called the "Trust") is a business
trust organized under the laws of Massachusetts and is engaged in the business
of an investment company. The authorized capital of the Trust consists of shares
of beneficial interest, with par value of $0.01 per share ("Shares"), currently
divided into two portfolios (each a "Portfolio"); however, shares may be divided
into additional Portfolios of the Trust and the Portfolios may be terminated
from time to time. The Trust has selected you to act as principal underwriter
(as such term is defined in Section 2(a)(29) of the Investment Company Act of
1940, as amended (the "1940 Act")) of the Shares and you are willing to act as
such principal underwriter and to perform the duties and functions of
underwriter in the manner and on the terms and conditions hereinafter set forth.
Accordingly, the Trust hereby agrees with you as follows:
1. Delivery of Documents. The Trust has furnished you with copies
properly certified or authenticated of each of the following:
(a) Declaration of Trust of the Trust, dated December 21, 1987, as
amended to date.
(b) By-Laws of the Trust as in effect on the date hereof.
<PAGE>
(c) Resolutions of the Board of Trustees of the Trust selecting
you as principal underwriter and approving this form of
Agreement.
The Trust will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
The Trust will furnish you promptly with properly certified or
authenticated copies of any registration statement filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
(the "1933 Act") or the 1940 Act, together with any financial statements and
exhibits included therein, and all amendments or supplements thereto hereafter
filed.
2. Registration and Sale of Additional Shares. The Trust will from time
to time use its best efforts to register under the 1933 Act such number of
Shares not already so registered as you may reasonably be expected to sell on
behalf of the Trust. You and the Trust will cooperate in taking such action as
may be necessary from time to time to comply with requirements applicable to the
sale of Shares by you or the Trust in any states mutually agreeable to you and
the Trust, and to maintain such compliance. This Agreement relates to the issue
and sale of Shares that are duly authorized and registered under the 1933 Act
and available for sale by the Trust, including redeemed or repurchased Shares if
and to the extent that they may be legally sold and if, but only if, the Trust
sees fit to sell them.
3. Sale of Shares. Subject to the provisions of paragraphs 5 and 7
hereof and to such minimum purchase requirements as may from time to time be
currently indicated in the Trust's prospectus or statement of additional
information, you are authorized to sell as agent on behalf of the Trust Shares
authorized for issue and registered under the 1933 Act. You may also purchase as
principal Shares for resale to the public. Such sales will be made by you on
behalf of the Trust by accepting unconditional orders to purchase Shares placed
with you by investors and such purchases will be made by you only after
acceptance by you of such orders. The sales price to the public of Shares shall
be the public offering price as defined in paragraph 6 hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
states in which you may lawfully do so) to obtain from investors unconditional
orders for Shares authorized for issue by
2
<PAGE>
the Trust and registered under the 1933 Act, provided that you may in your
discretion refuse to accept orders for Shares from any particular applicant.
5. Sale of Shares by the Trust. Unless you are otherwise notified by
the Trust, any right granted to you to accept orders for Shares or to make sales
on behalf of the Trust or to purchase Shares for resale will not apply to (i)
Shares issued in connection with the merger or consolidation of any other
investment company with the Trust or its acquisition, by purchase or otherwise,
of all or substantially all of the assets of any investment company or
substantially all the outstanding shares of any such company, and (ii) to Shares
that may be offered by the Trust to shareholders of the Trust by virtue of their
being such shareholders.
6. Public Offering Price. All Shares sold to investors by you will be
sold at the public offering price. The public offering price for all accepted
subscriptions will be the net asset value per Share, determined, in the manner
provided in the Trust's registration statements as from time to time in effect
under the 1933 Act and the 1940 Act, next after the order is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Shares shall be accepted by you except unconditional orders placed with you
before you had knowledge of the suspension. In addition, the Trust reserves the
right to suspend sales and your authority to accept orders for Shares on behalf
of the Trust if, in the judgment of a majority of the Board of Trustees or a
majority of the Executive Committee of such Board, if such body exists, it is in
the best interests of the Trust to do so, such suspension to continue for such
period as may be determined by such majority; and in that event, no Shares will
be sold by you on behalf of the Trust while such suspension remains in effect
except for Shares necessary to cover unconditional orders accepted by you before
you had knowledge of the suspension.
8. Portfolio Securities. Portfolio securities of any Portfolio of the
Trust may be bought or sold by or through you and you may participate directly
or indirectly in brokerage commissions or "spread" in respect of transactions in
portfolio securities of any Portfolio of the Trust; provided, however, that all
sums of money received by you as a result of such purchases and sales or as a
result
3
<PAGE>
of such participation must, after reimbursement of your actual expenses in
connection with such activity, be paid over by you to or for the benefit of the
Trust.
9. Expenses. (a) The Trust will pay (or will enter into arrangements
providing that others than you will pay) all fees and expenses:
(1) in connection with the preparation, setting in type and filing
of any registration statement (including a prospectus and
statement of additional information) under the 1933 Act or the
1940 Act, or both, and any amendments or supplements thereto
that may be made from time to time;
(2) in connection with the registration and qualification of
Shares for sale, or compliance with other conditions
applicable to the sale of Shares in the various jurisdictions
in which the Trust shall determine it advisable to sell such
Shares (including registering the Trust as a broker or dealer
or any officer of the Trust or other person as agent or
salesman of the Trust in any such jurisdictions);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other
communication to shareholders of the Trust in their capacity
as such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually, and any supplements thereto, to
existing shareholders;
(5) in connection with the issue and transfer of Shares resulting
from the acceptance by you of orders to purchase Shares placed
with you by investors, including the expenses of printing and
mailing confirmations of such purchase orders and the expenses
of printing and mailing a prospectus included with the
confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this paragraph 9;
4
<PAGE>
(8) of wiring funds in payment of Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who
initiates the transaction;
(9) of the cost of printing and postage of business reply
envelopes sent to Trust shareholders;
(10) of one or more CRT terminals connected with the computer
facilities of the transfer agent other than the portion
allocated to you in this paragraph 9;
(11) permitted to be paid or assumed by the Trust pursuant to a
plan ("12b-1 Plan"), if any, adopted by the Trust in
conformity with the requirements of Rule 12b-1 under the 1940
Act ("Rule 12b-1") or any successor rule, notwithstanding any
other provision to the contrary herein;
(12) of the expense of setting in type, printing and postage of the
periodic newsletter to shareholders other than the portion
allocated to you in this paragraph 9; and
(13) of the salaries and overhead of persons employed by you as
shareholder representatives other than the portion allocated
to you in this paragraph 9.
