AARP INVESTMENT PROGRAM FROM SCUDDER
AARP Cash Investment Funds:
AARP HIGH QUALITY MONEY FUND
AARP Income Trust:
AARP GNMA and U.S. TREASURY FUND
AARP HIGH QUALITY BOND FUND
AARP Tax Free Income Trust:
AARP HIGH QUALITY TAX FREE MONEY FUND
AARP INSURED TAX FREE GENERAL BOND FUND
AARP Growth Trust:
AARP BALANCED STOCK AND BOND FUND
AARP GROWTH AND INCOME FUND
AARP GLOBAL GROWTH FUND
AARP CAPITAL GROWTH FUND
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STATEMENT OF ADDITIONAL INFORMATION
February 1, 1996
As Revised October 1, 1996
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This Statement of Additional Information is not a prospectus and should
be read in conjunction with the combined Prospectus for all nine of the above
Funds, dated February 1, 1996, as amended from time to time, copies of which may
be obtained without charge by writing to the AARP INVESTMENT PROGRAM FROM
SCUDDER, P.O. Box 2540, Boston, Massachusetts 02208-2540 or by calling
1-800-253-2277.
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TABLE OF CONTENTS
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AARP INVESTMENT PROGRAM FROM SCUDDER..................................................................................1
Summary of Advantages and Benefits...........................................................................1
THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES.........................................................................3
AARP Money Funds.............................................................................................3
AARP Income Funds............................................................................................6
AARP Insured Tax Free Income Fund............................................................................8
AARP Growth Funds...........................................................................................11
Special Investment Policies of the AARP Funds...............................................................13
General Investment Policies of the AARP Funds...............................................................27
Investment Restrictions.....................................................................................27
PURCHASES............................................................................................................32
General Information.........................................................................................32
Checks......................................................................................................32
Share Price.................................................................................................33
Share Certificates..........................................................................................33
Direct Deposit Program......................................................................................33
Wire Transfers..............................................................................................33
Holidays....................................................................................................33
Other Information...........................................................................................33
REDEMPTIONS..........................................................................................................34
General Information.........................................................................................34
Redemption by Telephone.....................................................................................34
Redemption by Mail or Fax...................................................................................35
Redemption by Checkwriting..................................................................................36
Redemption-in-Kind..........................................................................................36
Other Information...........................................................................................36
EXCHANGES............................................................................................................37
TRANSACT BY PHONE....................................................................................................37
Purchasing Shares by Transact by Phone......................................................................38
Redeeming Shares by Transact by Phone.......................................................................38
FEATURES AND SERVICES OFFERED BY THE FUNDS...........................................................................38
Automatic Dividend Reinvestment.............................................................................38
Distributions Direct........................................................................................38
Reports to Shareholders.....................................................................................39
Consolidated Statements.....................................................................................39
RETIREMENT PLANS.....................................................................................................39
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")...............................................39
AARP Keogh Plan.............................................................................................40
OTHER PLANS..........................................................................................................41
Automatic Investment........................................................................................41
Automatic Withdrawal Plan...................................................................................41
Direct Payment of Regular Fixed Bills.......................................................................42
DIVIDENDS AND YIELD..................................................................................................42
Performance Information: Computation of Yields and Total Return.............................................43
TRUST ORGANIZATION...................................................................................................48
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MANAGEMENT OF THE FUNDS..............................................................................................49
Personal Investments by Employees of Scudder................................................................53
TRUSTEES AND OFFICERS................................................................................................53
REMUNERATION.........................................................................................................57
DISTRIBUTOR..........................................................................................................59
TAXES 59
BROKERAGE AND PORTFOLIO TURNOVER.....................................................................................63
Brokerage Commissions.......................................................................................63
Portfolio Turnover..........................................................................................65
NET ASSET VALUE......................................................................................................65
AARP Money Funds............................................................................................65
AARP Non-Money Market Funds.................................................................................65
ADDITIONAL INFORMATION...............................................................................................66
Experts.....................................................................................................66
Shareholder Indemnification.................................................................................67
Ratings of Corporate Bonds..................................................................................67
Ratings of Commercial Paper.................................................................................67
Ratings of Municipal Bonds..................................................................................68
Other Information...........................................................................................68
Tax-Exempt Income vs. Taxable Income........................................................................69
FINANCIAL STATEMENTS.................................................................................................70
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AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Investment Program from Scudder (the "Program") was developed
by the American Association of Retired Persons ("AARP") to provide an array of
conservatively managed investment options for its members. Today's financial
markets present an enormous, ever-changing selection of investments suited for
investors with varying needs. AARP, a non-profit organization dedicated to
improving the quality of life, independence and dignity of older people, has
undertaken to help its members by designing an investment program which attempts
to satisfy the investment and retirement planning needs of most of its members,
whether they be experienced investors or savers who have never invested at all.
As with any program with the "AARP" name, the Program includes special benefits
as described in the combined prospectus for the four Trusts, dated February 1,
1996 (the "Prospectus"). AARP endorses this program which was developed with the
assistance of Scudder, Stevens & Clark, Inc. ("the Fund Manager" or "Scudder"),
a firm with over 75 years of investment counseling and management experience.
Scudder, Stevens & Clark, Inc. was selected after an extensive search among
qualified candidates, and provides the Program with continuous and conservative
professional investment management. (See "MANAGEMENT OF THE FUNDS.")
The Program consists of four Trusts - AARP Cash Investment Funds, AARP
Income Trust, AARP Tax Free Income Trust, and AARP Growth Trust (the "Trusts").
Each of the Trusts is an open-end, management investment company authorized to
issue its shares of beneficial interest in separate series ("the AARP Funds"). A
total of nine diversified Funds are currently offered by the four Trusts. The
differing investment objectives of the nine Funds in the Program provide AARP
members with a variety of sensible investment alternatives, and by matching
their own objectives with those of the different AARP Funds, AARP members may
design an investment program to meet their personal needs. Not all your money is
the same. There is short-term money, for example money needed for your regular
budgeting and for emergencies, and there is money which can be invested for the
longer term. It is generally thought that three months of income/expenses should
be set aside in a savings account or money market fund to cover short-term
needs. The Program is designed to offer alternatives to keeping all of your
money in short-term fixed price investments like money market funds, insured
short-term savings accounts and insured six-month certificates of deposit. The
AARP Money Funds provide a taxable and a tax free alternative for short-term
monies and the AARP Income Funds, the AARP Insured Tax Free General Bond Fund
and the AARP Growth Funds provide a range of choices for longer term investment
dollars.
The Program includes functions performed by AARP Member Services; the
AARP Funds; Scudder Investor Services, Inc., the AARP Funds' "underwriter";
Scudder Service Corporation ("SSC"), the AARP Funds' "transfer agent"; and Brown
Brothers Harriman & Co. and State Street Bank and Trust Company, the AARP Funds'
"custodians."
Summary of Advantages and Benefits
o Experienced Professional Management: Scudder, Stevens & Clark, Inc.,
investment counsel since 1919 and mutual Fund managers since 1928, provides
investment advice to the Funds.
o AARP's Commitment: the Program was designed with AARP's active
participation to provide strong ongoing representation of the members'
interests and to help ensure a high level of service.
o Wide Selection of Investment Objectives: you can emphasize money market
returns and liquidity, income, tax-free income, growth, or any combination.
o Diversification: you benefit from investing in one or more large portfolios
of carefully selected securities.
o $500 Minimum Starting Investment for Eight of the Funds ($2,500 Minimum
Starting Investment in AARP High Quality Tax Free Money Fund, $250 Minimum
Starting Investment for AARP IRA and Keogh Plan Accounts): you may make
additional investments in any amount at any time.
o No Sales Commissions: the AARP Funds are pure no-load(TM), so you pay no
sales charges to purchase, transfer or redeem shares nor do you pay Rule
12b-1 fees.
o Investment Flexibility and Exchange: you may exchange among the nine AARP
Funds in the Program at any time without charge.
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o Dividends: the AARP Money Funds, the AARP Income Funds, and the AARP
Insured Tax Free Income Fund all pay dividends monthly, the AARP Balanced
Stock and Bond Fund and the AARP Growth and Income Fund are expected to pay
dividends quarterly and the AARP Global Growth Fund and the AARP Capital
Growth Fund pay dividends, if any, annually.
o Automatic Dividend Reinvestment: you may receive dividends by check or
arrange to have them automatically reinvested.
o Readily Available Account, Price, Yield and Total Return Information: the
yield for the AARP Money Funds is quoted weekly and the net asset value of
each other Fund is quoted daily in the financial pages of leading
newspapers. You may also dial our automated Easy-Access Line, toll-free,
1-800-631-4636 for recorded account information, share price, yield and
total return information, 7 days a week.
o Convenience and Efficiency: simplified investment procedures save you time
and help your money work harder for you.
o Liquidity: on any business day (subject to a 7 day waiting period for
investment checks to clear), you may request redemption of your shares at
the next determined net asset value, and, in the case of the AARP Money
Funds, you may elect free Checkwriting and write checks for $100 or more on
your account to make payments to any person or business.
o Direct Deposit Program: you may have your Social Security or other checks
from the U.S. Government or any other regular income checks, such as
pension, dividend, interest, and even payroll checks automatically
deposited directly to your account.
o Automatic Withdrawal Plan: with a minimum qualifying balance of $10,000 in
one AARP Fund, you may arrange to receive monthly, quarterly or periodic
checks from your account for any designated amount of $50 or more.
o Direct Payment of Regular Fixed Bills: with a minimum qualifying balance of
$10,000 in one AARP Fund, you may arrange to have your regular fixed bills
that are of fixed amounts, such as rent, mortgage, or other payments of $50
or more sent directly from your account at the end of the month.
o Personal Service and Information: professionally trained service
representatives help you whenever you have questions through our toll-free
number, 1-800-253-2277.
o Consolidated Statements: in addition to receiving a confirmation statement
of each transaction in your account, you receive, without extra charge, a
convenient monthly consolidated statement. (Retirement Plan statements are
mailed quarterly.) This statement contains the market value of all your
holdings and a complete listing of your transactions for the statement
period.
o Shareholder Handbook: the Shareholder Handbook was created to help answer
many of the questions you may have about investing in the Program.
o IRA Shareholder Handbook: The IRA Shareholder Handbook was created to help
answer many of the questions you may have about investing in the no-fee
AARP IRA.
o A Glossary of Investment Terms: the Glossary defines commonly used
financial and investment terms.
o Newsletter: every month, shareholders receive our newsletter, Financial
Focus (retirement plan shareholders receive a special edition of Financial
Focus on a quarterly basis) which is designed to help keep you up to date
on economic and investment developments, and any new financial services and
features of the Program.
This Statement of Additional Information supplements the Prospectus,
and provides more detailed information about the Trusts and the Funds.
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THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
AARP Money Funds
(See "AARP High Quality Money Fund," "AARP High Quality Tax Free Money
Fund," "INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND
RISK FACTORS" in the Prospectus.)
The AARP Funds offer a choice of a taxable and a tax free money fund
for small savers, big savers and people looking for a way to invest. People who
earn a relatively low interest rate in an insured bank savings account, who have
to make withdrawals or deposits in person or whose money isn't easily accessible
may find that the AARP Money Funds can help.
AARP High Quality Money Fund. The AARP High Quality Money Fund is a
separate series of AARP Cash Investment Funds and is the only Fund currently
offered by that Trust. Additional series of the Trust may be offered in the
future. From investments in high quality securities, the Fund is designed to
provide current income. The Fund also seeks to maintain stability and safety of
principal while offering liquidity. The Fund seeks to maintain a constant net
asset value of $1.00 per share. There may be circumstances under which this goal
cannot be achieved. The Fund invests in securities with remaining maturities of
397 calendar days or less, except in the case of U.S. Government securities
which may have maturities of up to 762 calendar days. The average
dollar-weighted maturity of its investments is 90 days or less. The investment
policies and restrictions of the Fund are described as follows:
To provide safety and liquidity, the investments of the AARP High
Quality Money Fund are limited to those that at the time of purchase are rated,
or judged by the Fund Manager to be the equivalent of those rated, within the
two highest credit ratings ("high quality instruments") by one or more rating
agencies such as: Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
("S&P") or Fitch Investors Service ("Fitch"). In addition, the Fund Manager
seeks through its own credit analysis to limit investments to high-quality
instruments presenting minimal credit risks. If a security ceases to be rated or
is downgraded below the second highest quality rating indicated above, the Fund
will promptly dispose of the security, unless the Trustees determine that
continuing to hold such security is in the best interests of the Fund.
Generally, the Fund will invest in securities rated in the highest quality
rating by at least two of these rating agencies.
Securities eligible for investment by the Fund include "first tier
securities" and "second tier securities." "First tier securities" are those
securities which are generally rated (or issued by an issuer with comparable
securities rated) in the highest category by at least two rating services (or by
one rating service, if no other rating service has issued a rating with respect
to that security). Securities generally rated (or issued by an issuer with
comparable securities rated) in the top two categories by at least two rating
agencies (or one, if only one rating agency has rated the security) which do not
qualify as first tier securities are known as "second tier securities." To
ensure diversity of the Fund's investments, as a matter of non-fundamental
policy the Fund will not invest more than 5% of its total assets in the
securities of a single issuer, other than the U.S. Government. The Fund may,
however, invest more than 5% of its total assets in the first tier securities of
a single issuer for a period of up to three business days after purchase,
although the Fund may not make more than one such investment at any time. The
Fund may not invest more than 5% of its total assets in securities which were
second tier securities when acquired by the Fund. Further, the Fund may not
invest more than the greater of (1) 1% of its total assets, or (2) one million
dollars, in the securities of a single issuer which were second tier securities
when acquired by the Fund.
The Fund purchases high quality short-term securities consisting of
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of supranational organizations such as the
International Bank for Reconstruction and Development (the World Bank);
obligations of domestic banks and their foreign branches, including bankers'
acceptances, certificates of deposit, deposit notes and time deposits;
obligations of savings and loan institutions; instruments whose credit has been
enhanced by: banks (letters of credit), insurance companies (surety bonds), or
other corporate entities (corporate guarantees); corporate obligations,
including commercial paper, notes, bonds, loans and loan participations;
securities with variable or floating interest rates; asset-backed securities,
including certificates, participations and notes; municipal securities including
notes, bonds and participation interests, either taxable or tax-free, as
described in more detail for the AARP High Quality Tax Free Money Fund;
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securities with put features; and repurchase agreements. The Fund may hold cash,
which does not earn interest, to facilitate stabilizing its net asset value per
share and for liquidity purposes.
Commercial paper at the time of purchase will be rated, or judged by
the Fund Manager under the supervision of the Trustees, to be the equivalent of
securities rated, A-1 or higher by S&P, Prime-1 or higher by Moody's or F-1 or
higher by Fitch. Investments in other corporate obligations, such as bonds or
notes, will be limited to securities rated, or judged by the Fund Manager to be
the equivalent of securities rated, AA or higher by S&P or Fitch or Aa or higher
by Moody's. Obligations which are the subject of repurchase agreements will be
limited to those of the type described above. Shares of this Fund are not
insured or guaranteed by the U.S. Government.
The Fund may invest in certificates of deposit and bankers' acceptances
of large domestic banks (i.e., banks which at the time of their most recent
annual financial statements show total assets in excess of $1 billion) and their
foreign branches and of smaller banks as described below. These as well as all
other investments of the Fund must be U.S. dollar denominated. The Fund will not
invest in certificates of deposit or bankers' acceptances of foreign banks
without additional consideration by and the approval of the Trustees of the
Trust. Although the Fund recognizes that the size of a bank is important, this
fact alone is not necessarily indicative of its creditworthiness.
Investment in certificates of deposit and bankers' acceptances issued
by foreign branches of domestic banks involves investment risks that are
different in some respects from those associated with investment in obligations
issued by domestic banks. Such investment risks include the possible imposition
of withholding taxes on interest income, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations, or other adverse political or economic
developments. In addition, it might be more difficult to obtain and enforce a
judgment against a foreign branch of a domestic bank.
The Fund may also invest in certificates of deposit issued by banks
which had, at the time of their most recent annual financial statements, total
assets of less than $1 billion, provided that (i) the principal amounts of such
certificates of deposit are insured by an agency of the U.S. Government, (ii) at
no time will the Fund hold more than $100,000 principal amount of certificates
of deposit of any one such bank, and (iii) at the time of acquisition, no more
than 10% of the Fund's net assets (taken at current value) are invested in
certificates of deposit and bankers' acceptances of banks having total assets
not in excess of $1 billion.