b) You shall pay or arrange for the payment of all fees and
expenses:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of
Shares to the public;
(3) of advertising in connection with the offering of Shares to
the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
trustees, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information or prospectuses;
5
<PAGE>
(6) of that portion of the expenses of setting in type, printing
and postage of the periodic newsletter to shareholders
attributable to promotional material included in such
newsletter at your request concerning investment companies
other than the Trust or concerning the Trust to the extent you
are required to assume the expense thereof pursuant to
paragraph 9(b)(8), except such material which is limited to
information, such as listings of other investment companies
and their investment objectives, given in connection with the
exchange privilege as from time to time described in the
Trust's prospectus;
(7) of that portion of the salaries and overhead of persons
employed by you as shareholder representatives attributable to
the time spent by such persons in responding to requests from
prospective investors and shareholders for information about
the Trust;
(8) of any activity which is primarily intended to result in the
sale of Shares, unless a 12b-1 Plan shall be in effect which
provides that the Trust shall bear some or all of such
expenses, in which case the Trust shall bear such expenses in
accordance with such Plan; and
(9) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent attributable to
your use of such terminal(s) to gain access to such of the
transfer agent's records as also serve as your records.
Expenses which are to be allocated between you and the Trust shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon
from time to time, which procedures or formulae shall to the extent practicable
reflect studies of relevant empirical data.
10. Conformity with Law. You agree that in selling Shares you will duly
conform in all respects with the laws of the United States and any state in
which Shares may be offered for sale by you pursuant to this Agreement and to
the rules and regulations of the National Association of Securities Dealers,
Inc., of which you are a member.
6
<PAGE>
11. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Trust in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through your
agents or employees. You assume full responsibility for your agents and
employees under applicable statutes and agree to pay all employee taxes
thereunder.
12. Indemnification. You agree to indemnify and hold harmless the Trust
and each of its trustees and officers and each person, if any, who controls the
Trust within the meaning of Section 15 of the 1933 Act, against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which the Trust or such trustees, officers, or controlling person
may become subject under such Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by you or any of your employees or
representatives, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement
(including a prospectus or statement of additional information) covering Shares
or any amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading if such statement or
omission was made in reliance upon information furnished to the Trust by you, or
(iii) may be incurred or arise by reason of your acting as the Trust's agent
instead of purchasing and reselling Shares as principal in distributing the
Shares to the public, provided, however, that in no case (i) is your indemnity
in favor of a trustee or officer or any other person deemed to protect such
trustee or officer or other person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) are
you to be liable under your indemnity agreement contained in this paragraph with
respect to any claim made against the Trust or any person indemnified unless the
Trust or such person, as the case may be, shall have notified you in writing
within a reasonable time after the summons or other first legal process giving
7
<PAGE>
information of the nature of the claims shall have been served upon the Trust or
upon such person (or after the Trust or such person shall have received notice
of such service on any designated agent), but failure to notify you of any such
claim shall not relieve you from any liability which you may have to the Trust
or any person against whom such action is brought otherwise than on account of
your indemnity agreement contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you so elect, to assume
the defense of any suit brought to enforce any such liability, but if you elect
to assume the defense, such defense shall be conducted by counsel chosen by you
and satisfactory to the Trust, to its officers and trustees, or to any
controlling person or persons, defendant or defendants in the suit. In the event
that you elect to assume the defense of any such suit and retain such counsel,
the Trust, such officers and trustees or controlling person or persons,
defendant or defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them, but, in case you do not elect to assume the
defense of any such suit, you will reimburse the Trust, such officers and
trustees or controlling person or persons, defendant or defendants in such suit
for the reasonable fees and expenses of any counsel retained by them. You agree
promptly to notify the Trust of the commencement of any litigation or
proceedings against it in connection with the issue and sale of any Shares.
The Trust agrees to indemnify and hold harmless you and each of your
trustee and officers and each person, if any, who controls you within the
meaning of Section 15 of the 1933 Act, against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such trustee, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Trust or any of its employees or representatives, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement (including a prospectus or statement
of additional information) covering Shares or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in reliance upon
8
<PAGE>
information furnished to you by the Trust; provided, however, that in no case
(i) is the Trust's indemnity in favor of you, a trustees or officer or any other
person deemed to protect you, such trustees or officer or other person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of obligations and duties under
this Agreement or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claims made against you or any
such trustees, officer or controlling person unless you or such trustees,
officer or controlling person, as the case may be, shall have notified the Trust
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon you or upon such trustees, officer or controlling person (or after you or
such trustees, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify the Trust of any such
claim shall not relieve it from any liability which it may have to the person
against whom such action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Trust will be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Trust elects to
assume the defense, such defense shall be conducted by counsel chosen by it and
satisfactory to you, your trustee, officers, or controlling person or persons,
defendant or defendants in the suit. In the event that the Trust elects to
assume the defense of any such suit and retain such counsel, you, your trustee,
officers or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them,
but, in case the Trust does not elect to assume the defense of any such suit, it
will reimburse you or such trustee, officers or controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Trust agrees promptly to notify you of the
commencement of any litigation or proceedings against it or any of its officers
or trustees in connection with the issuance or sale of any Shares.
13. Authorized Representations. The Trust is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained
9
<PAGE>
in a registration statement (including a prospectus or statement of additional
information) covering Shares, as such registration statement and prospectus may
be amended or supplemented from time to time.
You are not authorized to give any information or to make any
representations on behalf of the Trust or in connection with the sale of Shares
other than the information and representations contained in a registration
statement (including a prospectus or statement of additional information)
covering Shares, as such registration statement may be amended or supplemented
from time to time. No person other than you is authorized to act as principal
underwriter (as such term is defined in the 1940 Act) for the Trust.
14. Duration and Termination of this Agreement. This Agreement shall
become effective upon the date first written above and will remain in effect
until September 30, 1999 and from year to year thereafter, but only so long as
such continuance is specifically approved at least annually by the vote of a
majority of the trustees who are not interested persons of you or of the Trust,
cast in person at a meeting called for the purpose of voting on such approval,
and by vote of the Board of Trustees or of a majority of the outstanding voting
securities of the Trust. This Agreement may, on 60 days' written notice, be
terminated at any time without the payment of any penalty, by the Board of
Trustees of the Trust, by a vote of a majority of the outstanding voting
securities of the Trust, or by you. This Agreement will automatically terminate
in the event of its assignment. In interpreting the provisions of this paragraph
14, the definitions contained in Section 2(a) of the 1940 Act (particularly the
definitions of "interested person", "assignment" and "majority of the
outstanding voting securities"), as modified by any applicable order of the
Securities and Exchange Commission, shall be applied.
15. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Trust should at any time deem it
necessary or advisable in the best interests of the Trust that any amendment of
this Agreement be made in order to comply with the recommendations or
10
<PAGE>
requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under state or federal tax laws and should
notify you of the form of such amendment, and the reasons therefor, and if you
should decline to assent to such amendment, the Trust may terminate this
Agreement forthwith. If you should at any time request that a change be made in
the Trust's Declaration of Trust or By-laws or in its methods of doing business,
in order to comply with any requirements of federal law or regulations of the
Securities and Exchange Commission or of a national securities association of
which you are or may be a member relating to the sale of shares of the Trust,
and the Trust should not make such necessary change within a reasonable time,
you may terminate this Agreement forthwith.
16 Termination of Prior Agreements. This Agreement upon its
effectiveness terminates and supersedes all prior underwriting contracts between
the parties.
17. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
The name "Scudder Funds Trust" is the designation of the Trustees for
the time being under a Declaration of Trust dated December 21, 1987, as amended
from time to time, and all persons dealing with the Trust must look solely to
the property of the Trust for the enforcement of any claims against the Trust,
as neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Trust.
11
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract.
Very truly yours,
SCUDDER FUNDS TRUST
By: /s/Thomas F. McDonough
----------------------------------
Thomas F. McDonough
Vice President
The foregoing agreement is hereby accepted as of the foregoing date
thereof.
SCUDDER INVESTOR SERVICES, INC.
By: /s/Daniel Pierce
---------------------------------
Daniel Pierce
Vice President
12
Exhibit (h)(8)
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 9th day of November, 1998, by and between Scudder Funds Trust (the
"Trust"), a Massachusetts business trust with its principal place of business at
Two International Place, Boston, MA 02110-4103, on behalf of Scudder Short Term
Bond Fund, (the "Acquiring Fund"), a separate series of the Trust, and the
Trust, on behalf of Scudder Zero Coupon 2000 Fund (the "Acquired Fund"), a
separate series of the Trust.
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all or substantially all of
the assets of the Acquired Fund to the Acquiring Fund in exchange solely for
voting shares of beneficial interest ($.01 par value per share) of the Acquiring
Fund (the "Acquiring Fund Shares"), the assumption by the Acquiring Fund of all
of the liabilities of the Acquired Fund and the distribution of the Acquiring
Fund Shares to the shareholders of the Acquired Fund in complete liquidation of
the Acquired Fund as provided herein, all upon the terms and conditions
hereinafter set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN
EXCHANGE FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED
FUND LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, the Acquired Fund
agrees to transfer to the Acquiring Fund all or substantially all of the
Acquired Fund's assets as set forth in section 1.2, and the Acquiring Fund
agrees in exchange therefor (i) to deliver to the Acquired Fund that number of
full and fractional Acquiring Fund Shares determined by dividing the value of
the Acquired Fund's assets, computed in the manner and as of the time and date
set forth in section 2.1, by the net asset value of one Acquiring Fund Share,
computed in the manner and as of the time and date set forth in section 2.2; and
(ii) to assume all of the liabilities of the Acquired Fund, as set forth in
section 1.3. Such transactions shall take place at the closing provided for in
section 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by the Acquiring
Fund (collectively "Assets") shall consist of all assets, including, without
limitation, all cash, cash equivalents, securities, commodities and futures
interests and dividends or interest or other receivables that are owned by the
Acquired Fund and any deferred or prepaid expenses shown on the unaudited
statement of assets and liabilities of the Acquired Fund prepared as of the
effective time of the closing (the "Effective Time Statement"), prepared in
accordance with generally
<PAGE>
accepted accounting principles ("GAAP") applied consistently with those of the
Acquired Fund's most recent audited balance sheet. The assets shall constitute
at least 90% of the fair market value of the net assets, and at least 70% of the
fair market value of the gross assets, held by Acquired Fund immediately before
the Closing (excluding for these purposes assets used to pay the dividends and
other distributions paid pursuant to section 1.4).
1.3. The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date as defined in section 3.1.
1.4. On or as soon as practicable prior to the Closing Date as defined
in section 3.1, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
1.5. Immediately after the transfer of assets provided for in section
1.1 (the "Liquidation Time"), the Acquired Fund will distribute to the Acquired
Fund's shareholders of record, determined as of the Valuation Time (the
"Acquired Fund Shareholders"), on a pro rata basis, the Acquiring Fund Shares
received by the Acquired Fund pursuant to section 1.1 and will completely
liquidate. Such distribution and liquidation will be accomplished by the
transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund Shareholders.
The aggregate net asset value of Acquiring Fund Shares to be so credited to
Acquired Fund Shareholders shall be equal to the aggregate net asset value of
the Acquired Fund shares owned by such shareholders as of the Valuation Time.
All issued and outstanding shares of the Acquired Fund will simultaneously be
cancelled on the books of the Acquired Fund, although share certificates
representing interests in shares of the Acquired Fund will represent a number of
Acquiring Fund Shares after the Closing Date as determined in accordance with
section 2.3. The Acquiring Fund will not issue certificates representing
Acquiring Fund Shares in connection with such exchange.
1.6. Ownership of Acquiring Fund Shares will be shown on the books of
the Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's then-current prospectus and statement of
additional information.
1.7. Any reporting responsibility of the Acquired Fund including,
without limitation, the responsibility for filing of regulatory reports, tax
returns, or other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commission, and any federal, state or local
tax authorities or any other relevant regulatory authority, is and shall remain
the responsibility of the Acquired Fund.
1.8. All books and records of the Acquired Fund, including all books
and records required to be maintained under the 1940 Act and the rules and
regulations thereunder, shall be available to the Acquiring Fund from and after
the Closing Date and shall be turned over to the Acquiring Fund as soon as
practicable following the closing date.
2
<PAGE>
2. VALUATION
2.1. The value of the Assets shall be computed as of the close of
regular trading on the New York Stock Exchange on the business day immediately
preceding the Closing Date, as defined in Section 3.1 (such time and date being
hereinafter called the "Valuation Time") after the declaration and payment of
any dividends and/or other distributions on that date, using the valuation
procedures set forth in the Acquiring Fund's Declaration of Trust, as amended,
and then-current prospectus or statement of additional information.