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System whose creditworthiness has been determined by the Fund
Manager to be equal to that of issuers of commercial paper rated within the two
highest grades. See "Repurchase Agreements" under "Special Investment Policies
of the AARP Funds."
AARP High Quality Tax Free Money Fund. The AARP High Quality Tax Free
Money Fund is a separate series of AARP Tax Free Income Trust. From investments
in high quality municipal securities, the Fund is designed to provide current
income free from federal income taxes. The Fund also seeks to maintain stability
and safety of principal, while offering liquidity. The Fund seeks to maintain a
constant net asset value of $1.00 per share. There may be circumstances under
which this goal cannot be achieved. Such securities may mature no more than 397
calendar days or less from the date the purchase is expected to be settled by
the Fund, with a weighted average maturity of 90 days or less.
The Fund will invest in municipal securities which are rated at the
time of purchase within the two highest quality ratings of rating agencies such
as: Fitch--AAA and AA, F1 and F2, or Moody's--Aaa and Aa, or within Moody's
short-term municipal obligations top ratings of MIG 1 and MIG 2 and P1, or
S&P--AAA/AA and SP1+/SP1, A1+ and A1--all in such proportions as management will
determine. Securities must be so rated by at least two agencies or by at least
one, if only one has rated the security. Generally, the Fund will invest in
securities rated in the highest quality rating by at least two of these rating
agencies. In some cases, short-term municipal obligations are rated using the
same categories as are used for corporate obligations. In addition, unrated
municipal securities will be considered as being within the foregoing quality
ratings if other equal or junior municipal securities of the same issuer are
rated and their ratings are within the foregoing ratings of Fitch, Moody's or
S&P. The Fund may also invest in municipal securities which are unrated if, in
the opinion of the Fund Manager, such securities possess creditworthiness
comparable to those rated securities in which the Fund may invest. For a
description of ratings, please see "Additional Information." Shares of this Fund
are not insured or guaranteed by the U.S. Government.
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Subsequent to its purchase by the AARP High Quality Tax Free Money
Fund, an issue of municipal securities may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. The Fund will
dispose of any such security unless the Board of Trustees of the Fund determines
that such disposal would not be in the best interests of the Fund.
As a fundamental policy, under normal circumstances, at least 80% of
the net assets of AARP High Quality Tax Free Money Fund will be invested in
tax-exempt securities. Although the Fund normally intends to ensure that all
income to shareholders will be exempt from federal income tax, there can be no
assurance that this goal will be achieved or that income to shareholders which
is federally tax exempt will be exempt from state and local taxes.
From time to time on a temporary basis or for defensive purposes, the
Fund may, subject to its investment restrictions, hold cash and invest in
taxable investments consisting of: (1) other obligations issued by or on behalf
of municipal or corporate issuers; (2) U.S. Treasury notes, bills and bonds; (3)
obligations of agencies and instrumentalities of the U.S. Government; (4) money
market instruments, such as domestic bank certificates of deposit, finance
company and corporate commercial paper, and banker's acceptances; and (5)
repurchase agreements (agreements under which the seller agrees at the time of
sale to repurchase the security at an agreed time and price) with respect to any
of the obligations which the Fund is permitted to purchase. The Fund will not
invest in instruments issued by banks or savings and loan associations unless at
the time of investment such issuers have total assets in excess of $1 billion
(as of the date of their most recently published financial statements).
Commercial paper investments will be limited to commercial paper rated A1+ and
A1 by S&P, Prime 1 by Moody's or F-1 by Fitch. The Fund may hold cash or invest
temporarily in taxable investments due, for example, to market conditions or
pending investment of proceeds of subscriptions for shares of the Fund or
proceeds from the sale of portfolio securities or in anticipation of
redemptions. However, the Fund expects to invest such proceeds in municipal
securities as soon as practicable. Interest income from temporary investments
may be taxable to shareholders as ordinary income.
Maintenance of Constant Net Asset Value Per Share. The Trustees of AARP
High Quality Money Fund and AARP High Quality Tax Free Money Fund have
determined that it is in the best interests of the Funds and their shareholders
to maintain the net asset value of the Funds' shares at a constant $1.00 per
share. In order to facilitate the maintenance of a constant $1.00 net asset
value per share, the AARP High Quality Money Fund and the AARP High Quality Tax
Free Money Fund operate in accordance with a rule of the Securities and Exchange
Commission (the "SEC"). In accordance with that rule, the assets of the Funds
consist entirely of cash, cash items, and high quality U.S. dollar-denominated
investments which have minimal credit risks and which have a remaining maturity
date of not more than 397 days from date of purchase (except that the AARP High
Quality Money Fund may invest in U.S. Government securities having maturities of
up to 762 days). The average dollar-weighted maturity of each Fund is varied
according to money market conditions, but may not exceed 90 days. The maturity
of a portfolio security shall be the period remaining until the date stated in
the security for payment of principal or such earlier date as it is called for
redemption, except that a shorter period shall be used for Variable and Floating
Rate Instruments in accordance with and subject to the conditions contained in
the Rule.
The Trustees have established procedures reasonably designed to
stabilize the price per share of the Funds at $1.00, as computed for the
purposes of sales, repurchases and redemptions, taking into account current
market conditions and each Fund's investment objectives. Such procedures, which
the Trustees review annually, include specific requirements designed to assure
that issuers of the Funds' securities continue to meet high standards of
creditworthiness. The procedures also establish certain requirements concerning
the quality and maturity of the Fund's investments. Finally, the procedures
require the determination, at such intervals as the Trustees deem appropriate
and reasonable, of the extent, if any, to which a Fund's net asset value
calculated by using available market quotations deviates from $1.00 per share.
Market quotations and market equivalents used in making such determinations may
be obtained from an independent pricing service approved by the Trustees. Such
determinations will be reviewed periodically by the Trustees.
If at any time it is determined that a deviation exists which may
result in material dilution or other unfair results to investors or existing
shareholders of a Fund, certain corrective actions may be taken, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding part or all of
dividends or payment of distributions from capital or capital gains; redeeming
shares in kind; or establishing a net asset value per share by using available
market quotations or equivalents. In addition, in order to stabilize the net
asset value per share at $1.00 the Trustees have the authority (1) to reduce the
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number of outstanding shares of a Fund on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends. The Funds may hold cash for the purpose of stabilizing their
net asset value per share. Holdings of cash, on which no return is earned, would
tend to lower the yield on the shares of the Funds.
The net income of the Funds is declared as dividends to shareholders
daily and distributed monthly in shares of the Funds unless payment is requested
in cash.
AARP Income Funds
(See "AARP GNMA and U.S. Treasury Fund," "AARP High Quality Bond Fund,"
"INVESTMENT OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK
FACTORS" in the Prospectus.) Each of the Funds seeks to earn a high level of
income consistent with its investment policies.
AARP GNMA and U.S. Treasury Fund. AARP GNMA and U.S. Treasury Fund is
designed for investors who are seeking high current income from high quality
securities and who wish to receive a degree of protection from bond market price
risk. The Fund's investment objective is to produce a high level of current
income and to keep the price of its shares more stable than that of a long-term
bond. The Fund pursues this objective by investing principally in U.S.
Government-guaranteed GNMA securities and U.S. Treasury obligations. The Fund
has been designed with the conservative, safety-conscious investor in mind. Of
the two funds in the AARP Income Trust, the AARP GNMA and U.S. Treasury Fund is
the more conservative choice. Although past performance is no guarantee of
future performance, historically, this Fund offers higher yields than such
short-term investments as insured savings accounts, insured six month
certificates of deposit and fixed-price money market funds.
The Fund invests in U.S. Treasury bills, notes and bonds; other
securities issued or backed by the full faith and credit of the U.S. Government,
including, but not limited to, Government National Mortgage Association ("GNMA")
mortgage-backed securities, Merchant Marine Bonds guaranteed by the Maritime
Administration and obligations of the Export-Import Bank; financial futures
contracts with respect to such securities; options on either such securities or
such financial futures contracts; and bank repurchase agreements. At least 65%
of the Fund's net assets will be directly invested in U.S. Treasury obligations,
including GNMA's. The Fund will make long-term investments but will also attempt
to dampen its price variability in comparison to that of a long-term bond by
including short-term U.S. Treasury securities in its portfolio. The Fund may
also utilize hedging techniques involving limited use of financial futures
contracts and the purchase and writing (selling) of put and call options on such
contracts. Under certain market conditions, these strategies may reduce current
income. At any time the Fund may have a substantial portion of its assets in
securities of a particular type or maturity. The Fund may also write covered
call options on portfolio securities and purchase "when-issued" securities.
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed
securities representing part ownership of a pool of mortgage loans. These loans,
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool" or group of
such mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. Once approved by GNMA, a Government
corporation within the U.S. Department of Housing and Urban Development, the
timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government. This is not, however, a guarantee
related to the Fund's yield or the value of your investment principal.
As mortgage-backed securities, GNMAs differ from bonds in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. GNMAs are called "pass-through" securities
because both interest and principal payments including prepayments are passed
through to the holder of the security (in this case, the Fund).
The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may involve capital losses if the
mortgages were purchased at a premium. For example, mortgagors may speed up the
rate at which they prepay their mortgages when interest rates decline
sufficiently to encourage refinancing. The Fund, when such prepayments are
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passed through to it, may be able to reinvest them only at a lower rate of
interest. The Fund Manager, in determining the attractiveness of GNMAs relative
to alternative fixed-income securities, and in choosing specific GNMA issues,
will have made assumptions as to the likely speed of prepayment. Actual
experience may vary from this assumption resulting in a higher or lower
investment return than anticipated.
Some investors may view the Fund as an alternative to a bank
certificate of deposit (CD). While an investment in the Fund is not federally
insured, and there is no guarantee of price stability, an investment in the
Fund--unlike a CD--is not locked away for any period, may be redeemed at any
time without incurring early withdrawal penalties, and may provide a higher
yield.
AARP High Quality Bond Fund. Consistent with investments primarily in
high quality securities, the Fund seeks to provide a high level of income and to
keep the value of its shares more stable than that of a long-term bond. By
including short- and medium-term bonds in its portfolio, the Fund seeks to offer
less share price volatility than long-term bonds or many long-term bond funds,
although its yield may be lower. Due to the greater market price risk of its
securities, the Fund may have a more variable share price than the AARP GNMA and
U.S. Treasury Fund. It is also possible that the Fund may provide a higher level
of income than the AARP GNMA and U.S.
Treasury Fund.
This Fund intends under normal circumstances to have at least 65% of
its total assets invested in bonds which include corporate notes and bonds
including high-yield issues convertible into common stock. It may also purchase
any investments eligible for the AARP GNMA and U.S. Treasury Fund as well as
obligations of federal agencies that are not backed by the full faith and credit
of the U.S. Government, such as obligations of Federal Home Loan Bank, Farm
Credit Banks and the Federal Home Loan Mortgage Corporation. In addition, it may
purchase obligations of international agencies such as the International Bank
for Reconstruction and Development, the Inter-American Development Bank and the
Asian Development Bank. Other eligible investments include U.S.
dollar-denominated foreign debt securities (such as U.S. dollar denominated debt
securities issued by the Dominion of Canada and its provinces), mortgage-backed
and other asset-backed securities, and money market instruments such as
commercial paper, bankers' acceptances and certificates of deposit issued by
domestic and foreign branches of U.S. banks. The Fund invests in a broad range
of short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income related
to the outlook for the economy and the securities markets, the quality of
available investments, the level of interest rates, and other factors.
Except for limitations in the Fund's investment restrictions, there is
no limit as to the proportions of the Fund which may be invested in any of the
eligible investments. However, it is a policy of the Fund that its
non-governmental investments will be spread among a variety of companies and
will not be concentrated in any industry.
(See "Investment Restrictions," herein.)
High Quality Portfolio. The policies of AARP High Quality Bond Fund are
designed to provide a portfolio that combines high quality securities with
investments that attempt to reduce its market price risk.
The portfolio of the AARP High Quality Bond Fund is high grade. In
fact, according to information provided by Morningstar, Inc., the Fund has one
of the highest quality standards of any general bond Fund currently available.
No purchase will be made if, as a result thereof, less than 65% of the Fund's
net assets would be invested in debt obligations, including money market
instruments, that (a) are issued or guaranteed by the U.S. Government, (b) are
rated at the time of purchase within the two highest grades assigned by any of
the nationally-recognized rating services including Moody's or S&P, or (c) if
not rated, are judged at the time of purchase by the Fund Manager, subject to
the Trustees' review, to be of a quality comparable to those in the two highest
ratings described in (b) above. All of the debt obligations in which the Fund
invests will, at the time of purchase, be rated within the three highest credit
ratings or, if not rated, will be judged to be of comparable quality by the Fund
Manager. (See "ADDITIONAL INFORMATION - Ratings of Corporate Bonds.")
Variations of Maturity. In an attempt to capitalize on the differences
in total return from securities of differing maturities, maturities may be
varied according to the structure and level of interest rates, and the Fund
Manager's expectations of changes therein.
Foreign Securities. The AARP High Quality Bond Fund may invest, without
limit, in U.S. dollar-denominated foreign debt securities (including U.S. dollar
denominated debt securities issued by the Dominion of Canada and its provinces
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and other debt securities which meet the Fund's criteria applicable to its
domestic investments), and in certificates of deposit issued by foreign branches
of United States banks, to any extent deemed appropriate by the Fund Manager.
AARP Insured Tax Free Income Fund
(See "AARP Insured Tax Free General Bond Fund," "INVESTMENT OBJECTIVES
AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the
Prospectus.)
AARP Insured Tax Free General Bond Fund. The AARP Insured Tax Free
General Bond Fund is a separate series of AARP Tax Free Income Trust. From a
portfolio consisting primarily of municipal securities covered by insurance, the
Fund seeks to provide high income free from federal income taxes and to keep the
value of its shares more stable than that of a long-term municipal bond. The
Fund seeks to provide investors with the higher tax-free income that is often
available from municipal securities by investing, under normal circumstances, in
a high grade portfolio of bonds consisting primarily of municipal securities,
with no restrictions as to maturity. Securities comprising at least 65% of the
total assets held by the Fund are fully insured as to face value and interest by
private insurers. While longer-term securities such as those in which the Fund
may invest have in recent years had higher yields, they also experience greater
price fluctuation than shorter-term securities. By including short- and
medium-term bonds in its portfolio, the Fund seeks to offer less share price
volatility than long-term municipal bonds or many long-term municipal bond
funds, although its yield may be lower. Because the Fund may trade its
securities, it is also free to attempt to take advantage of opportunities in the
market to achieve higher current income. This opportunity is not available to
unit investment trusts, which hold fixed portfolios of municipal securities.
Under normal circumstances, at least 80% of the Fund's net assets are
invested in tax-exempt securities. For this purpose, private activity bonds, the
interest on which is treated as a preference item for purposes of calculating
alternative minimum tax liability, will not be treated as tax exempt securities.
The Fund does not intend to purchase any such private activity bonds. (See
"TAXES" herein.)
There can be no assurance that the objectives of the Fund will be
achieved or that all income to shareholders which is exempt from federal income
taxes will be exempt from state or local taxes. Shareholders may also be subject
to tax on long-term and short-term capital gains (see "TAXES" herein).
In addition, the market prices of municipal securities, like those of
taxable debt securities, go up and down when interest rates change. Thus, the
net asset value per share can be expected to fluctuate and shareholders may
receive more or less than their purchase price for shares they redeem. In
addition to investments in municipal obligations, as described below, the Fund
may invest in short-term taxable U.S. Government securities and repurchase
agreements backed by U.S. Government securities. The Fund also may invest in
demand notes and tax-exempt commercial paper, financial futures contracts, and
may invest in and write (sell) options related to such futures contracts. These
investments are not insured or guaranteed or backed by the U.S. Government.
Except for futures and options, which are not rated, the AARP Insured Tax Free
General Bond Fund will only purchase securities rated within the top three
ratings by Moody's and S&P, or the equivalent as determined by the Fund Manager,
or repurchase agreements on such securities. To qualify as "within the top three
ratings," a security must have such a rating due to the credit of the issuer or
due to specific insurance on the security, whether acquired at issuance or by
the Fund at the time of purchase. A security would not so qualify if its rating
was solely the result of coverage under the Fund's portfolio insurance.
Securities in which the Fund may invest may include: (a) a security
that carries at the time of issuance, whether because of the credit of the
issuer or because it is insured at issuance by an insurance company, a rating
within the top three ratings; and (b) a security not rated within the top three
ratings at the time of issuance but insured to maturity by the Fund at the time
of purchase if, upon issuance of such insurance, the Fund Manager is able to
determine that the security is now the equivalent of a security rated within the
top three ratings by a nationally recognized rating agent.
When, in the opinion of the Fund Manager, defensive considerations or
an unusual disparity between the after-tax income on taxable investments and
comparable municipal obligations make it advisable to do so, up to 20% of the
Fund's net assets may be held in cash or invested in short-term investments such
as U.S. Treasury notes, bills and bonds and repurchase agreements collateralized
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by U.S. Government securities, the interest income from which may be subject to
federal income tax. Notwithstanding the foregoing, the Fund may invest more than
20% of its net assets in such taxable U.S. Treasury securities and repurchase
agreements for temporary defensive purposes.
Insurance. Insurance on at least 65% of the AARP Insured Tax Free
General Bond Fund's total assets will be obtained from nationally recognized
private insurers, including the following: Financial Guaranty Insurance Company
("FGIC") is owned by FGIC Corporation, which in turn is owned by General
Electric Credit Corporation; AMBAC Indemnity Corporation; and Municipal Bond
Investors Assurance Corporation, a wholly-owned subsidiary of MBIA Incorporated,
the principal shareholders of which are: The Aetna Life & Casualty Company,
Fireman's Fund Insurance Company, subsidiaries of the CIGNA Corporation and
affiliates of the Continental Insurance Company.
The Fund currently has portfolio insurance provided by FGIC pursuant to
which it may insure securities mutually agreed to between the Fund and FGIC so
long as the security remains in the Fund's portfolio. Pursuant to an irrevocable
commitment, FGIC also provides the Fund with the option to obtain insurance for
any security covered by the FGIC portfolio insurance, which insurance can
continue if the security were to be sold by the Fund. The Fund may procure
portfolio insurance from other insurers.
At least 65% of the Fund's assets are fully insured by private insurers
as to payment of face value and interest to the Fund, when due. If uninsured
securities or securities not directly or indirectly backed or guaranteed by the
U.S. Government are purchased and expected to be held for 60 days or more,
insurance will be obtained within 30 days to ensure that 65% of the Fund's
assets are insured by the issuer or arranged for by the Fund. If at least 65% of
its assets are not insured securities, the Fund will obtain insurance for a
portion of its U.S. Government guaranteed or backed securities so that the 65%
standard is achieved.
The Fund requires that insurance with respect to its securities provide
for the unconditional payment of scheduled principal and interest when due. In
the event of a default by the issuer, the insurer will, within 30 days of notice
of such default, provide to its agent or Trustee funds needed to make any such
payments. Such agent or Trustee will bear the responsibility of seeing that such
funds are used to make such payments to the appropriate parties. Such insurance
will not guarantee the market value of a security. Insurance on the Fund's
securities will in some cases continue in the event the securities are sold by
the Fund, while in other cases it may not.
To the extent the Fund's insured municipal securities do not equal 65%
of its total assets, the Fund will obtain insurance on such amount of its U.S.
Government guaranteed or backed securities as is necessary to have 65% of the
Fund's total assets insured at all times. This type of insurance will terminate
when the security is sold and will involve an added cost to the Fund while not
increasing the quality rating of the security.
Insurance on individual securities, whether obtained by the issuer or
the Fund, is non-cancelable and runs for the life of the security. Securities
covered under the Fund's portfolio insurance are insured only so long as they
are held by the Fund, though the Fund has the option to procure individual
secondary market insurance which would continue to cover any such security after
its sale by the Fund. Such guaranteed renewable insurance continues so long as
premiums are paid by the Fund and, in the judgment of the Fund Manager, coverage
should be continued. Non-payment of premiums on the portfolio insurance will,
under certain circumstances result in the cancellation of such insurance and
will also permit FGIC to take action against the Fund to recover premiums due
it. In the case of securities which are individually insured, default by the
issuer is not expected to affect the market value of the security relative to
other insured securities of the same maturity value and coupon and covered by
the same insurer. In the case of a security covered by the Fund's portfolio
insurance, the market value of such a security in the event of such default
might be less unless the Fund elected to purchase secondary market insurance for
it. It is the intention of the Fund Manager either to procure individual
secondary market insurance for, or retain in the Fund's portfolio, securities
which are insured by the Fund under portfolio insurance and which are in default
or significant risk of default in the payment of principal or interest. Any such
securities retained by the Fund would be held until the default has been cured
or the principal and interest have been paid by the issuer or the insurer.
Premiums for individual insurance may be payable in advance or may be
paid periodically over the term of the security by the party then owning the
security, and the costs will be reflected in the price of the security. The cost
of insurance for longer-term securities, expressed in terms of income on the
security, is likely to reduce such income by from 10 to 60 basis points. Thus, a
security yielding 10% might have a net insured yield of 9.9% to 9.4%. The impact
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of the cost of the Fund's portfolio insurance on the Fund's net yield is
somewhat less. The cost of insurance for shorter-term securities, which are
generally lower-yielding, is expected to be less. It should be noted that
insurance raises the rating of a municipal security. Lower rated securities
generally pay a higher rate of interest than higher rated securities. Thus,
while there is no assurance that this will always be the case, the Fund may
purchase lower rated securities which, when insured, will bear a higher rating,
and may pay a higher net rate of interest than other equivalently rated
securities which are not insured.
Insurers have certain eligibility standards as to municipal securities
they will insure. Such standards may be more or less strict than standards which
would be applied for purchase of a security for the Fund. To the extent the
insurers apply stricter standards, the Fund will be restricted by such standards
in the purchase and retention of municipal securities.
The Internal Revenue Service has issued revenue rulings indicating that
(a) the fact that municipal obligations are insured will not affect their
tax-exempt status and (b) insurance proceeds representing maturing interest on
defaulted municipal obligations paid to certain municipal bond funds will be
excludable from federal gross income under Section 103(a) of the Internal
Revenue Code. While operation of the Fund and the terms of the insurance
policies on the Fund's securities may differ somewhat from those addressed by
the revenue rulings, the Fund does not anticipate that any differences will be
material or change the result with respect to the Fund.
Insurers of the Fund's municipal securities are subject to regulation
by the department of insurance in each state in which they are qualified to do
business. Such regulation, however, is no guarantee that an insurer will be able
to perform on its contract of insurance in the event a claim should be made
thereunder at some time in the future. The Fund Manager reviews the financial
condition of each insurer of their securities at least annually, and in the
event of any material development, with respect to its continuing ability to
meet its commitments to any contract of bond or portfolio insurance.
Management Strategies. In pursuit of its investment objectives the Fund
purchases securities that it believes are attractive and competitive values in
terms of quality, and relationship of current price to market value. However,
recognizing the dynamics of municipal bond prices in response to changes in
general economic conditions, fiscal and monetary policies, interest levels and
market forces such as supply and demand for various bond issues, the Fund
Manager manages the Fund continuously, attempting to achieve a high level of
tax-free income.
The primary strategies employed in the management of the Fund are:
Variations of Maturity. In an attempt to capitalize on the differences
in total return from municipal securities of differing maturities, maturities
may be varied according to the structure and level of interest rates, and the
Fund Manager's expectations of changes therein.
Emphasis on Relative Valuation. The interest rate (and hence price)
relationships between different categories of municipal securities of the same
or generally similar maturity tend to change constantly in reaction to broad
swings in interest rates and factors affecting relative supply and demand. These
temporary disparities in normal yield relationships may afford opportunities to
invest in more attractive market sectors or specific issues by trading
securities currently held by the Fund.
Market Trading Opportunities. In addition to the above, the Fund may
engage in short-term trading (selling securities held for brief periods of time,
usually less than 3 months) if the Fund believes that such transactions, net of
costs, would further the attainment of that Fund's objectives. The needs of
different classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
Fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Funds will be able to take advantage of
them. The Fund will limit its voluntary short-term trading to the extent
necessary to qualify as a "regulated investment company" under the Internal
Revenue Code.
Special Considerations: Income Level and Credit Risk. To the extent
that AARP Insured Tax Free General Bond Fund holds insured municipal
obligations, the income earned on its shares will tend to be less than for an
uninsured portfolio of the same securities. The fund will amortize as income,
over the life of the respective security issues, any original issue discount on
debt obligations (even where these are acquired in the after-market), and market
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discount on short-term U.S. Government securities. The Fund will elect to
amortize the premium paid on acquisition of any premium coupon obligations.
Since such discounts and premiums will be recognized in the Fund's accounts over
the life of the respective security issues and included in the regular monthly
income distributions to shareholders, they will not give rise to taxable capital
gains or losses. However, a capital gain may be realized upon the sale or
maturity and payment of certain obligations purchased at a market discount.
AARP Growth Funds
(See "AARP Balanced Stock and Bond Fund," "AARP Growth and Income
Fund," "AARP Global Growth Fund," "AARP Capital Growth Fund," "INVESTMENT
OBJECTIVES AND POLICIES," and "OTHER INVESTMENT POLICIES AND RISK FACTORS" in
the Prospectus.)
AARP Balanced Stock and Bond Fund. The AARP Balanced Stock and Bond
Fund's investment objective is to seek to provide long-term growth of capital
and income while attempting to keep the value of its shares more stable than
other balanced mutual funds. The Fund pursues these objectives by investing in a
combination of stocks, bonds, and cash reserves.
The Fund is intended to provide--through a single investment--access to
a wide variety of income-oriented stocks and investment-grade bond investments.
Common stocks and other equity investments provide long-term growth potential to
help offset the effect of inflation on an investor's purchasing power. Bonds and
other fixed-income investments provide current income and may, over time, help
reduce fluctuations in the Fund's share price.
In seeking a balance of growth and income, as well as long-term
preservation of capital, the Fund invests in a diversified portfolio of equity
and fixed-income securities. At least 30% of the Fund's assets will be in
fixed-income securities, with the remainder of its net assets in common stocks
and securities convertible into common stocks. For temporary defensive purposes,
the Fund may invest without limit in cash and in other money market and
short-term instruments when the Fund Manager deems such a position advisable in
light of economic or market conditions.
The Fund will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Fund
Manager weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Fund Manager analyzes, on a global basis,
the level and direction of interest rates, capital flows, inflation
expectations, anticipated growth of corporate profits, monetary and fiscal
policies around the world, and other related factors.
The Fund does not take extreme investment positions as part of an
effort to "time the market." Shifts between stocks and fixed-income investments
are expected to occur in generally small increments within the guidelines
adopted in the prospectus and this Statement of Additional Information. The Fund
is designed as a conservative long-term investment.
While the Fund emphasizes U.S. equity and debt securities, it may
invest without limit in foreign securities, including depositary receipts. The
Fund's foreign holdings will meet the criteria applicable to its domestic
investments. Foreign securities are intended to increase diversification, thus
reducing risk, while providing the opportunity for higher returns.
In addition, the Fund may invest in securities on a when-issued or
forward delivery basis and may write (sell) covered call options on the equity
securities it holds to enhance investment return and may purchase and sell
options on stock indices for hedging purposes. Subject to applicable regulatory
guidelines and solely to protect against adverse effects of changes in interest
rates, the Fund may make limited use of financial futures contracts.
Equity investments. The Fund can invest up to 70% of its net assets in
equity securities. The Fund's equity investments consist of common stocks,
preferred stocks and securities convertible into common stocks, of companies
that, in the Fund Manager's judgment, will offer the opportunity for capital
growth and growth of earnings while providing dividends. The Fund pursues these
objectives by investing primarily in common stocks and securities convertible
into common stocks. Over time, a stock which produces continued earnings growth
tends to produce higher dividends and stock values.
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The Fund invests in a variety of industries and companies. Changes in
the Fund's portfolio securities are made on the basis of investment
considerations and not for trading purposes.
Fixed-income investments. To enhance income and stability, the Fund
will have at least 30% of its net assets invested in fixed-income securities.
The Fund can invest in a broad range of corporate bonds and notes, convertible
bonds, and preferred and convertible preferred securities. It may also purchase
U.S. Government securities and obligations of federal agencies and
instrumentalities that are not backed by the full faith and credit of the U.S.
Government, such as obligations of the Federal Home Loan Banks, Farm Credit
Banks, and the Federal Home Loan Mortgage Corporation. The Fund may also invest
in obligations of international agencies, foreign debt securities (both U.S. and
non-U.S. dollar denominated), mortgage-backed and other asset-backed securities,
municipal obligations, zero coupon securities, and restricted securities issued
in private placements.
For liquidity and defensive purposes, the Fund may invest in money
market securities such as commercial paper, bankers' acceptances, and
certificates of deposit issued by domestic and foreign branches of U.S. banks.
The Fund may also enter into repurchase agreements with respect to U.S.
Government securities.
All of the Fund's debt securities will be investment grade, that is,
rated Baa or above by Moody's or BBB by S&P. Moreover, at least 75% of these
securities will be high grade, that is, rated within the three highest quality
ratings of Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or, if unrated,
judged to be of equivalent quality as determined by the Fund Manager at the time
of purchase. Securities must also meet credit standards applied by the Fund
Manager. Moreover, the Fund does not purchase debt securities rated below Baa by
Moody's or BBB by S&P. Should the rating of a portfolio security be downgraded
the Fund Manager will determine whether it is in the best interest of the Fund
to retain or dispose of the security.
AARP Growth and Income Fund. From investments primarily in common
stocks and securities convertible into common stocks, the Fund seeks to provide
long-term capital growth and income, and to keep the value of its shares more
stable than other growth and income mutual funds.
The Fund invests primarily in common stocks and securities convertible
into common stocks. It also may invest in rights to purchase common stocks of
companies offering the prospect for capital growth and growth of earnings while
paying current dividends. The Fund may also invest in preferred stocks
consistent with the Fund's objective. Over time, continued growth of earnings
tends to produce higher dividends and to enhance capital value. In addition,
since 1945, the overall performance of common stocks has exceeded the rate of
inflation. For temporary defensive purposes, the Fund may also purchase
high-quality money market securities (such as U.S. Treasury bills, commercial
paper, certificates of deposit and bankers' acceptances) and repurchase
agreements when the Fund Manager deems such a position advisable in light of
economic or market conditions.
AARP Global Growth Fund. From investments primarily in equity
securities of corporations worldwide, the Fund seeks to offer long-term capital
growth in a globally diversified portfolio, and to keep the value of its shares
more stable than other global equity funds. The Fund invests on a worldwide
basis in equity securities of companies which are incorporated in the U.S. or in
foreign countries. It may also invest in the debt securities of U.S. and foreign
issuers. Income is an incidental consideration.
The management of the Fund believes that there is substantial
opportunity for long-term capital growth from a professionally managed portfolio
of securities selected from the U.S. and foreign equity markets. Global
investing takes advantage of the investment opportunities created by the growing
integration of economies around the world. The world has become highly
integrated in economic, industrial and financial terms. Companies increasingly
operate globally as they purchase raw materials, produce and sell their
products, and raise capital. As a result, international trends such as movements
in currency and trading relationships are becoming more important to many
industries than purely domestic influences. To understand a company's business,
it is frequently more important to understand how it is linked to the world
economy than whether or not it is, for example, a U.S., French or Swiss company.
Just as a company takes a global perspective in deciding where to operate, so
too may an investor benefit from looking globally in deciding which industries
are growing, which producers are efficient and which companies' shares are
undervalued. The Fund affords the investor access to opportunities wherever they
arise, without being constrained by the location of a company's headquarters or
the trading market for its shares.
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The Fund invests in companies that the Fund Manager believes will
benefit from global economic trends, promising technologies or products and
specific country opportunities resulting from changing geopolitical, currency,
or economic relationships. The Fund will normally invest at least 65% of its
total assets in securities of at least three different countries. Typically, it
is expected that the Fund will invest in a wide variety of regions and
countries, including both foreign and U.S. issues. The Fund may be invested 100%
in non-U.S. issues, and for temporary defensive purposes may be invested 100% in
U.S. issues, although under normal circumstances it is expected that both
foreign and U.S. investments will be represented in the Fund's portfolio. It is
expected that investments will include companies of varying size as measured by
assets, sales, or capitalization.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
AARP Capital Growth Fund. From investments primarily in common stocks
and securities convertible into common stocks, the Fund seeks to provide
long-term capital growth, and to keep the value of its shares more stable than
other capital growth mutual funds. Through a broadly diversified portfolio
consisting primarily of high quality, medium- to large-sized companies with
strong competitive positions in their industries the Fund seeks to offer less
share price volatility than many growth funds. It may also invest in rights to
purchase common stocks, the growth prospects of which are greater than most
stocks but which may also have above-average market risk. The Fund may also
invest in preferred stocks consistent with the Fund's objective. The securities
in which the Fund may invest are described under "AARP Capital Growth Fund" in
the Prospectus.