2.2. The net asset value of an Acquiring Fund share shall be the net
asset value per share computed as of the Valuation Time using the valuation
procedures referred to in section 2.1.
2.3. The number of the Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Assets shall be determined by
dividing the value of the Assets with respect to shares of the Acquired Fund
determined in accordance with section 2.1 by the net asset value of an Acquiring
Fund Share determined in accordance with section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act and
shall be subject to confirmation by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1. The Closing of the transactions contemplated by this Agreement
shall be December 18, 1998, or such later date as the parties may agree in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously as of 4:00 p.m., Eastern time, on the
Closing Date, unless otherwise agreed to by the parties. The Closing shall be
held at the offices of Dechert Price & Rhoads, 10 Post Office Square - South,
Boston, MA 02109, or at such other place and time as the parties may agree.
3.2. Acquired Fund shall deliver to Acquiring Fund on the Closing Date
a schedule of assets.
3.3. State Street Bank and Trust Company, as custodian for the Acquired
Fund, shall (a) deliver at the Closing a certificate of an authorized officer
stating that the Assets shall have been delivered in proper form to State Street
Bank and Trust Company, custodian for the Acquiring Fund, prior to or on the
Closing Date and (b) all necessary taxes in connection with the delivery of the
Assets, including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made. Acquired Fund's
portfolio securities represented by a certificate or other written instrument
shall be presented by Custodian for Acquired Fund to Custodian for Acquiring
Fund for examination no later than five business days preceding the Closing Date
and transferred and delivered by the Acquired Fund as of the Closing Date by the
Acquired Fund for the account of Acquiring Fund duly endorsed in proper form for
3
<PAGE>
transfer in such condition as to constitute good delivery thereof. Acquired
Fund's portfolio securities and instruments deposited with a securities
depository, as defined in Rule 17f-4 under the 1940 Act, shall be delivered as
of the Closing Date by book entry in accordance with the customary practices of
such depositories and Custodian for Acquiring Fund. The cash to be transferred
by the Acquired Fund shall be delivered by wire transfer of federal funds on the
Closing Date.
3.4. The Transfer Agent, on behalf of the Acquired Fund, shall deliver
at the Closing a certificate of an authorized officer stating that its records
contain the names and addresses of the Acquired Fund Shareholders and the number
and percentage ownership (to three decimal places) of outstanding Acquired Fund
Shares owned by each such shareholder immediately prior to the Closing. The
Acquiring Fund shall issue and deliver a confirmation evidencing the Acquiring
Fund Shares to be credited on the Closing Date to the Acquired Fund or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have
been credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts or other documents as
such other party or its counsel may reasonably request to effect the
transactions contemplated by this Agreement.
3.5. In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange or another primary trading market for portfolio
securities of the Acquiring Fund or the Acquired Fund shall be closed to trading
or trading thereupon shall be restricted, or (b) trading or the reporting of
trading on such Exchange or elsewhere shall be disrupted so that, in the
judgment of the Board of Trustees of the Trust, accurate appraisal of the value
of the net assets with respect to the Acquiring Fund Shares or the Acquired Fund
Shares is impracticable, the Closing Date shall be postponed until the first
business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Trust, on behalf of the Acquired Fund, represents and warrants
to the Acquiring Fund as follows:
(a) The Trust is a business trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under the Trust's
Declaration of Trust, as amended, to own all of its properties and assets and to
carry on its business as it is now being conducted;
(b) The Trust is registered with the Commission as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and such registration is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the Securities Act of 1933, as
4
<PAGE>
amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the
"1934 Act") and the 1940 Act and such as may be required by state securities
laws;
(d) Other than with respect to contracts entered into in connection
with the portfolio management of the Acquired Fund which shall terminate on or
prior to the Closing Date, the Trust is not, and the execution, delivery and
performance of this Agreement by the Trust will not result, in violation of
Massachusetts law or of the Trust's Declaration of Trust, as amended, or
By-Laws, or of any material agreement, indenture, instrument, contract, lease or
other undertaking known to counsel to which the Acquired Fund is a party or by
which it is bound, and the execution, delivery and performance of this Agreement
by the Acquired Fund will not result in the acceleration of any obligation, or
the imposition of any penalty, under any agreement, indenture, instrument,
contract, lease, judgment or decree to which the Acquired Fund is a party or by
which it is bound;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Acquired Fund or any properties or
assets held by it. The Acquired Fund knows of no facts which might form the
basis for the institution of such proceedings which would materially and
adversely affect its business and is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body which
materially and adversely affects its business or its ability to consummate the
transactions herein contemplated;
(f) The Statement of Assets and Liabilities, Operations, and Changes in
Net Assets, the Supplementary Information, and the Investment Portfolio of the
Acquired Fund at and for the fiscal year ended December 31, 1997, has been
audited by PricewaterhouseCoopers LLP, independent certified public accountants,
and is in accordance with GAAP consistently applied, and such statement (a copy
of which has been furnished to the Acquiring Fund) presents fairly, in all
material respects, the financial position of the Acquired Fund as of such date
in accordance with GAAP, and there are no known contingent liabilities of the
Acquired Fund required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(g) Since December 31, 1997, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more than one year from
the date such indebtedness was incurred except as otherwise disclosed to and
accepted in writing by the Acquiring Fund. For purposes of this subsection (g),
a decline in net asset value per share of the Acquired Fund due to declines in
market values of securities in the Acquired Fund's portfolio, the discharge of
Acquired Fund liabilities, or the redemption of Acquired Fund shares by Acquired
Fund Shareholders shall not constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquired Fund required by law to have been filed
by such dates (including any extensions) shall have been filed and are or will
be correct in all material respects, and all federal and other taxes shown as
due or required to be shown as due on said returns and reports shall
5
<PAGE>
have been paid or provision shall have been made for the payment thereof, and,
to the best of the Acquired Fund's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
(i) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment company and
has elected to be treated as such, has been eligible to and has computed its
federal income tax under Section 852 of the Code, and will have distributed all
of its investment company taxable income and net capital gain (as defined in the
Code) that has accrued through the Closing Date;
(j) All issued and outstanding shares of the Acquired Fund (i) have
been offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the 1933
Act and state securities laws, (ii) are, and on the Closing Date will be, duly
and validly issued and outstanding, fully paid and non-assessable (recognizing
that, under Massachusetts law, Acquired Fund Shareholders, under certain
circumstances, could be held personally liable for obligations of the Acquired
Fund), and (iii) will be held at the time of the Closing by the persons and in
the amounts set forth in the records of the Transfer Agent, as provided in
section 3.3. The Acquired Fund does not have outstanding any options, warrants
or other rights to subscribe for or purchase any of the Acquired Fund shares,
nor is there outstanding any security convertible into any of the Acquired Fund
shares;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the Acquired Fund's assets to be transferred to the