Investments in common stocks have a wide range of characteristics, and
management of the Fund believes that opportunity for long-term growth of capital
may be found in all sectors of the market for publicly-traded equity securities.
Thus, the search for equity investments for the Fund may encompass any sector of
the market and companies of all sizes. In addition, since 1945, the overall
performance of common stocks has exceeded the rate of inflation. It is a
fundamental policy of the Fund, which may not be changed without approval of a
majority of the Fund's outstanding shares (see "Investment Restrictions",
herein, for majority voting requirements), that the Fund will not concentrate
its investments in any particular industry. However, the Fund reserves the right
to invest up to 25% of its total assets (taken at market value) in any one
industry.
The Fund may invest in high-quality money market instruments (including
U.S. Treasury bills, commercial paper, certificates of deposit, and bankers'
acceptances), repurchase agreements and other debt securities for temporary
defensive purposes when the Fund Manager deems such a position advisable in
light of economic or market conditions.
Special Investment Policies of the AARP Funds
(See "OTHER INVESTMENT POLICIES AND RISK FACTORS" in the Prospectus.)
U.S. Government Securities. U.S. Treasury securities, backed by the
full faith and credit of the U.S. Government, include a variety of securities
which differ in their interest rates, maturities and times of issuance. Treasury
bills have original maturities of one year or less. Treasury notes have original
maturities of one to ten years and Treasury bonds generally have original
maturities of greater than ten years.
U.S. Government agencies and instrumentalities which issue or guarantee
securities include, for example, the Export-Import Bank of the United States,
the Farmers Home Administration, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Small Business Administration and the
Federal Farm Credit Bank. Obligations of some of these agencies and
instrumentalities, such as the Export-Import Bank, are supported by the full
faith and credit of the United States; others, such as the securities of the
Federal Home Loan Bank, by the ability of the issuer to borrow from the
Treasury; while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. No assurance can be given
that the U.S. Government would provide financial support to the latter group of
U.S. Government instrumentalities, as it is not obligated to do so.
Interest rates on U.S. Government obligations which the AARP Funds may
purchase may be fixed or variable. Interest rates on variable rate obligations
are adjusted at regular intervals, at least annually, according to a formula
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reflecting then current specified standard rates, such as 91-day U.S. Treasury
bill rates. These adjustments tend to reduce fluctuations in the market value of
the securities.
Municipal Obligations. Municipal obligations held by AARP High Quality
Tax Free Money Fund and AARP Insured Tax Free General Bond Fund are issued by or
on behalf of states, territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on these
obligations is generally exempt from federal income tax in the hands of most
investors. The two principal classifications of municipal obligations are
"notes" and "bonds". Municipal notes are generally used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include: Tax Anticipation Notes; Revenue Anticipation Notes;
Bond Anticipation Notes; and Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under "Fannie Mae" (the Federal National Mortgage Association)
or GNMA. There are, of course, a number of other types of notes issued for
different purposes and secured differently than those described above.
Municipal bonds, which meet longer-term capital needs and generally
have maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of general obligation bonds is the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a revenue bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully-insured, rent-subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt reserve fund.
Lease rental bonds issued by a state or local authority for capital projects are
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Some issues of municipal bonds are payable from United States Treasury
bonds and notes held in escrow by a Trustee, frequently a commercial bank. The
interest and principal on these U.S. Government securities are sufficient to pay
all interest and principal requirements of the municipal securities when due.
Some escrowed Treasury securities are used to retire municipal bonds at their
earliest call date, while others are used to retire municipal bonds at their
maturity.
Private activity bonds, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by an
industrial or other non-governmental user.
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Securities purchased for either Fund may include variable/floating rate
instruments, variable mode instruments, put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice
by the holder ("demand obligations"). Demand obligations are considered for the
AARP Funds' purposes to mature at the demand date.
There are, in addition, a variety of hybrid and special types of
municipal obligations as well as numerous differences in the security of
municipal obligations both within and between the two principal classifications
(i.e., notes and bonds) discussed above.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as the AARP Funds. Thus, such an
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale unless an
exemption from such registration is available, municipal obligations which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for municipal obligations which have not been publicly offered initially.
Obligations purchased for a Fund are subject to the limitations on holdings of
securities which are not readily marketable based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its recorded
value. The AARP Funds believe that the quality standards applicable to their
investments enhance marketability. In addition, stand-by commitments,
participation interests and demand obligations also enhance marketability.
For the purpose of the AARP Funds' investment restrictions, the
identification of the "issuer" of municipal obligations which are not general
obligation bonds is made by the Fund Manager on the basis of the characteristics
of the obligation as described above, the most significant of which is the
source of funds for the payment of principal and interest on such obligations.
Municipal Lease Obligations and Participation Interests. Participation
interests represent undivided interests in municipal leases, installment
purchase contracts, conditional sales contracts or other instruments. These are
typically issued by a Trust or other entity which has received an assignment of
the payments to be made by the state or political subdivision under such leases
or contracts.
Each AARP Tax Free Fund may purchase from banks participation interests
in all or part of specific holdings of municipal obligations, provided the
participation interest is fully insured. Each participation is backed by an
irrevocable letter of credit or guarantee of the selling bank that the AARP
Funds' investment adviser has determined meets the prescribed quality standards
of the Fund. Thus either the credit of the issuer of the municipal obligation or
the selling bank, or both, will meet the quality standards of the particular
Fund. Each Fund has the right to sell the participation back to the bank after
seven days' notice for the full principal amount of the Fund's interest in the
municipal obligation plus accrued interest, but only (1) as required to provide
liquidity to the Fund, (2) to maintain a high quality investment portfolio or
(3) upon a default under the terms of the municipal obligation. The selling bank
will receive a fee from the Fund in connection with the arrangement. Neither
Fund will purchase participation interests unless it receives an opinion of
counsel or a ruling of the Internal Revenue Service satisfactory to the Trustees
that interest earned by that Fund on municipal obligations on which it holds
participation interests is exempt from Federal income tax.
A municipal lease obligation may take the form of a lease, installment
purchase contract or conditional sales contract which is issued by a state or
local government and authorities to acquire land, equipment and facilities.
Income from such obligations is generally exempt from state and local taxes in
the state of issuance. Municipal lease obligations frequently involve special
risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title in the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
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property in the event of nonappropriation or foreclosure might prove difficult,
time consuming and costly, and result in a delay in recovery or the failure to
fully recover a Fund's original investment.
Certain municipal lease obligations and participation interests may be
deemed illiquid for the purpose of a Fund's limitation on investments in
illiquid securities. Other municipal lease obligations and participation
interests acquired by a Fund may be determined by the Fund Manager to be liquid
securities for the purpose of such limitation. In determining the liquidity of
municipal lease obligations and participation interests, the Fund Manager will
consider a variety of factors including: (1) the willingness of dealers to bid
for the security; (2) the number of dealers willing to purchase or sell the
obligation and the number of other potential buyers; (3) the frequency of trades
or quotes for the obligation; and (4) the nature of the marketplace trades. In
addition, the Fund Manager will consider factors unique to particular lease
obligations and participation interests affecting the marketability thereof.
These include the general creditworthiness of the issuer, the importance to the
issuer of the property covered by the lease and the likelihood that the
marketability of the obligation will be maintained throughout the time the
obligation is held by a Fund.
A Fund may purchase participation interests in municipal lease
obligations held by a commercial bank or other financial institution. Such
participations provide a Fund with the right to a pro rata undivided interest in
the underlying municipal lease obligations. In addition, such participations
generally provide a Fund with the right to demand payment, on not more than
seven days' notice, of all or any part of such Fund's participation interest in
the underlying municipal lease obligation, plus accrued interest. Each Fund will
only invest in such participations if, in the opinion of bond counsel, counsel
for the issuers of such participations or counsel selected by the Fund Manager,
the interest from such participations is exempt from regular federal income tax
and state income tax for each state specific fund.
Stand-by Commitments. Pursuant to an exemptive order from the SEC, each
AARP Tax Free Fund may acquire "stand-by commitments," which will enable the
Fund to improve its portfolio liquidity by making available same-day settlements
on sales of its securities. A stand-by commitment is a right acquired by a Fund,
when it purchases a municipal obligation from a broker, dealer or other
financial institution ("seller"), to sell up to the same principal amount of
such securities back to the seller, at the Fund's option, at a specified price.
Stand-by commitments are also known as "puts". Each Fund's investment policies
permit the acquisition of stand-by commitments solely to facilitate portfolio
liquidity and not to protect against changes in the market price of the Fund's
portfolio securities. The exercise by a Fund of a stand-by commitment is subject
to the ability of the other party to fulfill its contractual commitment.
Stand-by commitments acquired by a Fund will have the following
features: (1) they will be in writing and will be physically held by the Fund's
custodian; (2) a Fund's right to exercise them will be unconditional and
unqualified; (3) they will be entered into only with sellers which in the Fund
Manager's opinion present a minimal risk of default; (4) although stand-by
commitments will not be transferable, municipal obligations purchased subject to
such commitments may be sold to a third party at any time, even though the
commitment is outstanding; and (5) their exercise price will be (i) the Fund's
acquisition cost (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized original
issue discount during the period the Fund owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date.
Each Fund expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund will pay for stand-by commitments, either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitments. As a matter of policy, the total amount
"paid" by a Fund in either manner for outstanding stand-by commitments will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
any stand-by commitment is acquired.
It is difficult to evaluate the likelihood of use or the potential
benefit of a stand-by commitment. Therefore, it is expected that the Trustees
will determine that stand-by commitments ordinarily have a "fair value" of zero,
regardless of whether any direct or indirect consideration was paid. However, if
the market price of the security subject to the stand-by commitment is less than
the exercise price of the stand-by commitment, such security will ordinarily be
valued at such exercise price. Where a Fund has paid for a stand-by commitment,
its cost will be reflected as unrealized depreciation for the period during
which the commitment is held.
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There is no assurance that stand-by commitments will be available to a
Fund nor does either Fund assume that such commitments would continue to be
available under all market conditions.
Third Party Puts. The AARP Tax Free Funds may also purchase long-term
fixed rate bonds that have been coupled with an option granted by a third party
financial institution allowing a Fund at specified intervals (not exceeding 397
calendar days in the case of AARP High Quality Tax Free Money Fund) to tender
(or "put") the bonds to the institution and receive the face value thereof (plus
accrued interest). These third party puts are available in several different
forms, may be represented by custodial receipts or Trust certificates and may be
combined with other features such as interest rate swaps. The Fund receives a
short-term rate of interest (which is periodically reset), and the interest rate
differential between that rate and the fixed rate on the bond is retained by the
financial institution. The financial institution granting the option does not
provide credit enhancement, and in the event that there is a default in the
payment of principal or interest, or downgrading of a bond to below investment
grade, or a loss of the bond's tax-exempt status, the put option will terminate
automatically, the risk to the Fund will be that of holding such a long-term
bond and the weighted average maturity of the Fund's portfolio would be
adversely affected.
These bonds coupled with puts may present the same tax issues as are
associated with Stand-By Commitments discussed above. As with any Stand-By
Commitments acquired by the Funds, each Fund intends to take the position that
it is the owner of any municipal obligation acquired subject to a third-party
put, and that tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt in its hands. There is no assurance that the
Internal Revenue Service will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees and swap payments, in
relation to various regulated investment company tax provisions is unclear.
However, the Fund Manager intends to manage the Funds' portfolios in a manner
designed to minimize any adverse impact from these investments.
Repurchase Agreements. Each of the AARP Funds may enter into repurchase
agreements with any member bank of the Federal Reserve System and any
broker-dealers which are recognized as a reporting government securities dealer,
whose creditworthiness has been determined by the Fund Manager to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by any of the nationally-recognized rating services including Moody's
and S&P, two of the most widely recognized rating services for the types of
securities in which a Fund invests. A repurchase agreement, which provides a
means for a Fund to earn income on monies for periods as short as overnight, is
an arrangement under which the purchaser (i.e., the Fund) acquires a security
("Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. The repurchase price may be higher
than the purchase price, the difference being income to the Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to the Fund at the time of repurchase. In either case, the income to the
Fund is unrelated to the interest rate on the Obligation itself. For purposes of
the Investment Company Act of 1940, as amended, ("1940 Act") a repurchase
agreement is deemed to be a loan to the seller of the Obligation and is
therefore covered by each Fund's investment restriction applicable to loans.
Each repurchase agreement entered into by a Fund requires that if the market
value of the Obligation becomes less than the repurchase price (including
interest), a Fund will direct the seller of the Obligation, on a daily basis to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. In the
event that a Fund is unsuccessful in seeking to enforce the contractual
obligation to deliver additional securities, and the seller defaults on its
obligation to repurchase, the Fund bears the risk of any drop in market value of
the Obligation(s). In the event that bankruptcy or insolvency proceedings were
commenced with respect to a bank or broker-dealer before its repurchase of the
Obligation, a Fund may encounter delay and incur costs before being able to sell
the security. Delays may involve loss of interest or decline in price of the
Obligation. In the case of repurchase agreements, it is not clear whether a
court would consider a repurchase agreement as being owned by the particular
Fund or as being collateral for a loan by the Fund. If a court were to
characterize the transaction as a loan and the Fund had not perfected a security
interest in the Obligation, the Fund could be required to return the Obligation
to the bank's estate and be treated as an unsecured creditor. As an unsecured
creditor, the Fund would be at the risk of losing some or all of the principal
and income involved in that transaction. The Fund Manager seeks to minimize the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligations.
Securities subject to a repurchase agreement are held in a segregated
account, and the amount of such securities is adjusted so as to provide a market
value at least equal to the repurchase price on a daily basis.
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Each of the AARP Income Funds has adopted a policy, which may be
changed without the vote of the shareholders of those funds, not to invest more
than 50% of its total assets in repurchase agreements. In addition, none of the
AARP Funds may invest more than 10% of its total assets in repurchase agreements
maturing in more than seven days. (See "Investment Restrictions", herein,
regarding requirements for a majority vote.)
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The AARP High
Quality Bond Fund and the AARP Balanced Stock and Bond Fund may 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. The AARP GNMA and U.S. Treasury Fund
invests in mortgage-backed securities guaranteed primarily by the Government
National Mortgage Association. 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 AARP High Quality Bond
Fund and the AARP Balanced Stock and Bond 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.
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. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages. These guarantees, however, do not apply to the market
value or yield of mortgage-backed securities or to the value of Fund shares.
Also, GNMA securities often are purchased at a premium over the maturity value
of the underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
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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 Fund Manager determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMO"s). The AARP High Quality Bond Fund
and the AARP Balanced Stock and Bond 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.
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.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with the AARP High Quality Bond Fund's and the AARP
Balanced Stock and Bond Fund's investment objectives and policies, the Funds 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 ("CARS^SM").
CARS^SM 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 CARS^SM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARS^SM may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If the
letter of credit is exhausted, the Trust may be prevented from realizing the
full amount due on a sales contract because of state law requirements and
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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 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 Funds 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 Funds to dispose of any then existing holdings of such
securities.
Zero Coupon Securities. The AARP Balanced Stock and Bond Fund and the
AARP Global Growth Fund may invest in zero coupon securities which pay no cash
income and are sold at substantial discounts from their value at maturity. When
held to maturity, their entire income, which consists of accretion of discount,
comes from the difference between the issue price and their value at maturity.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current distributions of interest (cash). Zero coupon securities which are
convertible into common stock offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks, as they usually are issued with maturities of 15 years
or less and are issued with options and/or redemption features exercisable by
the holder of the obligation entitling the holder to redeem the obligation and
receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
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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 SEC no longer considers
such privately stripped obligations to be U.S. Government securities, as defined
in the Investment Company Act of 1940; therefore, the Fund intends to adhere to
this staff position and will not treat such privately stripped obligations to be
U.S. Government securities for the purpose of determining if the Fund is
"diversified" under 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" herein).
Loans of Portfolio Securities. Each Fund may lend its portfolio
securities provided: (1) the loan is secured continuously by collateral
consisting of U.S. Government securities or cash or cash equivalents adjusted
daily to have a market value at least equal to the current market value of the
securities loaned; (2) the Fund may at any time call the loan and regain the
securities loaned; (3) the Fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
will not at any time exceed one-third of the total assets of the Fund. In
addition, it is anticipated that the Fund may share with the borrower some of
the income received on the collateral for the loan or that it will be paid a
premium for the loan. In determining whether to lend securities, the Fund's
investment adviser considers all relevant factors and circumstances including
the creditworthiness of the borrower. The AARP Funds have no current intention
of lending their portfolio securities.
Securities Purchased on a "Forward Delivery" or "When-Issued" Basis.
Debt securities, including municipal obligations when originally issued, are
frequently offered on a "forward delivery" or "when-issued" basis and may be
purchased on this basis by the AARP Money, Income and Tax Free Funds, and the
AARP Balanced Stock and Bond Fund. When so offered, the price, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase of U.S. Government obligations. During the period between purchase and
settlement, no payment is made on behalf of the Fund and no interest accrues to
the Fund. To the extent that assets of the Fund are not invested prior to the
settlement of a purchase of securities, the Fund will earn no income; however,
it is the intention of each Fund to be fully invested to the extent practicable,
subject to the policies stated above. While securities purchased on a forward
delivery or when-issued basis may be sold prior to the settlement date, each of
the above Funds intends to purchase such securities with the purpose of actually
acquiring them for its portfolio unless a sale appears desirable for investment
reasons. At the time the commitment to purchase a debt security on a forward
delivery or when-issued basis is made, the transaction will be recorded and the
value of the security will be reflected in determining its net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Funds do not
believe that their net asset value or income will be adversely affected by their
purchase of debt securities on a when-issued or forward delivery basis. Each
Fund will establish with its custodian a segregated account in which it will
maintain cash, U.S. Government securities and other high-quality debt
obligations equal in value to commitments for when-issued or forward delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date.
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Futures Contracts. The AARP Income Funds, the AARP Insured Tax Free
General Bond Fund, the AARP Balanced Stock and Bond Fund and the AARP Global
Growth Fund may each enter into financial futures contracts. Such contracts may
be either based on indices of particular groups or varieties of securities
("Index Futures Contracts") or be for the purchase or sale of debt obligations
("Debt Futures Contracts"). Such futures contracts are traded on exchanges
licensed and regulated by the Commodity Futures Trading Commission. Each Fund
enters into futures contracts to gain a degree of protection against anticipated
changes in interest rates that would otherwise have an adverse effect upon the
economic interests of the Fund. However, the costs of and possible losses from
futures transactions reduce the Funds' yield from interest on its holdings of
debt securities. Income from futures transactions constitutes taxable gain.
For each Fund, the custodian places cash, U.S. government securities
and other high grade debt obligations into a segregated account in an amount
equal to the value of the total assets committed to the consummation of futures
positions. If the value of the securities placed in the segregated account
declines, additional cash or securities are required to be placed in the account
on a daily basis so that the value of the account equals the amount of a Fund's
commitments with respect to such contracts. Alternatively, a Fund may cover such
positions by purchasing offsetting positions, or covering such positions partly
with cash, U.S. government securities and other high grade debt obligations, and
partly with offsetting positions.
An Index Futures Contract is a contract to buy or sell units of a
particular index of securities at a specified future date at a price agreed upon
when the contract is made. Index Futures Contracts typically specify that no
delivery of the actual securities making up the index takes place. Instead, upon
termination of the contract, final settlement is made in cash based on the
difference between the contract price and the actual price on the termination
date of the units of the index.
A Debt Futures Contract is a binding contractual commitment which, if
held to maturity, requires a Fund to make or accept delivery, during a
particular month, of obligations having a standardized face value and rate of
return. By purchasing a Debt Futures Contract, a Fund legally obligates itself
to accept delivery of the underlying security and to pay the agreed price; by
selling a Debt Futures Contract it legally obligates itself to make delivery of
the security against payment of the agreed price. However, positions taken in
the futures markets are not normally held to maturity. Instead they are
liquidated through offsetting transactions which may result in a profit or loss.
While Debt Futures Contract positions taken by a Fund are usually liquidated in
this manner, a Fund may instead make or take delivery of the underlying
securities whenever it appears economically advantageous.
A clearing corporation, associated with the exchange on which futures
contracts are traded, assumes responsibility for close-outs of such contracts
and guarantees that the sale or purchase, if still open, is performed on the
settlement date.
By entering into futures contracts, a Fund seeks to establish more
certainly than would otherwise be possible the effective rate of return on its
portfolio securities. A Fund may, for example, take a "short" position in the
futures markets by selling a Debt Futures Contract for the future delivery of
securities held by the Fund in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of such securities. Or it
might sell an Index Futures Contract based on a group of securities whose price
trends show a significant correlation with those of securities held by the Fund.
When hedging of this character is successful, any depreciation in the value of
portfolio securities is substantially offset by appreciation in the value of the
futures position. On other occasions a Fund may take a "long" position by
purchasing futures contracts. This is done when the Fund is not fully invested
or expects to receive substantial proceeds from the sale of portfolio securities
or of Fund shares, and anticipates the future purchase of particular securities
but expects the rate of return then available in the securities markets to be
less favorable than rates that are currently available in the futures markets.
The Funds expect that, in the normal course, securities will be purchased upon
termination of the long futures position, but under unusual market conditions, a
long futures position may be terminated without a corresponding purchase of
securities.
Debt Futures Contracts, however, currently involve only taxable
obligations and do not encompass municipal securities. The value of Debt Futures
Contracts on taxable securities, as well as Index Futures Contracts, may not
vary in direct proportion with the value of a Fund's securities, limiting the
ability of the Fund to hedge effectively against interest rate risk.
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Presently the only available index futures contract in which the AARP
Insured Tax Free General Bond Fund might invest is the Bond Buyer Municipal Bond
Index. The Fund might sell a contract based on this index in anticipation of an
increase in interest rates, to attempt to offset the decrease in market value of
its portfolio securities which could result. Or the Fund might purchase such a
contract in the anticipation of a significant decrease in interest rates to
offset the increased cost of securities it hopes to purchase in the future. No
index futures contracts have yet been developed which are suitable for
investment by the Funds in the AARP Income Trust.
The investment restriction concerning futures contracts does not
specify the types of index-based futures contracts into which the Funds may
enter because it is impossible to foresee what particular indices may be
developed and traded or may prove useful to the Funds in implementing their
overall risk management strategies. For example, price trends for a particular
index-based futures contract may show a significant correlation with price
trends in the securities held by the Funds, or either of them, even though the
securities comprising the index are not necessarily identical to those held by
such Fund or Funds. In any event, the Funds would not enter into a particular
index-based futures contract unless the Adviser determined that such a
correlation existed.
Index Futures Contracts and Debt Futures Contracts currently are
actively traded on the Chicago Board of Trade and the International Monetary
Market at the Chicago Mercantile Exchange.
Options on Futures Contracts. To attempt to gain additional protection
against the effects of interest rate fluctuations, each of the AARP Income
Funds, the AARP Insured Tax Free General Bond Fund, the AARP Balanced Stock and
Bond Fund and the AARP Global Growth Fund may purchase and write (sell) put and
call options on futures contracts that are traded on a U.S. exchange or board of
trade and enter into related closing transactions. There can be no assurance
that such closing transactions will be available at all times. In return for the
premium paid, such an option gives the purchaser the right to assume a position
in a futures contract at any time during the option period for a specified
exercise price.
A Fund may purchase put options on futures contracts in lieu of, and
for the same purpose as, sale of a futures contract. It also may purchase such
put options in order to hedge a long position in the underlying futures
contract.
The purchase of call options on futures contracts is intended to serve
the same purpose as the actual purchase of the futures contracts. A Fund may
purchase call options on futures contracts in anticipation of a market advance
when it is not fully invested.
A Fund may write (sell) a call option on a futures contract in order to
hedge against a decline in the prices of the index or debt securities underlying
the futures contracts. If the price of the futures contract at expiration is
below the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing (selling) of a put option on a futures contract is similar
to the purchase of the futures contracts, except that, if market price declines,
a Fund would pay more than the market price for the underlying securities or
index units. The net cost to that Fund would be reduced, however, by the premium
received on the sale of the put, less any transactions costs.
Limitations on Futures Contracts and Options on Futures Contracts. A
Fund will not engage in transactions in futures contracts or related options for
speculation but only as a hedge against changes resulting from market conditions
in the values of debt securities held in its portfolio or which it intends to
purchase and where the transactions are appropriate to the reduction of the
Fund's risks. The Trustees have adopted policies (which are not Fundamental and
may be modified by the Trustees without a shareholder vote) that, immediately
after the purchase for a Fund of a futures contract or a related option, the
value of the aggregate initial margin deposits with respect to all futures
contracts (both for receipt and delivery), and premiums paid on related options,
entered into on behalf of the Fund will not exceed 5% of the fair market value
of the Fund's total assets. Additionally, the value of the aggregate premiums
paid for all put and call options held by a Fund will not exceed 20% of its net
assets. Futures contracts and put options written (sold) by a Fund will be
offset by assets of the Fund held in a segregated account in an amount
sufficient to satisfy obligations under such contracts and options.
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Each Fund has received from the CFTC an interpretative letter
confirming its opinion that it is not a "commodity pool" as defined under the
Commodity Exchange Act. To ensure that its futures transactions meet this
definition, each Fund will enter into them for the purposes and with the hedging
intent specified in CFTC regulations. It will further determine that the price
fluctuations in the futures contracts used for hedging are substantially related
to price fluctuations in securities held by the Fund or which it expects to
purchase, though there can be no assurance this result will be achieved. The
Funds' futures transactions will be entered into for traditional hedging
purposes -- that is, futures contracts will be sold (or related put options
purchased) to protect against a decline in the price of securities that a Fund
owns, or futures contracts (or related call options) will be purchased to
protect the Fund against an increase in the price of securities it intends to
purchase. As evidence of this hedging intent, each Fund expects that
approximately 75% of its long futures positions (purchases of futures contracts
or call options on futures contracts) will be "completed"; that is, upon sale
(or other termination) of these long contracts, the Fund will have purchased, or
will be in the process of, purchasing, equivalent amounts of related securities
in the cash market. However, under unusual market conditions, a long futures
position may be terminated without the corresponding purchase of securities.
Covered Call Options. Each of the AARP Growth Funds and each of the
AARP Income Funds may write (sell) covered call options on their portfolio
securities in an attempt to enhance investment performance. The writing of
covered call options by each Fund is subject to limitations imposed by certain
state securities authorities. The Funds have been advised that, under the most
restrictive of such limitations currently in effect, no more than 25% of a
Fund's net assets may be subject to covered options. Further, such states advise
that, unless an exception is granted with respect to certain transactions in
debt securities and related options, such options and the securities underlying
the call must both be listed on national securities exchanges.
When a Fund writes (sells) a covered call option, it gives the
purchaser of the option the right to buy the underlying security at the price
specified in the option (the "exercise price") at any time during the option
period, generally ranging up to nine months. If the option expires unexercised,
the Fund will realize gain to the extent of the amount received for the option
(the "premium") less any commission paid. If the option is exercised, a decision
over which the Fund has no control, the Fund must sell the underlying security
to the option holder at the exercise price. By writing a covered option, the
Fund forgoes, in exchange for the premium less the commission ("net premium"),
the opportunity to profit during the option period from an increase in the
market value of the underlying security above the exercise price.
When a Fund sells an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked-to-market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction (i.e., the Fund
terminates its obligation as the writer of the option by purchasing a call
option on the same security with the same exercise price and expiration date as
the option previously written), the Fund will realize a gain (or loss if the
cost of a closing purchase transaction exceeds the net premium received when the
option was sold) and the deferred credit related to such option will be
eliminated. If an option is exercised, the Fund will realize a long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
The writing of covered options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
options are written will be segregated on the books of the Fund's custodian.
Purchasing Options on Stock Indices. To protect the value of their
portfolios against declining stock prices, each of the AARP Growth Funds may
purchase put options on stock indices. To protect against an increase in the
value of securities that it wants to purchase, a Fund may purchase call options
on stock indices. A stock index (such as the Standard & Poor's 500) assigns
relative values to the common stocks included in the index and the index
fluctuates with the changes in the market values of the common stocks so
included. Options on stock indices are similar to options on stock except that,
rather than giving the purchaser the right to take delivery of stock at a
specified price, an option on a stock index gives the purchaser the right to
receive cash. The amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars,
times a specified multiple (the "multiplier"). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Gain or loss with respect to options on stock indices depends on price movements
in the stock market generally rather than price movements in individual stocks.
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The multiplier for an index option performs a function similar to the
unit of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an option
and the current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Because the value of a stock index option depends upon movements in the
level of the stock index rather than the price of a particular stock, whether a
Fund will realize a gain or loss on the purchase of a put or call option on a
stock index depends upon movements in the level of stock prices in the stock
market generally or in an industry or market segment rather than movements in
the price of a particular stock. Accordingly, successful use by a Fund of both
put and call options on stock indices will be subject to the Fund Manager's
ability to accurately predict movements in the direction of the stock market
generally or of a particular industry. In cases where the Fund Manager's
prediction proves to be inaccurate, a Fund will lose the premium paid to
purchase the option and it will have failed to realize any gain.
In addition, a Fund's ability to hedge effectively all or a portion of
its securities through transactions in options on stock indices (and therefore
the extent of its gain or loss on such transactions) depends on the degree to
which price movements in the underlying index correlate with price movements in
the Fund's securities. Inasmuch as such securities will not duplicate the
components of an index, the correlation probably will not be perfect.
Consequently, a Fund will bear the risk that the prices of the securities being
hedged will not move in the same amount as the option. This risk will increase
as the composition of a Fund's portfolio diverges from the composition of the
index.
Over-the-counter options ("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. A Fund will only sell OTC options (other than OTC
currency options) that are subject to a buy-back provision permitting a Fund to
require the Counterparty to sell the option back to the Fund at a formula price
within seven days. A Fund expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Fund Manager 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. A Fund will engage in OTC option transactions only
with United States government securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers", or broker dealers, domestic or
foreign banks or other financial institutions which have received (or the
guarantors of the obligation of which have received) a short-term credit rating
of A-1 from S&P or P-1 from Moody's or an equivalent rating from any other
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a Fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to a Fund's limitation on investing no
more than 10% of its assets in illiquid securities.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
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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.
Risks of Futures and Options Investments. A Fund will incur brokerage
fees in connection with its futures and options transactions, and it will be
required to segregate Funds for the benefit of brokers as margin to guarantee
performance of its futures and options contracts. In addition, while such
contracts will be entered into to reduce certain risks, trading in these
contracts entails certain other risks. Thus, while a Fund may benefit from the
use of futures contracts and related options, unanticipated changes in interest
rates may result in a poorer overall performance for that Fund than if it had
not entered into any such contracts. Additionally, the skills required to invest
successfully in futures and options may differ from skills required for managing
other assets in the Fund's portfolio.
The AARP Growth Funds may engage in over-the-counter options
transactions with broker-dealers who make markets in these options. The Fund
Manager will consider risk factors such as their creditworthiness when
determining a broker-dealer with which to engage in options transactions. The
ability to terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the issuing
broker rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Certain
over-the-counter options may be deemed to be illiquid securities and may not be
readily marketable. The Fund Manager will monitor the creditworthiness of
dealers with whom the Funds enter into such options transactions under the
general supervision of the Funds' Trustees.
Convertible Securities. Convertible securities include convertible
bonds, notes and debentures, convertible preferred stocks, and other securities
that give the holder the right to exchange the security for a specific number of
shares of common stock. Convertible securities entail less credit risk than the
issuer's common stock because they are considered to be "senior" to common
stock. Convertible securities generally offer lower interest or dividend yields
than non-convertible debt securities of similar quality. They may also reflect
changes in value of the underlying common stock.
Foreign Securities. All the Funds in the AARP Growth Trust may invest
without limit in foreign securities. The AARP High Quality Bond Fund may invest
without limit in U.S. dollar denominated foreign securities. The AARP Money
Funds may currently invest in U.S. dollar-denominated certificates of deposit
and bankers' acceptances of foreign branches of large U.S. banks.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in United States securities and
which may favorably or unfavorably affect the Funds' performance. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
securities markets, while growing in volume of trading activity, have
substantially less volume than the U.S. market, and securities of some foreign
issuers are less liquid and more volatile than securities of domestic issuers.
Similarly, volume and liquidity in most foreign bond markets is less than in the
United States and, at times, volatility of price can be greater than in the
United States. Fixed commissions on some foreign securities exchanges and bid to
asked spreads in foreign bond markets are generally higher than commissions on
bid to asked spreads on U.S. markets, although the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S. It may be more difficult for the
Funds' agents to keep currently informed about corporate actions which may
affect the prices of portfolio securities. Communications between the United
States and foreign countries may be less reliable than within the United States,
thus increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Payment for securities without
delivery may be required in certain foreign markets. In addition, with respect
to certain foreign countries, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect United States investments in those countries.
Investments in foreign securities may also entail certain risks such as possible
currency blockages or transfer restrictions, and the difficulty of enforcing
rights in other countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, to the
extent investments in foreign securities involve currencies of foreign
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countries, the Funds may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversion between currencies.