Acquiring Fund pursuant to section 1.2 and full right, power, and authority to
sell, assign, transfer and deliver such assets hereunder free of any liens or
other encumbrances, except those liens or encumbrances as to which the Acquiring
Fund has received notice at or prior to the Closing, and upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, except those
restrictions as to which the Acquiring Fund has received notice and necessary
documentation at or prior to the Closing;
(l) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Trustees of the Trust, and, subject to the approval of the Acquired
Fund Shareholders, this Agreement constitutes a valid and binding obligation of
the Trust, on behalf of the Acquired Fund, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(m) The information to be furnished by the Acquired Fund for use in
applications for orders, registration statements or proxy materials or for use
in any other document filed or to be filed with any federal, state or local
regulatory authority (including the National Association of Securities Dealers,
Inc.), which may be necessary in connection with the transactions contemplated
hereby, shall be accurate and complete in all material respects and shall comply
in all material respects with federal securities and other laws and regulations
applicable thereto; and
6
<PAGE>
(n) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading; and
(o) The proxy statement of the Acquired Fund to be included in the
Registration Statement referred to in section 5.7 (the "Proxy Statement"),
insofar as it relates to the Acquired Fund, will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not materially misleading;
provided, however, that the representations and warranties in this section shall
not apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon and in conformity with information
that was furnished or should have been furnished by the Acquiring Fund for use
therein.
4.2. The Trust, on behalf of the Acquiring Fund, represents and
warrants to the Acquired Fund as follows:
(a) The Trust is a business trust duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under the Trust's
Declaration of Trust, as amended, to own all of its properties and assets and to
carry on its business as it is now being conducted;
(b) The Trust is registered with the Commission as an open-end
management investment company under the 1940 Act, and such registration is in
full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The Trust is not, and the execution, delivery and performance of
this Agreement by the Trust will not result, in violation of Massachusetts law
or of the Trust's Declaration of Trust, as amended, or By-Laws, or of any
material agreement, indenture, instrument, contract, lease or other undertaking
known to counsel to which the Acquiring Fund is a party or by which it is bound,
and the execution, delivery and performance of this Agreement by the Acquiring
Fund will not result in the acceleration of any obligation, or the imposition of
any penalty, under any agreement, indenture, instrument, contract, lease,
judgment or decree to which the Acquiring Fund is a party or by which it is
bound;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the
7
<PAGE>
Acquiring Fund or any properties or assets held by it. The Acquiring Fund knows
of no facts which might form the basis for the institution of such proceedings
which would materially and adversely affect its business and is not a party to
or subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
(f) The Statement of Assets and Liabilities, Operations, and Changes in
Net Assets, the Supplementary Information, and the Investment Portfolio of the
Acquiring Fund at and for the fiscal year ended December 31, 1997 has been
audited by Pricewaterhouse Coopers LLP, independent certified public
accountants, and is in accordance with GAAP consistently applied, and such
statement (a copy of which has been furnished to the Acquired Fund) presents
fairly, in all material respects, the financial position of the Acquiring Fund
as of such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquiring Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(g) Since December 31, 1997, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred except as otherwise disclosed to
and accepted in writing by the Acquired Fund. For purposes of this subsection
(g), a decline in net asset value per share of the Acquiring Fund due to
declines in market values of securities in the Acquiring Fund's portfolio, the
discharge of Acquiring Fund liabilities, or the redemption of Acquiring Fund
shares by Acquiring Fund shareholders shall not constitute a material adverse
change;
(h) At the date hereof and at the Closing Date, all federal and other
tax returns and reports of the Acquiring Fund required by law to have been filed
by such dates (including any extensions) shall have been filed and are or will
be correct in all material respects, and all federal and other taxes shown as
due or required to be shown as due on said returns and reports shall have been
paid or provision shall have been made for the payment thereof, and, to the best
of the Acquiring Fund's knowledge, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
(i) For each taxable year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such, has been eligible to
and has computed its federal income tax under Section 852 of the Code, and will
do so for the taxable year including the Closing Date;
8
<PAGE>
(j) All issued and outstanding shares of the Acquiring Fund (i) have
been offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the 1933
Act and state securities laws and (ii) are, and on the Closing Date will be,
duly and validly issued and outstanding, fully paid and non-assessable
(recognizing that, under Massachusetts law, Acquiring Fund Shareholders, under
certain circumstances, could be held personally liable for the obligations of
the Acquired Fund). The Acquiring Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Acquiring Fund
shares, nor is there outstanding any security convertible into any of the
Acquiring Fund shares;
(k) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement, will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued and
outstanding Acquiring Fund Shares, and will be fully paid and non-assessable
(recognizing that, under Massachusetts law, Acquiring Fund Shareholders, under
certain circumstances, could be held personally liable for the obligations of
the Acquired Fund).
(l) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens or other
encumbrances, except those liens or encumbrances as to which the Acquired Fund
has received notice at or prior to the Closing;
(m) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Trustees of the Trust and this Agreement will constitute a valid and
binding obligation of the Trust, on behalf of the Acquiring Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and other laws
relating to or affecting creditors' rights and to general equity principles;
(n) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements or proxy materials or for use
in any other document filed or to be filed with any federal, state or local
regulatory authority (including the National Association of Securities Dealers,
Inc.), which may be necessary in connection with the transactions contemplated
hereby, shall be accurate and complete in all material respects and shall comply
in all material respects with federal securities and other laws and regulations
applicable thereto;
(o) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
(p) The Proxy Statement to be included in the Registration Statement,
only insofar as it relates to the Acquiring Fund, will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material
9
<PAGE>
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading; provided, however, that the representations and
warranties in this section shall not apply to statements in or omissions from
the Proxy Statement and the Registration Statement made in reliance upon and in
conformity with information that was furnished or should have been furnished by
the Acquired Fund for use therein; and
(q) The Acquiring Fund agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act and such
of the state securities laws as may be necessary in order to continue its
operations after the Closing Date.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1. The Acquiring Fund and the Acquired Fund each covenants to operate
its business in the ordinary course between the date hereof and the Closing
Date, it being understood that (a) such ordinary course of business will include
(i) the declaration and payment of customary dividends and other distributions
and (ii) such changes as are contemplated by the Funds' normal operations; and
(b) each Fund shall retain exclusive control of the composition of its portfolio
until the Closing Date.