Investments in companies domiciled in developing countries may be
subject to potentially greater risks than investments in developed countries.
The possibility of revolution and the dependence on foreign economic assistance
may be greater in these countries than in developed countries. The management of
each Fund seeks to mitigate the risks associated with these considerations
through diversification and active professional management.
Forward Foreign Currency Exchange Contracts. Each of the AARP Growth
Funds may enter into forward foreign currency exchange contracts in connection
with its investments in foreign securities. A forward foreign currency exchange
contract ("forward contract") involves an obligation to purchase or sell 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. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
The maturity date of a forward contract may be any fixed number of days
from the date of the contract agreed upon by the parties, rather than a
predetermined date in a given month, and forward contracts may be in any amount
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between banks or currency dealers so that no
intermediary is required. A forward contract generally requires no margin or
other deposit. Closing transactions with respect to forward contracts are
effected with the currency trader who is a party to the original forward
contract.
The Funds may enter into foreign currency futures contracts in several
circumstances. First, when the Funds enter into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Funds
anticipates the receipt in a foreign currency of interest and dividend payments
on such a security which it holds, the Funds may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such interest and
dividend payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of U.S. dollars, of the amount of
foreign currency involved in the underlying transactions, the Funds will attempt
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the applicable foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend payment is declared, and the date on which such
payments are made or received.
The Funds' activities involving forward contracts may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company.
General Investment Policies of the AARP Funds
Changes in portfolio securities are made on the basis of investment
considerations and it is against the policy of management to make changes for
trading purposes.
The AARP Funds have no present intention of acquiring restricted
securities, though they have limited authority to do so (see "Investment
Restrictions").
The AARP Funds cannot guarantee a gain or eliminate the risk of loss.
The net asset value of a non-money market Fund's shares will increase or
decrease with changes in the market prices of the Fund's investments and there
is no assurance that a Fund's objective(s) will be achieved.
Except where otherwise indicated, the objectives and policies stated
above may be changed by the Trustees without a vote of the shareholders.
Investment Restrictions
The following restrictions may not be changed with respect to a Fund
without the approval of a majority of the outstanding voting securities of such
Fund which, under the 1940 Act and the rules thereunder and as used in this
Statement of Additional Information, means the lesser of (1) 67% of the shares
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of such Fund present at a meeting if the holders of more than 50% of the
outstanding shares of such Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of such Fund.
(A) None of the Funds may:
(1) borrow money, except for temporary or emergency purposes and
not for investment purposes or except in connection with
reverse repurchase agreements; provided that a Fund maintains
asset coverage of 300% for all borrowings;
(2) underwrite any securities issued by other persons, except that
it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Fund;
(3) purchase or sell real estate, but this shall not prevent a
Fund from investing in (i) securities of companies which deal
in real estate or mortgages, and (ii) securities secured by
real estate or interests therein, and 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;
(4) purchase or sell physical commodities, or contracts relating
to physical commodities;
(5) make loans to other persons, except (i) loans of portfolio
securities, and (ii) except to the extent that the entry into
repurchase agreements and the purchase of debt securities in
accordance with its investment objective and investment
policies may be deemed to be loans;
(6) issue senior securities except as appropriate to evidence
indebtedness which it is permitted to incur and except for
shares of the separate classes or series of the Trust,
provided that collateral arrangements with respect to
currency-related contracts, futures contracts, option or other
permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of
senior securities for purposes of this restriction; and
(7) with respect to 75% of each Fund's total assets, purchase more
than 10% of the voting securities of any one issuer or invest
more than 5% of the value of the total assets of the Fund in
the securities of any one issuer (except for investments in
obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, cash and cash equivalents and
securities of other investment companies), provided that the
amount of the total assets of each of the AARP High Quality
Money Fund and AARP High Quality Tax Free Money Fund, that may
be invested in the securities of any one issuer will, instead,
be limited in accordance with federal law, regulation and
regulatory interpretation applicable to money market funds, as
amended from time to time.
(B) Neither the AARP High Quality Money Fund, the AARP GNMA and U.S.
Treasury Fund, the AARP High Quality Bond Fund, the AARP Growth and
Income Fund, the AARP Global Growth Fund, nor the AARP Capital Growth
Fund may:
(1) purchase any securities which would cause more than 25% of the
market value of the total assets of the Fund at the time of
such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry (for this purpose, telephone companies are considered
to be a separate industry from gas and electric public
utilities, and wholly-owned finance companies are considered
to be in the industry of their parents if their activities are
primarily related to financing the activities of the parents),
provided that there is no limitation in respect to investments
in the U.S. Government or its agencies or instrumentalities
or, in the case of AARP High Quality Money Fund, in
certificates of deposit or bankers' acceptances or, in the
case of the AARP Growth and Income Funds, to municipal
securities other than pollution control and industrial
development bonds.
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(C) Neither the AARP High Quality Tax Free Money Fund nor the AARP Insured
Tax Free General Bond Fund may:
(1) purchase (i) private activity bonds or (ii) securities which
are neither municipal bonds nor securities of the U.S.
Government, its agencies or instrumentalities, if in either
case the purchase would cause more than 25% of the market
value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers having their
principal business activities in the same industry. For this
purpose, telephone companies are considered to be a separate
industry from gas and electric public utilities and
wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily
related to financing the activities of their parents provided
that, in the case of the AARP High Quality Tax Free Money
Fund, there is no limitation in respect to investments in the
U.S. Government or its agencies or instrumentalities, or in
certificates of deposit or bankers' acceptances.
(D) AARP High Quality Tax Free Money Fund may not:
(1) purchase securities which are not municipal obligations if
such purchase would cause more than 20% of the Fund's total
assets to be invested in such securities, except, for
temporary defensive purposes, that the Fund may invest more
than 20% of its total assets in such securities prior to the
time normal operating conditions have been achieved and during
other than normal market conditions.
The following restrictions are not fundamental and may be changed by a Fund
without shareholder approval, in compliance with applicable law, regulation or
regulatory policy. None of the Funds may:
(a) make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary
for the clearance of transactions; and, in the case of the
AARP Income Funds and AARP Insured Tax Free General Bond Fund
in connection with entering into futures contracts and related
options;
(b) purchase or retain for a Fund the securities of any issuer if
those officers and Trustees of a Trust, or partners and
officers of its investment adviser, who individually own more
than 1/2 of 1% of the outstanding securities of such issuer,
together own more than 5% of such outstanding securities;
(c) purchase from or sell to any of the officers and Trustees of a
Trust, its investment adviser, its principal underwriter or
the officers, directors, and partners of its investment
adviser or principal underwriter, portfolio securities of a
Fund;
(d) purchase restricted securities (for these purposes restricted
security means a security with a legal or contractual
restriction on resale in the principal market in which the
security is traded), including repurchase agreements maturing
in more than seven days and securities which are not readily
marketable if as a result more than 10% of the net assets
(valued at market at purchase) would be invested in such
securities;
(e) purchase securities of any issuer with a record of less than
three years continuous operation, including predecessors, and
equity securities of issuers that are not readily marketable,
except obligations issued or guaranteed by the U.S. Government
or its agencies (or, in the case of the AARP Tax-Free Income
Funds, municipal securities rated by a recognized municipal
bond rating service), if such purchase would cause the
investments of that Fund in all such issuers to exceed 5% of
the value of the total assets of that Fund;
(f) invest its assets in securities of other open-end investment
companies, but may invest in closed-end investment companies
when such purchases are made in the open market where no
commission or profit to a sponsor or dealer result from such
purchase other than the customary broker's commission, if
after such purchase (a) a Fund would own no more than 3% of
the total outstanding voting stock of such investment company,
(b) no more than 5% of a Fund's total assets would be invested
in the securities of any single investment company, (c) no
more than 10% of a Fund's total assets would be invested in
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the securities of investment companies in the aggregate, or
(d) all the investment companies advised by the Fund Manager
would own no more than 10% of the total outstanding voting
stock of any closed-end company; provided that this
restriction shall not preclude acquisition of investment
company securities by dividend, exchange offer or
reorganization. To the extent that a Fund invests in shares of
other investment companies, additional fees and expenses may
be deducted from such investments in addition to those
incurred by a Fund. Except in the case of the AARP Insured Tax
Free Income Funds, for purposes of this limitation, foreign
banks or their agencies or subsidiaries are not considered
investment companies;
(g) invest in other companies for the purpose of exercising
control or management;
(h) purchase or sell real estate and real estate limited
partnership interests, but this shall not prevent a Fund from
investing in securities secured by real estate or interest
therein; and
(i) purchase or sell commodities, commodities contracts (except,
in the case of the AARP Income Funds, the AARP Insured Tax
Free General Bond Fund and the AARP Global Growth Fund,
contracts for the future delivery of debt obligations and
contracts based on debt indices) or oil, gas or other mineral
exploration or development programs or leases (although it may
invest in issuers which own or invest in such interests).
AARP High Quality Money Fund may not:
(j) purchase or sell any put or call options or any combination
thereof; or
(k) purchase warrants, unless attached to other securities in
which the Fund is permitted to invest.
Neither the AARP High Quality Money Fund nor the AARP High Quality Tax Free
Money Fund may:
(l) pledge, mortgage or hypothecate its assets, except that, to
secure borrowings permitted by subparagraph (A) (1) above, it
may pledge securities having a value at the time of pledge not
exceeding 15% of the cost of the Fund's total assets.
Neither the AARP GNMA and U.S. Treasury Fund nor the AARP High Quality Bond
Fund may:
(m) purchase warrants of any issuer, except that AARP High Quality
Bond Fund can purchase warrants on a limited basis. As a
result of such purchases by the Fund, no more than 2% of the
value of the total assets of the Fund may be invested in
warrants which are not listed on the New York Stock Exchange
or the American Stock Exchange, and no more than 5% of the
value of the total assets of the Fund may be invested in
warrants whether or not so listed, such warrants in each case
to be valued at the lesser of cost or market, but assigning no
value to warrants acquired by the Fund in units with or
attached to debt securities;
(n) purchase or sell any put or call options or any combination
thereof, except that the Fund may write and sell national
exchange-listed covered call option contracts on national
exchange-listed securities and, to the extent permitted by
applicable state regulatory limits, on other debt securities
owned by the Fund up to, but not in excess of, 25% of the
value of the Fund's net assets at the time such option
contracts are written. The Fund may also purchase call options
for the purpose of terminating its outstanding obligations
with respect to securities upon which covered call option
contracts have been written (i.e., "closing purchase
transaction"). In connection with the writing of covered call
options, the Fund may pledge assets to an extent not greater
than 25% of the value of its net assets at the time such
options are written. The Fund also may purchase and write
options on futures contracts in the manner described under
"The Funds' Investment Objectives and Policies";
(o) pledge, mortgage or hypothecate its assets, (a) except to the
extent that the writing of covered call options may be deemed
to involve the pledge of securities against which the option
is being written, (b) except to the extent that margin
deposits on futures contracts and related options may be
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deemed to involve a pledge of assets to guarantee the
performance of the futures obligations, and (c) except to
secure borrowings permitted by subparagraph (A) (1) above, it
may pledge securities having a value at the time of pledge not
exceeding 15% of the cost of the Fund's total assets.
AARP High Quality Bond Fund has adopted a non-fundamental policy that
it will not underwrite securities issued by entities regulated under Part II of
the Federal Power Act.
Neither AARP Insured Tax Free General Bond Fund nor AARP High Quality Tax Free
Money Fund may:
(p) purchase or sell any put or call options or combinations
thereof, except to the extent that the acquisition of Stand-by
Commitments or Participation Interests may be considered the
purchase or sale of a put option and except that the AARP
Insured Tax Free General Bond Fund may purchase and write
options on futures contracts in the manner and to the extent
described herein;
(q) underwrite securities issued by entities regulated under Part
II of the Federal Power Act, provided that, for this purpose
private activity bonds the interest on which is exempt from
tax under Section 103 of the Internal Revenue Code of 1986
will be treated as obligations of the municipal authority or
other governmental unit issuing the bonds.
AARP Insured Tax Free General Bond Fund may not:
(r) hold for a period of more than 30 days any municipal
securities maturing in 60 or more days from purchase by a Fund
which are not fully insured or guaranteed directly or
indirectly by the U.S.
Treasury.
(s) pledge, mortgage or hypothecate its assets, except to the
extent that margin deposits on futures contracts and related
options may be deemed to be a pledge of assets to guarantee
performance of such obligations, and except that, to secure
borrowings permitted by subparagraph (A) (1) above, it may
pledge securities having a value at the time of the pledge not
exceeding 15% of the cost of the Fund's total assets;
None of the AARP Growth Funds may:
(t) purchase or sell any put or call options or any combination
thereof, except that the Funds may each purchase and sell
options on stock indices in accordance with the requirements
of applicable regulations. The Funds may write (sell) covered
call option contracts on securities owned by the Fund up to,
but not in excess of, 25% of the value of the Fund's net
assets at the time such option contracts are written. The
Funds may also purchase call options for the purpose of
terminating their outstanding obligations with respect to
securities upon which covered call option contracts have been
written (i.e., "closing purchase transactions"). In connection
with the writing of covered call options, the Funds may pledge
assets to an extent not greater than 25% of the value of its
net assets at the time such options are written;
(u) purchase securities if, as a result thereof, more than 5% of
the value of the net assets would be invested in restricted
securities (for these purposes restricted security means a
security with a legal or contractual restriction on resale in
the principal market in which the security is traded).
(v) purchase warrants of any issuer if, as a result more than 2%
of the value of the total assets of the Fund would be invested
in warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange, or more than 5% of
the value of the total assets of the Fund would be invested in
warrants acquired by the Fund in units with or attached to
debt securities.
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Neither the AARP Growth and Income Fund nor the AARP Capital Growth Fund may:
(w) pledge, mortgage or hypothecate its assets, except as provided
in subparagraph (t), above, and except that, to secure
borrowings permitted by subparagraph (A) (1) above, it may
pledge an amount not exceeding 15% of the Fund's total assets
taken at cost;
AARP Global Growth Fund may not:
(x) pledge, mortgage or hypothecate its assets in excess, together
with permitted borrowings, of 1/3 of its total assets;
(y) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund
at any time do not exceed 20% of its net assets; or sell put
options on securities if, as a result, the aggregate value of
the obligations underlying such put options would exceed 50%
of the Fund's net assets;
(z) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Fund and the premiums paid for
options on futures contracts does not exceed 5% 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;
(aa) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the
time any loan is made; all loans of portfolio securities will
be fully collateralized and marked to market daily. The Fund
has no current intention of making loans of portfolio
securities that would amount to greater than 5% of the Fund's
total assets; or
(bb) borrow money, including reverse repurchase agreements, in
excess of 5% of its total assets (taken at market value)
except for temporary or emergency purposes, or borrow other
than from banks.
"Value" for the purposes of the above fundamental and non-fundamental
investment policies shall mean the value used in determining a Fund's net asset
value.
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, the restricted
activity or, in the case of AARP High Quality Money Fund and the AARP Income
Funds, an acquisition or encumbrance of securities or assets of, or borrowings
by, the Fund.
PURCHASES
(See "OPENING AN ACCOUNT" and "ADDING TO YOUR INVESTMENT" in the Prospectus.)
General Information
Confirmations of each transaction will be sent following the
transaction by Scudder Investor Services, Inc., as the AARP Funds' agent. By
retaining year-to-date confirmations, an investor will have an historical record
of the account activity.
Checks
A certified check is not necessary, but checks are accepted subject to
collection at full face value in United States Funds and must be drawn on a
United States financial institution.
If shares are purchased by a check which proves to be uncollectible,
the Trusts reserve the right to cancel the purchase immediately and the
purchaser will be responsible for any loss incurred by the Fund or the principal
underwriter by reason of such cancellation. Each Trust has the authority, as
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agent of the shareholder, to redeem shares in the account to reimburse the Fund
or the principal underwriter for any loss incurred. Investors whose orders have
been canceled may be prohibited from or restricted in placing future orders in
any of the Funds in the Program or in other Funds advised by the AARP Funds'
investment adviser or an affiliate.
Share Price
Accepted purchases for shares in all the AARP Funds will be filled at
the net asset value next computed after receipt of payment by check or other
means. Each Fund's net asset value per share is currently determined once daily,
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") (usually 4:00 p.m. Eastern time), on each day the Exchange is open
for trading. (See "NET ASSET VALUE," herein for additional information on how
the Fund's net asset value is calculated.) Orders received after the close of
regular trading will be filled at the next day's net asset value per share for
the relevant Fund.
There is no sales charge in connection with purchase of shares of any
of the AARP Funds.