5.2. Upon reasonable notice, the Acquiring Fund's officers and agents
shall have reasonable access to the Acquired Fund's books and records necessary
to maintain current knowledge of the Acquired Fund and to ensure that the
representations and warranties made by the Acquired Fund are accurate.
5.3. The Acquired Fund covenants to call a meeting of the Acquired Fund
Shareholders entitled to vote thereon to consider and act upon this Agreement
and to take all other reasonable action necessary to obtain approval of the
transactions contemplated herein. Such meeting shall be scheduled for no later
than March 31, 1999.
5.4. The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.
5.5. The Acquired Fund covenants that it will assist the Acquiring Fund
in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Acquired Fund Shares and will provide
the Acquiring Fund with a list of affiliates of the Acquired Fund.
5.6. Subject to the provisions of this Agreement, the Acquiring Fund
and the Acquired Fund will each take, or cause to be taken, all actions, and do
or cause to be done, all things reasonably necessary, proper, and/or advisable
to consummate and make effective the transactions contemplated by this
Agreement.
5.7. Each Fund covenants to prepare the Registration Statement on Form
N-14 (the "Registration Statement"), in compliance with the 1933 Act, the 1934
Act and the 1940 Act in
10
<PAGE>
connection with the meeting of the Acquired Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein. The
Acquiring Fund will file the Registration Statement, including the Proxy
Statement, with the Commission. The Acquired Fund will provide the Acquiring
Fund with information reasonably necessary for the preparation of a prospectus,
which will include the Proxy Statement referred to in section 4.1(o), all to be
included in the Registration Statement, in compliance in all material respects
with the 1933 Act, the 1934 Act and the 1940 Act.
5.8. The Acquired Fund covenants that it will, from time to time, as
and when reasonably requested by the Acquiring Fund, execute and deliver or
cause to be executed and delivered all such assignments and other instruments,
and will take or cause to be taken such further action as the Acquiring Fund may
reasonably deem necessary or desirable in order to vest in and confirm the
Acquiring Fund's title to and possession of all the assets and otherwise to
carry out the intent and purpose of this Agreement.
5.9. The Acquiring Fund covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act and 1940 Act,
and such of the state securities laws as it deems appropriate in order to
continue its operations after the Closing Date and to consummate the
transactions contemplated herein; provided, however, that the Acquiring Fund may
take such actions it reasonably deems advisable after the Closing Date as
circumstances change.
5.10. The Acquiring Fund covenants that it will, from time to time, as
and when reasonably requested by the Acquired Fund, execute and deliver or cause
to be executed and delivered all such assignments, assumption agreements,
releases, and other instruments, and will take or cause to be taken such further
action, as the Acquired Fund may reasonably deem necessary or desirable in order
to (i) vest and confirm to the Acquired Fund title to and possession of all
Acquiring Fund shares to be transferred to Acquired Fund pursuant to this
Agreement and (ii) assume the assumed liabilities from the Acquired Fund.
5.11. As soon as reasonably practicable after the Closing, the Acquired
Fund shall make a liquidating distribution to its shareholders consisting of the
Acquiring Fund Shares received at the Closing.
5.12. The Acquiring Fund and the Acquired Fund shall each use its
reasonable best efforts to fulfill or obtain the fulfillment of the conditions
precedent to effect the transactions contemplated by this Agreement as promptly
as practicable.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
11
<PAGE>
6.1. All representations and warranties of the Trust, with respect to
the Acquired Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than Acquiring Fund, its adviser or any of their affiliates) against the
Acquired Fund, the Acquiring Fund or their advisers, directors, trustees or
officers arising out of this Agreement and (ii) no facts known to the Acquired
Fund which the Acquired Fund reasonably believes might result in such
litigation.
6.2. The Acquiring Fund shall have delivered to the Acquired Fund on
the Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquired Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Trust, with respect to the Acquiring Fund, made in this Agreement are true
and correct on and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as the
Acquired Fund shall reasonably request;
6.3. The Acquired Fund shall have received on the Closing Date an
opinion of Dechert Price & Rhoads, in a form reasonably satisfactory to the
Acquired Fund, and dated as of the Closing Date, to the effect that:
(a) The Trust has been duly formed and is an existing business trust;
(b) the Acquiring Fund has the power to carry on its business as presently
conducted in accordance with the description thereof in the Trust's registration
statement under the 1940 Act; (c) the Agreement has been duly authorized,
executed and delivered by the Trust, on behalf of the Acquiring Fund, and
constitutes a valid and legally binding obligation of the Trust, on behalf of
the Acquiring Fund, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and laws
of general applicability relating to or affecting creditors' rights and to
general equity principles; (d) the execution and delivery of the Agreement did
not, and the exchange of the Acquired Fund's assets for Acquiring Fund Shares
pursuant to the Agreement will not, violate the Acquiring Fund's Declaration of
Trust, as amended, or By-laws; and (e) to the knowledge of such counsel, all
regulatory consents, authorizations, approvals or filings required to be
obtained or made by the Acquiring Fund under the Federal laws of the United
States or the laws of the Commonwealth of Massachusetts for the exchange of the
Acquired Fund's assets for Acquiring Fund Shares, pursuant to the Agreement have
been obtained or made; and
6.4. The Acquiring Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquiring Fund on or before the Closing Date.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
12
<PAGE>
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquired Fund of all of the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following further
conditions:
7.1. All representations and warranties of the Trust, with respect to
the Acquired Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date; and there
shall be (i) no pending or threatened litigation brought by any person (other
than Acquired Fund, its adviser or any of their affiliates) against the
Acquiring Fund, the Acquired Fund or their advisers, directors, trustees or
officers arising out of this Agreement and (ii) no facts known to the Acquiring
Fund which the Acquiring Fund reasonably believes might result in such
litigation.