Share Certificates
In order to afford ease of redemption, ownership in the AARP Funds is
on a non-certified basis. Share certificates now in a shareholder's possession
may be sent to the AARP Funds' transfer agent for cancellation and credit to
such shareholder's account. Shareholders who prefer may hold the certificates
now in their possession until they wish to exchange or redeem such shares. See
"EXCHANGING" and "ACCESS TO YOUR INVESTMENT" in the Funds' Prospectus.
Direct Deposit Program
Investors can have Social Security or other checks from the U.S.
Government or any other regular income checks such as pension, dividends, and
even payroll checks automatically deposited directly to their accounts.
Investors may allocate a minimum of 25% of their income checks into any AARP
Fund. Information may be obtained by contacting the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, Massachusetts 02208-2540, or by calling toll
free, 1-800-253-2277.
Wire Transfers
In the case of wire purchases, failure to receive timely and complete
account information will delay investment and subsequent accrual of dividends
and will result in the federal funds being returned to the sender on the day
following receipt by State Street Bank and Trust Company (the "custodian").
Unlike shareholders subscribing by check, purchasers who wire funds will be able
to redeem shares so purchased by any method without any limitation as to the
period of time such shares have been on a Fund's books.
The bank sending federal funds by bank wire may charge for the service.
Presently, Scudder Investor Services, Inc. or the AARP Funds pay a fee for
receipt by the custodian of "wired funds," but the right to charge investors for
this service is reserved.
Holidays
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Martin Luther King, Jr. Day (the 3rd Monday in
January), 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 a Fund.
Other Information
All purchase payments will be invested in full and fractional shares.
The Trusts and Scudder Investor Services, Inc., the AARP Funds'
principal underwriter, each have the right to limit the amount of shares
purchased of a Fund, to reject any purchase and to refuse to sell shares to any
person.
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It should be noted that if purchases are made through a member of the
National Association of Securities Dealers other than Scudder Investor Services,
Inc., that member may, in its discretion, charge a fee for this service. It is
the responsibility of the broker, not the AARP Funds, to place the purchase
order by the time as of which the net asset value of the Funds is next
determined.
The Trusts 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.
REDEMPTIONS
(See "ACCESS TO YOUR INVESTMENT" in the Prospectus.)
General Information
If a shareholder redeems all shares in an account, the shareholder will
receive, in addition to the net asset value thereof, all declared but unpaid
dividends thereon. The AARP Funds do not impose a redemption charge.
The proceeds of redemption transactions are normally available to be
mailed or wired to the designated bank account within one business day, and in
any event will be available within seven calendar days, following receipt of a
redemption request in good order.
A shareholder's right to redeem shares of a Fund and to receive payment
therefore may be suspended at times (a) when the Exchange is closed, other than
customary weekend and holiday closings, (b) when trading on the Exchange is
restricted for any reason, (c) when an emergency exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (d) when the SEC permits a suspension of the right of
redemption; provided that applicable rules and regulations of the SEC (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b) or (c) exist.
The Trustees may suspend or terminate the offering of shares of a Fund
at any time.
Redemption by Telephone
Redemption by telephone is not available for shares for which share
certificates have been issued. Redemptions of such shares must be requested by
mail as explained in the section entitled "Redemption by Mail" below.
For other investors, the following procedures are available.
TO ADDRESS OF RECORD: New investors automatically receive the option,
without having to elect it, to redeem by telephone to their address of record
for any amount up to $50,000 per Fund. Telephone Redemption to Address of Record
may be used as long as the account registration address has not changed within
the last 15 days. In order to decline this feature, the shareholder must notify
the Program in writing. Any shareholder who refuses Telephone Redemption to
Address of Record can later establish the feature with a signature guaranteed
written request. This request must be done prior to utilizing this service for
the first time.
TO YOUR BANK--BY MAIL OR BY WIRE: In order to request redemptions by
telephone to their bank, shareholders must have completed the telephone
redemption authorization included in the enrollment form and have sent the
authorization to the Program. This authorization requires designation of a bank
account to which the redemption payment is to be sent. The proceeds will be
mailed or wired only to the designated bank account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
predesignated bank account must complete the appropriate
section on the enrollment form, and send it to the Program.
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(b) EXISTING SHAREHOLDERS who wish to establish telephone
redemption to a predesignated bank account or who want to
change the bank account previously designated to receive
redemption payments should either enter the new information on
the "Telephone Option Form" which may be obtained by calling
the Program, or send a signature guaranteed letter identifying
the account and specifying the exact information to be
changed. In each case, the letter must be signed exactly as
the shareholder's name(s) appears on the account. All requests
for telephone redemption should be accompanied by a voided
check from the designated bank account. All signatures will
require a guarantee, which can be obtained from most banks,
credit unions or savings associations, or from broker/dealers,
government securities broker/dealers, national securities
exchanges, registered securities associations, or clearing
agencies deemed eligible by the SEC. An original signature and
an original signature guarantee are required for each person
in whose name the account is registered. Signature guarantees
by notaries public are not acceptable.
In addition, if shares to be redeemed were purchased by check, mailing
of the redemption proceeds may be delayed long enough to assure that the
purchase check has cleared.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve wire to the bank account
designated on the application form unless a request is made that the redemption
be mailed to the designated bank account. For each wire redemption, the program
charges a $5.00 fee which is deducted from the proceeds of the redemption.
Note: Investors designating a savings bank to receive their telephone
redemption proceeds are advised that if the savings bank is not a participant in
the Federal Reserve System, redemption proceeds must be wired through a
commercial bank which is a correspondent of the savings bank. As this may delay
receipt by the shareholder's account, it is suggested that investors wishing to
use a savings bank discuss wire procedures with their bank and submit any
special wire transfer information with the telephone redemption authorization.
If appropriate wire information is not supplied, redemption proceeds will be
mailed to the designated bank.
The Trusts and their agents each reserve the right to modify,
interrupt, suspend or terminate the telephone redemption privilege at any time,
without notice. A shareholder may cancel the telephone redemption authorization
upon written notice. Each 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 Corporation does not follow such procedures, it may be liable for
acting upon instructions communicated by telephone that it reasonably believes
to be genuine.
Redemption by Mail or Fax
Any shareholder may redeem his or her shares by writing to the Program.
All written requests must be signed by at least one person on the account's
registration exactly as registered. In addition, for the protection of the
shareholder and to prevent fraudulent redemptions, a signature guarantee is
required on all written redemption requests for over $50,000. A signature
guarantee is also required on written redemption requests for any amount if the
check is made payable to someone other than the registered shareholder, if the
proceeds are to be forwarded to an address other than the address of record, or
if the address of record has changed in the last 15 days. In order to ensure
proper authorization before redeeming shares, the Program may request additional
documents such as, but not restricted to, stock powers, Trust instruments,
certificates of death, appointments as executor, certificates of corporate
authority and waivers of tax required in some states when settling estates.
Redemption to Address of Record for up to $50,000 without a signature
guarantee is an automatic feature of any AARP Fund account unless it has been
declined by the shareholder in writing. Any shareholder who refuses this feature
can later establish it with a written request containing a signature guarantee.
This request must be made prior to utilizing the feature for the first time.
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with the signature(s) guaranteed as explained
above. It is suggested that the shareholders holding certificated shares or
shares registered in other than individual names contact the Program prior to
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requesting a redemption to ensure that all necessary documents accompany the
request. When shares are held in the name of a corporation, trust, fiduciary 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 help ensure prompt payment. Redemption
requests must not be conditional as to date or price of the redemption. Proceeds
of a redemption will be sent within seven (7) days after receipt of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days for payment for shares tendered for repurchase or redemption may
result but only until the purchase check has cleared.
Redemption by Checkwriting
All new investors in the AARP Money Funds and existing shareholders of
these Funds who apply to State Street Bank and Trust Company for checks may use
them to pay any person, provided that each check is for at least $100 and not
more than $1,000,000. By using one of these checks, the shareholder will receive
daily dividend credit on his or her shares in either Fund 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 7
days. Shareholders who use this service may also use other redemption
procedures. Both Funds pay the bank charges for this service. However, each Fund
will review the cost of operation periodically and it reserves the right to
determine if direct charges to the persons who avail themselves of this service
would be appropriate. An account cannot be closed using the "free Checkwriting"
privilege. The Trusts, the transfer agent and the custodian each reserve the
right at any time to suspend or terminate the "free Checkwriting" procedure.
Redemption-in-Kind
The AARP Growth Trust reserves the right to permit the AARP Balanced
Stock and Bond Fund, AARP Growth and Income Fund, the AARP Global Growth Fund
and the AARP Capital Growth Fund, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase order by making
payment in whole or in part in readily marketable securities chosen by the Fund
and valued as they are for purposes of computing the Fund's net asset value (a
redemption-in-kind). If payment is made in securities, a shareholder may incur
transaction expenses in converting these securities into cash. The AARP Growth
Trust has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a
result of which each Fund of the Trust is obligated to redeem shares, with
respect to any one shareholder during any 90 day period, solely in cash up to
the lesser of $250,000 or 1% of the net asset value of such Fund at the
beginning of the period.
Other Information
The value of shares redeemed or repurchased may be more or less than
the shareholder's cost depending on the net asset value at the time of
redemption or repurchase. The Funds do not impose a redemption or repurchase
charge. Redemptions of shares, including redemptions undertaken to effect an
exchange for shares of another Fund in the Program, 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 Retirement Plans (see
"RETIREMENT PLANS," below) should contact the Trustee or custodian of the Plan
for information on proper procedures.
The Trustees have established certain amount size requirements. For an
account established prior to September 1, 1989 in a particular Fund, the minimum
investment is $250. For accounts established on or after September 1, 1989 in a
particular Fund, the minimum investment is $500, except that in the case of the
AARP High Quality Tax Free Money Fund accounts opened on or after August 1, 1991
the minimum is $2,500. Each Trust reserves the right to adopt a policy that if
transactions at any time reduce a shareholder's account in a Fund to below the
applicable minimum, the shareholder will be notified that, unless the account is
brought up to at least the applicable minimum the Fund will redeem all shares
and close the account by making payment to the shareholder. The shareholder has
sixty days to bring the account up to the applicable minimum before any action
will be taken by the Fund. Reductions in value that result solely from market
activity will not trigger an involuntary redemption. No transfer from an
existing to a new account may be for less than $500 ($2,500 for AARP High
Quality Tax Free Money Fund); otherwise the new account may be redeemed as
described above. (This policy applies to accounts of new shareholders in a
36
<PAGE>
particular Fund, but does not apply to Retirement Plan Accounts.) The Trustees
have the authority to increase the minimum account size.
EXCHANGES
The procedure for exchanging shares from one AARP Fund to another AARP
Fund in the Program, when the account in the new AARP Fund is established with
the same registration, telephone option, dividend option and address as the
present account, is set forth under "EXCHANGING" in the Prospectus. If the
registration data for the account receiving the proceeds of the exchange is to
be different in any respect from the account from which shares are to be
exchanged, the exchange request must be in writing and must contain a signature
guarantee as described under "SIGNATURE GUARANTEES" in the Prospectus. If an
exchange involves an initial investment in the Fund being acquired, the amount
to be exchanged must be at least $500 ($2,500 for AARP High Quality Tax Free
Money Fund) for non-retirement plan accounts. For IRA and Keogh Plan accounts
the amount must be $250. If the exchange is made into an existing account, there
is no minimum requirement.
Only exchange orders received between 8:00 a.m. and 4:00 p.m. Eastern
time on any business day will ordinarily be accomplished at respective net asset
values determined on that day. Exchange orders received after 4:00 p.m. are
processed on the next business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one AARP Fund to an
existing account in another AARP Fund through the AARP Funds' Automatic Exchange
Program. Exchanges must be for a minimum of $50. Shareholders may add this free
feature over the phone or in writing. Automatic Exchanges will continue until
the shareholder requests by phone or in writing to have the feature removed, or
until the originating account is depleted. The Trusts and the Transfer Agent
each reserve the right to modify, interrupt, suspend or terminate the privilege
of the Automatic Exchange Program at any time, without notice.
There is no charge to the shareholder for any exchange described above.
An exchange from any AARP Fund other than the AARP Money Funds is likely to
result in recognition of gain or loss to the shareholder.
Investors currently receive the exchange privilege automatically
without having to elect it. The Trusts and the AARP Funds' distributor, Scudder
Investor Services, Inc., reserve the right to suspend or terminate the exchange
privilege at any time. Telephone exchange may be initiated by anyone able to
identify the registration of an account, but the proceeds will only be invested
in another AARP Fund with the same registration. The AARP Funds employ
procedures to give reasonable assurance that telephone instructions are genuine,
including recording telephone calls, testing a caller's identity and sending
written confirmation of such transactions. If an AARP Fund does not follow such
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions.
All the AARP Funds in the Program into which investors may make an
exchange are described in the combined Prospectus and in this Statement of
Additional Information. Before making an exchange, shareholders should read the
information in the Prospectus regarding the Fund into which the exchange is
being contemplated.
TRANSACT BY PHONE
(See "INVESTOR SERVICES--TRANSACT BY PHONE" in the Prospectus.)
Shareholders, whose bank of record is a member of the Automated
Clearing House Network (ACH) and who have enrolled in the "Transact by Phone"
option, may purchase or redeem shares by telephone. Shareholders may purchase
shares valued at up to $250,000 but not less than $250. Shareholders may redeem
shares in an amount not less than $250.
In order to utilize the Transact by Phone service, shareholders must
have completed the Transact by Phone authorization. This authorization requires
designation of a bank account from which the purchase payment will be debited or
to which the redemption payment will be credited. New investors wishing to
establish the Transact by Phone service can do so by completing the appropriate
section on the enrollment form. Existing shareholders who wish to establish
Transact by Phone will need to complete a Transact by Phone Enrollment Form. If
37
<PAGE>
a shareholder has previously elected the "Telephone Redemption to Bank of
Record" and/or the "Automatic Investment Plan" services, the banking information
must be identical for all of these services for each of the shareholder's Funds.
After sending in their enrollment forms, shareholders should allow 15 days for
the service to be activated. The Trusts and their agents each reserve the right
to modify, interrupt, suspend or terminate the Transact by Phone service at any
time, without notice.
Purchasing Shares by Transact by Phone
To purchase shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time. Shares will be purchased at that
night's closing share price. The shareholder's bank account will be debited on
the first business day following the purchase request. Requests received after
4:00 p.m. will be purchased at the next business day's closing price.
Redeeming Shares by Transact by Phone
To redeem shares by Transact by Phone, a shareholder should call our
service people before 4:00 p.m. Eastern time to receive that night's closing
share price. Requests received after 4:00 p.m. will be sold at the next business
day's closing price. The shareholder's bank account will be credited with
redemption proceeds on the second or third business day following the redemption
request.
The AARP Funds employ procedures to give reasonable assurance that
telephone instructions are genuine, including recording telephone calls, testing
a caller's identity and sending written confirmation of such transactions. If an
AARP Fund does not follow such procedures, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
FEATURES AND SERVICES OFFERED BY THE FUNDS
(See "STATEMENTS AND REPORTS," "EXCHANGING"
and "INVESTOR SERVICES" in the Prospectus.)
Automatic Dividend Reinvestment
Investors may elect on their enrollment form whether they wish to
receive any dividends from net investment income or any distributions from
realized capital gains in cash or to reinvest such dividends and distributions
in additional shares of the Fund paying the dividend or distribution. They may
also elect to have these payments invested in shares of any other AARP Fund in
the Program in which they have an account. If no election is made, dividends and
distributions will be reinvested in additional shares. A change of instructions
for the method of payment may be given to the Program at any time prior to a
record date.
Each distribution, whether by check or reinvested in a Fund, will
include a brief explanation of the source of the distribution.
Distributions Direct
Investors may also have dividends and distributions automatically
deposited to their predesignated bank account through the AARP Funds'
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
1-800-253-2277. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
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<PAGE>
Reports to Shareholders
The AARP Funds send to shareholders at least semiannually financial
statements, which are examined at least annually by independent accountants,
including a list of investments held and statements of assets and liabilities,
operations, changes in net assets, and financial highlights.
Investors receive a brochure entitled Your Guide to Simplified
Investment Decisions when they order an investment kit for the nine AARP Funds
which also contains a prospectus. The Shareholder's Handbook is sent to all new
shareholders to help answer any questions they may have about investing. An IRA
Handbook is sent to all new IRA shareholders. Every month, shareholders will be
sent the newsletter, Financial Focus. Retirement plan shareholders will be sent
a special edition of Financial Focus on a quarterly basis. The newsletters are
designed to help you keep up to date on economic and investment developments,
and any new financial services and features of the Program.