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3. The Acquired Fund shall have delivered to the Acquiring Fund on
the Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquiring Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Trust with respect to the Acquired Fund made in this Agreement are true and
correct on and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as the
Acquiring Fund shall reasonably request;
7.4. The Acquiring Fund shall have received on the Closing Date an
opinion of Dechert Price & Rhoads, in a form reasonably satisfactory to the
Acquiring Fund, and dated as of the Closing Date, to the effect that:
(a) The Trust has been duly formed and is an existing business trust;
(b) the Acquired Fund has the corporate power to carry on its business as
presently conducted in accordance with the description thereof in the Trust's
registration statement under the 1940 Act; (c) the Agreement has been duly
authorized, executed and delivered by the Trust, on behalf of the Acquired Fund,
and constitutes a valid and legally binding obligation of the Trust, on behalf
of the Acquired Fund, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and laws
of general applicability relating to or affecting creditors' rights and to
general equity principles; (d) the execution and delivery of the Agreement did
not, and the exchange of the Acquired Fund's assets for Acquiring Fund Shares
pursuant to the Agreement will not, violate the Trust's Declaration of Trust, as
amended, or By-laws; and (e) to the knowledge of such counsel, all regulatory
consents, authorizations, approvals or filings required to be obtained or made
by the Acquired Fund under the Federal laws of the United States or the laws of
the Commonwealth of Massachusetts for the exchange of the Acquired Fund's assets
for Acquiring Fund Shares, pursuant to the Agreement have been obtained or made;
and
13
<PAGE>
7.5. The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquired Fund on or before the Closing Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND
THE ACQUIRED FUND
If any of the conditions set forth below have not been met on or before
the Closing Date with respect to the Acquired Fund or the Acquiring Fund, the
other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the Trust's Declaration
of Trust, as amended, and By-Laws, applicable Massachusetts law and the 1940
Act, and certified copies of the resolutions evidencing such approval shall have
been delivered to the Acquiring Fund. Notwithstanding anything herein to the
contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
conditions set forth in this section 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending or to its knowledge threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain material damages or
other relief in connection with, this Agreement or the transactions contemplated
herein;
8.3. All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the
1933 Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5. The parties shall have received an opinion of Dechert Price &
Rhoads addressed to the Trust substantially to the effect that, based upon
certain facts, assumptions and representations, the transaction contemplated by
this Agreement constitutes a tax-free reorganization for Federal income tax
purposes. The delivery of such opinion is conditioned upon receipt by Dechert
Price & Rhoads of representations it shall request of the Trust. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund nor the Acquired
Fund may waive the condition set forth in this section 8.5.
14
<PAGE>
9. INDEMNIFICATION
9.1. The Acquiring Fund agrees to indemnify and hold harmless the
Acquired Fund and each of the Acquired Fund's trustees and officers from and
against any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Acquired Fund or any of its
trustees or officers may become subject, insofar as any such loss, claim damage
liability or expense (or actions with respect thereto) arises out of or is based
on any breach by the Acquiring Fund of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
9.2. The Acquired Fund agrees to indemnify and hold harmless the
Acquiring Fund and each of the Acquiring Fund's trustees and officers from and
against any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable costs of
investigation) to which jointly and severally, the Acquiring Fund or any of its
trustees or officers may become subject, insofar as any such loss, claim damage
liability or expense (or actions with respect thereto) arises out of or is based
on any breach by the Acquired Fund of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
10. FEES AND EXPENSES
10.1. The Trust on behalf of the Acquiring Fund, and the Trust, on
behalf of the Acquired Fund, represents and warrants to the other that it has no
obligations to pay any brokers or finders fees in connection with the
transactions provided for herein.
10.2. Expenses of the Reorganization that relate to the Acquiring Fund
and the Acquired Fund will be borne by Scudder Kemper Investments, Inc., the
investment adviser to the Acquiring Fund and the Acquired Fund. Any such
expenses which are so borne by Scudder Kemper Investments, Inc. will be solely
and directly related to the Reorganization within the meaning of Revenue Ruling
73-54, 1973-1 C.B. 187. The Acquired Fund shareholders will pay their own
expenses, if any, incurred in connection with the Reorganization.
11. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
11.1. The Acquiring Fund and the Acquired Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
11.2. Except as specified in the next sentence set forth in this
section 11.2, the representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
The covenants to be performed after the Closing and the obligations of each of
the Acquired Fund and Acquired Fund in Sections 9.1 and 9.2 shall survive the
Closing.
15
<PAGE>
12. TERMINATION
This Agreement may be terminated and the transactions contemplated
hereby may be abandoned by either party by (i) mutual agreement of the parties,
or (ii) by either party if the Closing shall not have occurred on or before
March 31, 1999, unless such date is extended by mutual agreement of the parties,
or (iii) by either party if the other party shall have materially breached its
obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any party or their respective directors/trustees or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the Acquired Fund Shareholders called by the Acquired Fund pursuant
to section 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Acquired Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval.
14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered by hand (including by Federal Express or similar express courier)
or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail, return receipt requested, addressed to the
Acquired Fund, Two International Place, Boston, MA 02110-4103, with a copy to
Dechert Price & Rhoads, 10 Post Office Square South, Boston, MA 02109-4603,
Attention: Sheldon A. Jones, Esq., or to the Acquiring Fund, Two International
Place, Boston, MA 02110-4103, with a copy to Dechert Price & Rhoads, 10 Post
Office Square South, Boston, MA 02109-4603, Attention: Sheldon A. Jones, Esq.,
or to any other address that the Acquired Fund or the Acquiring Fund shall have
last designated by notice to the other party.
15. HEADINGS; COUNTERPARTS; ASSIGNMENT; LIMITATION OF LIABILITY
15.1. The Article and section headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15.2. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
15.3. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or
16
<PAGE>
obligations hereunder shall be made by any party without the written consent of
the other party. Nothing herein expressed or implied is intended or shall be
construed to confer upon or give any person, firm or corporation, other than the
parties hereto and the shareholders of the Acquiring Fund and the Acquired Fund
and their respective successors and assigns, any rights or remedies under or by
reason of this Agreement.
15.4. The Trust is organized as a Massachusetts business trust, and
references in this Agreement to the Trust mean and refer to the Trustees from
time to time serving under its Declaration of Trust on file with the Secretary
of State of the Commonwealth of Massachusetts, as the same may be amended from
time to time, pursuant to which the Trust conducts its business. It is expressly
agreed that the obligations of the Trust hereunder shall not be binding upon any
of the Trustees, shareholders, nominees, officers, agents, or employees of the
Trust, the Acquiring Fund or the Acquired Fund personally, but bind only the
respective property of each of the Acquiring Fund and the Acquired Fund, as
provided in the Trust's Declaration of Trust. Moreover, no series of the Trust
other than the Acquiring Fund and the Acquired Fund shall be responsible for the
obligations of the Trust hereunder, and all persons shall look only to the
respective assets of each of the Acquiring Fund and the Acquired Fund to satisfy
the obligations of the Trust hereunder. The execution and the delivery of this
Agreement have been authorized by the Trust's Board of Trustees, on behalf of
each of the Acquiring Fund and the Acquired Fund, respectively, and this
Agreement has been signed by authorized officers of each of the Acquiring Fund
and the Acquired Fund acting as such, and neither such authorization by such
Trustees, nor such execution and delivery by such officers, shall be deemed to
have been made by any of them individually or to impose any liability on any of
them personally, but shall bind only the respective property of each of the
Acquiring Fund and the Acquired Fund, as provided in the Trust's Declaration of
Trust.
15.5. This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of Massachusetts, without regard to
its principles of conflicts of laws.
17
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its President or Vice President and its seal to be
affixed thereto and attested by its Secretary or Assistant Secretary.
Attest: Scudder Funds Trust
on behalf of Scudder Zero Coupon 2000 Fund
/s/Thomas F. McDonough
- -------------------------
Secretary /s/Daniel Pierce
------------------------------
By: Daniel Pierce
Its: President
Attest: Scudder Funds Trust
on behalf of Scudder Short Term Bond Fund
/s/Thomas F. McDonough
- -------------------------
Secretary /s/Daniel Pierce
------------------------------
By: Daniel Pierce
Its: President
18
[GRAPHIC OMITTED]
April 29, 1999
Scudder Funds Trust
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 28 to the Registration
Statement on Form N-1A (SEC File No. 2-73371)
Ladies and Gentlemen:
Scudder Funds Trust, formerly Scudder Target Fund, (the "Trust") is a
trust created under a written Declaration of Trust dated July 24, 1981. The
Declaration of Trust, as amended from time to time, is referred to as the
"Declaration of Trust." The beneficial interest under the Declaration of Trust
is represented by transferable shares, $.01 par value per share ("Shares"). The
Trustees have the powers set forth in the Declaration of Trust, subject to the
terms, provisions and conditions therein provided.
We are of the opinion that all legal requirements have been complied
with in the creation of the Trust and that said Declaration of Trust is legal
and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the Trustees
are empowered, in their discretion, from time to time, to issue Shares for such
amount and type of consideration, at such time or times and on such terms as the
Trustees may deem best. Under Article V, Section 5.1, it is provided that the
number of Shares authorized to be issued under the Declaration of Trust is
unlimited. Under Article V, Section 5.11, the Trustees may authorize the
division of Shares into two or more series. By written instruments, the Trustees
have from time to time established various series of the Trust. The Shares are
currently divided into two series (the "Funds").
<PAGE>
Scudder Funds Trust
April 29, 1999
Page 2
By votes adopted on November 11, 1997 and November 9, 1998, the
Trustees of the Trust authorized the President, any Vice President, the
Secretary and the Treasurer, from time to time, to determine the appropriate
number of Shares to be registered, to register with the Securities and Exchange
Commission, and to issue and sell to the public, such Shares.
We understand that you are about to file with the Securities and
Exchange Commission, on Form N-1A, Post Effective Amendment No. 28 to the
Trust's Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the continuous offering of the Shares of one Fund: Scudder Short Term Bond Fund.
We understand that our opinion is required to be filed as an exhibit to the
Registration Statement.
We are of the opinion that all necessary Trust action precedent to the
issue of the Shares of the Fund named above has been duly taken, and that all
such Shares may be legally and validly issued for cash, and when sold will be
fully paid and non-assessable by the Trust upon receipt by the Trust or its
agent of consideration for such Shares in accordance with the terms in the
Registration Statement, subject to compliance with the Securities Act, the
Investment Company Act of 1940, as amended, and applicable state laws regulating
the sale of securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to Post-Effective Amendment No. 28 to the Registration
Statement.
Very truly yours,
/s/Dechert Price & Rhoads
DECHERT PRICE & RHOADS
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 28 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder Funds Trust, comprised of Scudder Short Term Bond Fund of our report
dated February 25, 1999, on the financial statements and financial highlights
appearing in the December 31, 1998 Annual Report to the Shareholders of Scudder
Short Term Bond Fund, which is also incorporated by reference into the
Registration Statement. We further consent to the references to our Firm under
the headings "Financial Highlights," in the Prospectus and "Experts" in the
Statement of Additional Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 26, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Short Term Bond Fund Annual Report for the fiscal year ended 12/31/98 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> Scudder Short Term Bond Fund
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 995,548,553
<INVESTMENTS-AT-VALUE> 991,416,267
<RECEIVABLES> 10,185,070
<ASSETS-OTHER> 170,866
<OTHER-ITEMS-ASSETS> 563,518
<TOTAL-ASSETS> 1,002,335,721
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,395,443
<TOTAL-LIABILITIES> 10,395,443
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,135,134,380
<SHARES-COMMON-STOCK> 91,279,720
<SHARES-COMMON-PRIOR> 105,576,081
<ACCUMULATED-NII-CURRENT> 1,651,041
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (140,712,857)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,132,286)
<NET-ASSETS> 991,940,278
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 74,703,631
<OTHER-INCOME> 0
<EXPENSES-NET> 9,277,530
<NET-INVESTMENT-INCOME> 65,426,101
<REALIZED-GAINS-CURRENT> (3,844,223)
<APPREC-INCREASE-CURRENT> (16,197,280)
<NET-CHANGE-FROM-OPS> 45,384,598
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (62,427,806)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 425,742,760
<NUMBER-OF-SHARES-REDEEMED> (629,978,033)
<SHARES-REINVESTED> 47,687,597
<NET-CHANGE-IN-ASSETS> (173,590,884)
<ACCUMULATED-NII-PRIOR> 379,071
<ACCUMULATED-GAINS-PRIOR> (138,594,958)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,850,577
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,284,332
<AVERAGE-NET-ASSETS> 1,077,840,022
<PER-SHARE-NAV-BEGIN> 11.04
<PER-SHARE-NII> 0.66
<PER-SHARE-GAIN-APPREC> (0.19)
<PER-SHARE-DIVIDEND> (0.64)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.87
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