Consolidated Statements
Shareholders with investments in two or more AARP Funds will receive,
without charge, a convenient monthly Consolidated Statement. IRA and Keogh Plan
accounts receive Consolidated Statements quarterly. This statement contains the
market value of all holdings, a complete listing of transactions for the
statement period and a summary of the shareholder's investment program for the
statement period and for the year to date. Information may be obtained by
contacting the AARP Investment Program from Scudder, P.O. Box 2540, Boston,
Massachusetts 02208-2540, or by calling toll free, 1-800-253-2277.
RETIREMENT PLANS
Shares of AARP High Quality Money Fund, AARP GNMA and U.S. Treasury
Fund, AARP High Quality Bond Fund, AARP Balanced Stock and Bond Fund, AARP
Growth and Income Fund, AARP Global Growth Fund and AARP Capital Growth Fund
("Eligible Funds") may be purchased in connection with several types of
tax-deferred retirement plans. These plans were created for members of AARP.
Each plan is briefly described below. The plans provide convenient ways for AARP
members to make investments which may be tax-deductible for their retirement and
have taxes on any income from their investment deferred until their retirement,
when they may be in a lower tax bracket. Additional information on each plan may
be obtained by contacting the AARP Investment Program from Scudder, P.O. Box
2540, Boston, Massachusetts, 02208-2540, or by calling toll free,
1-800-253-2277. Investment professionals and retirement-benefits experts
estimate that prospective retirees will need 70% to 80% of their current
salaries during each year of their retirement, with adjustment for changes in
prices during retirement, to maintain their current life-style. Investment
professionals recommend diversifying investments among stock, bonds and
cash-equivalents when building retirement reserves. It is advisable for an
investor considering any of the plans described below to consult with an
attorney or tax advisor with respect to the terms, suitability requirements and
tax aspects of the plan.
AARP No-Fee Individual Retirement Account ("AARP No-Fee IRA")
Shares of the Eligible Funds may be purchased as the underlying
investment for an AARP No-Fee IRA which meets the requirements of Section 408(a)
of the Internal Revenue Code. Any AARP member with earned income or wages is
eligible to make annual contributions to the AARP No-Fee IRA before the year the
member attains age 70 1/2. An individual may establish an AARP No-Fee IRA
whether or not he or she is an active participant in another tax-qualified
retirement plan, including a tax-sheltered annuity or government plan.
AARP No-Fee IRA participants may generally contribute to an AARP No-Fee
IRA up to the lesser of $2,000 or 100% of their compensation or earned income.
If both a husband and wife work, each may set up an AARP No-Fee IRA before the
year they attain age 70 1/2, permitting a potential maximum contribution of
$4,000 per year for both persons. If one spouse has no earnings, each spouse may
have an AARP No-Fee IRA and the total maximum contributions will be $2,250 with
no more than $2,000 going to either AARP No-Fee IRA.
An individual will be allowed a full deduction for contributions to an
AARP No-Fee IRA only if (1) neither the individual, nor his or her spouse, if
they file a joint return, is an active participant in an employer-maintained
39
<PAGE>
retirement plan, or (2) the individual (and his or her spouse, if applicable)
has an adjusted gross income below a certain level ($25,050 for a single
individual, with a phase-out of the deduction for adjusted gross income between
$25,050 and $35,000; $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). However, an individual not permitted to make a deductible contribution
may nonetheless make a nondeductible contribution to an AARP No-Fee IRA.
Any AARP member who is entitled to receive a qualifying distribution
from a qualified retirement plan (including a tax-sheltered annuity plan) or
another IRA may make a rollover contribution of all or any portion of the
distribution to the AARP No-Fee IRA, either in a direct rollover or within 60
days after receipt of the distribution, whether or not the member has attained
age 70 1/2. If a qualified rollover contribution is made, the distribution will
not be subject to Federal income tax until distributed from the AARP No-Fee IRA;
however, distributions not directly rolled over might be subject to automatic
20% federal tax withholding.
AARP Mutual Fund Representatives are available to help you transfer
your IRA to the AARP No-Fee IRA. You pay no transfer fees for this service. An
AARP Mutual Fund Representative can help you with the paperwork, contact your
present IRA custodian, help to transfer your funds to the AARP No-Fee IRA, and
send you a confirmation when your transfer is complete.
Earnings on the AARP No-Fee IRA are not subject to current Federal
income tax until distributed; distributions are taxed as ordinary income.
Withdrawals attributable to nondeductible contributions are not taxable
(however, early withdrawals of such amounts are subject to penalty). The assets
in an AARP No-Fee IRA may be withdrawn without penalty after the participant
reaches age 59 1/2 or becomes disabled, and must begin to be withdrawn by April
1st following the taxable year in which the participant reaches age 70 1/2.
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.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
- -------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of -------------------------------------------------------------
Contributions 5% 10% 15%
- -------------------------------------------------------------------------------
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
AARP Keogh Plan
Shares of the Eligible Funds may be purchased for the AARP Keogh Plan.
The AARP Keogh Plan (the "Plan") is designed as a tax-qualified retirement plan
consisting of a profit sharing plan and a money purchase pension plan which can
be adopted by self-employed persons who are members of AARP and by corporations
whose principal shareholders are members of AARP. Self-employed persons may make
annual tax-deductible contributions to the Plan equal to the lesser of $30,000
or 20% of their earned income. An adopting corporation may contribute for each
employee the lesser of $30,000 or 25% of the employee's taxable compensation. No
more than $150,000 (as adjusted) of earned income or taxable compensation may be
taken into account, however. If the Plan is "top heavy," a minimum contribution
may be required for certain employees. Additional information on contributions
to the Plan is found in Your Guide to the AARP Keogh Plan.
The Plan provides that contributions may continue to be made on behalf
of participants after they have reached the age of 70 1/2 if they are still
working.
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<PAGE>
Lump sum distributions from the Plan may be eligible to be taxed for
Federal income tax purposes according to a favorable 5-year averaging (or
10-year averaging for individuals who reached age 50 before 1986) method not
available to IRA distributions. If members eligible to join this Plan choose to
roll over pension and profit-sharing distributions from other tax-qualified
retirement plans, they will retain the right to use the averaging method for
such distributions.
The Plans are prototype plans approved by the Internal Revenue Service.
In general, distributions from all tax-qualified retirement programs,
including IRAs and tax-sheltered annuity programs, must begin by April 1st in
the year following the year in which the participant reaches age 70 1/2, whether
or not he or she continues to be employed. Excise taxes will apply to premature
distributions, and to taxpayers who are required, but fail, to receive a
distribution after reaching age 70 1/2. An additional excise tax may apply to
certain excess retirement accumulations. Special favorable tax treatment for
certain distributions is reduced or phased out, except where grandfathering
provisions apply.
Shares of the Eligible Funds may be purchased also as an investment for
an IRA or tax-qualified retirement plan (including a tax-sheltered annuity plan)
other than those described above, if permitted by the provisions of the relevant
plan.
OTHER PLANS
(See "INVESTOR SERVICES" in the Prospectus.)
Automatic Investment
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts. The minimum pre-authorized investment amount
is $50. New shareholders who open a Gift to Minors Account pursuant to the
Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA)
and who sign up for the Automatic Investment Plan will be able to open a Fund
account for less than $500 if they agree to increase their investment to $500
within a 10 month period. This feature is only available to Gifts to Minors
Account investors. The Automatic Investment Plan may be discontinued at any time
without prior notice to a shareholder if any debit from their bank is not paid,
or by written notice to the shareholder at least thirty days prior to the next
scheduled payment to the Automatic Investment Plan.
Automatic Withdrawal Plan
Shareholders who own or purchase $10,000 or more of shares of a AARP
Fund may establish an Automatic Withdrawal Plan with that Fund. The investor can
then receive monthly, quarterly or periodic redemptions from his or her account
for any designated amount of $50 or more. Payments are mailed at the end of each
month. The check amounts may be based on the redemption of a fixed dollar
amount, fixed share amount or percent of account value or declining balance. The
Automatic Withdrawal 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 "SIGNATURE GUARANTEES" in
the Prospectus. Any such request must be received by the AARP Fund's transfer
agent by the 15th of the month in which such change is to take effect. An
Automatic Withdrawal Plan may be terminated at any time by the shareholder, the
AARP Funds or their agents on written notice, and will be terminated when all
shares of the Funds under the Plan have been liquidated or upon receipt by the
Funds of notice of death of the shareholder. For more information concerning
this plan, write to the AARP Investment Program from Scudder, P.O. Box 2540,
Boston, MA 02208-2540 or call, toll-free, 1-800-253-2277.
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<PAGE>
Direct Payment of Regular Fixed Bills
Shareholders who own or purchase $10,000 or more of shares of an AARP
Fund may arrange to have regular fixed bills such as rent, mortgage or other
payments of more than $50 made directly from their account. The arrangements are
virtually the same as for an Automatic Withdrawal Plan (see above). For more
information concerning this plan, write to the AARP Investment Program from
Scudder, P.O. Box 2540, Boston, MA 02208-2540 or call, toll-free,
1-800-253-2277.
DIVIDENDS AND YIELD
(See "UNDERSTANDING FUND PERFORMANCE" in the Prospectus.)
Each AARP Fund intends to follow the practice of distributing
substantially all of its investment company taxable income (which includes, for
example, interest, dividends and any excess of net realized short-term capital
gains over net realized long-term capital losses, less deductible expenses), and
its net tax-exempt interest income, if any. Each AARP Fund also intends to
follow the practice of distributing any excess of net realized long-term capital
gains over net realized short-term capital losses after reduction for any
capital loss carryforwards. However, if it appears to be in the best interests
of a Fund and its shareholders, the Fund may retain all or part of such gain for
reinvestment.
AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund
intend to pay dividends in March, June, September and December of each year and
any net realized capital gains after the September 30 fiscal year end. AARP
Global Growth Fund and AARP Capital Growth Fund intend to pay dividends and any
realized capital gains over net realized short-term capital losses after
reduction for any capital loss carryforwards in December after the September 30
fiscal year end. See "TAXES."
Both types of distributions will be made in shares of the respective
AARP 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.
The net income of each AARP Money Fund, each of the AARP Income Funds
and the AARP Insured Tax Free General Bond Fund, is determined as of the close
of trading on the Exchange (usually 4:00 p.m. Eastern time) on each day on which
the Exchange is open for business. All of the net income so determined normally
will be declared as a dividend daily to shareholders of record as of 4:00 p.m.
on the preceding day, and distributed monthly. Dividends commence on the next
business day after purchase. Dividends which are not paid by check will be
reinvested in additional shares of the particular Fund at the net asset value
per share determined as of a day selected within five days of the last business
day of the month. Checks will be mailed to shareholders no later than the fourth
business day of the following month, and consolidated statements confirming the
month's dividends will be mailed to shareholders electing to invest dividends in
additional shares. Dividends will ordinarily be invested on the last business
day of each month at the net asset value per share determined as of the close of
regular trading on the Exchange.
Should the AARP Money Funds incur or anticipate any unusual or
unexpected significant expense, depreciation or loss which would affect
disproportionately the Fund's income for a particular period, the Trustees of
such Fund or the Executive Committee of the Trustees may at that time consider
whether to adhere to the dividend policy described above or to revise it in the
light of the then prevailing circumstances in order to ameliorate to the extent
possible the disproportionate effect of such expense or loss on then existing
shareholders. Such expenses may nevertheless result in a shareholder's receiving
no dividends for the period during which the shares are held and in receiving
upon redemption a price per share lower than that which was paid.
Similarly, should the AARP High Quality Money Fund incur or anticipate
any unusual or unexpected significant income, appreciation or gain which would
affect disproportionately the Fund's income for a particular period, the
Trustees or the Executive Committee of the Trustees may consider whether to
adhere to the dividend policy described above or to revise it in the light of
the then prevailing circumstances in order to ameliorate to the extent possible
the disproportionate effect of such income, appreciation or gain on the dividend
received by existing shareholders. Such actions may reduce the amount of the
daily dividend received by existing shareholders.
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<PAGE>
Performance Information: Computation of Yields and Total Return
a) The AARP Money Funds
From time to time, quotations of an AARP Money Fund's yield may be
included in advertisements, sales literature or shareholder reports. These yield
figures are calculated in the following manner:
The current yield is the net annualized yield based on a specified 7
calendar-days calculated at simple interest rates. Current yield is calculated
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period and dividing such change by the value of the account at the
beginning of the base period to obtain the base-period return. The base-period
return is then annualized by multiplying it by 365/7; the resultant product
equals net annualized current yield. The current yield figure is stated to the
nearest hundredth of one percent. The current yield of the AARP High Quality
Money Fund and the AARP High Quality Tax Free Money Fund for the seven-day
period ended September 30, 1995 respectively, were 4.97% and 3.37%.
The effective yield is the net annualized yield for a specified 7
calendar-days assuming a reinvestment in Fund shares of all dividends during the
period, i.e., compounding. Effective yield is calculated by using the same
base-period return used in the calculation of current yield except that the
base-period return is compounded by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, according to the
following formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The effective yield of the AARP High Quality Money Fund and the AARP
High Quality Tax Free Money Fund for the seven-day period ended September 30,
1995 respectively, were 5.10% and 3.43%.
As described above, current yield and effective yield are based on
historical earnings, show the performance of a hypothetical investment and are
not intended to indicate future performance. Current yield and effective yield
will vary based on changes in market conditions and the level of Fund expenses.
In connection with communicating its current yield and effective yield
to current or prospective shareholders, a Fund also may compare these figures to
the performance of other mutual Funds tracked by mutual Fund rating services or
to other unmanaged indices which may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
b) The AARP Money Funds, AARP Income Funds, AARP Growth Funds and AARP
Insured Tax Free General Bond Fund
From time to time, quotations of a Fund's total return may be included
in advertisements, sales literature or shareholder reports. This total return
figure is calculated in the following manner:
The total return is the average annualized compound rate of return for,
where applicable, the periods of one year, five years and ten years, all ended
on the last day of a recent calendar quarter. 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. Total return is calculated by finding the average annualized
compound rates of return of a hypothetical investment over such periods,
according to the following formula (total return is then expressed as a
percentage):
T = (ERV/P)^1/n - 1
Where:
T = average annualized compound total rate of 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.
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<PAGE>
<TABLE>
<CAPTION>
Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/95 9/30/95 9/30/95(1)
------- ------- ----------
<S> <C> <C> <C>
AARP High Quality Money Fund 4.99% 4.05% 5.39%
AARP High Quality Tax Free Money Fund 2.99 3.00* 4.28*
AARP GNMA and U.S. Treasury 10.31 7.77 8.17
AARP High Quality Bond 12.98 8.98 8.58
AARP Insured Tax Free General Bond 10.21 8.55 8.64
AARP Balanced Stock and Bond Fund 16.80 n.a.. 9.28
AARP Growth and Income 20.43 17.12 14.55
AARP Global Growth Fund n.a. n.a. n.a.
AARP Capital Growth 23.47 16.81 14.10
(1) For the ten fiscal years ended September 30, 1995 for each of the above
listed Funds except for the period February 1, 1994 (commencement of
operations) to September 30, 1995 for the AARP Balanced Stock and Bond
Fund.
* Prior to August 1, 1991, the AARP High Quality Tax Free Money Fund
operated as the AARP Insured Tax Free Short Term Fund. The total return
figures for the five and ten years ended September 30, 1995 for the
AARP High Quality Tax Free Money Fund are representative of the Fund
prior to its conversion date except that the figures have been adjusted
to reflect its conversion to a money market fund.
</TABLE>
In addition to total return described above, the Funds may quote
nonstandard "cumulative total return."
The cumulative total return is the 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 rates of
return of a hypothetical investment over such periods, according to the
following formula. (Cumulative total return is then expressed as a percentage):
C = (ERV/P) -1
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.
<TABLE>
<CAPTION>
Cumulative Total Return
-----------------------------------------------------------------
One Year Ended Five Years Ended Ten Years Ended
9/30/95 9/30/95 9/30/95(1)
------- ------- ----------
<S> <C> <C> <C>
AARP Balanced Stock and Bond Fund 16.80% n.a. 15.89%
AARP Growth and Income 20.43 120.33% 289.03
AARP Global Growth Fund n.a. n.a. n.a.
AARP Capital Growth 23.47 117.50 273.88
(1) For the period February 1, 1994 (commencement of operations) to September 30, 1995 for the AARP Balanced
</TABLE>
c) The AARP Income Funds and AARP Insured Tax Free General Bond Fund
From time to time, quotations of an AARP Fund's yield may be included
in advertisements, sales literature or shareholder reports. This yield is
calculated in the following manner.
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<PAGE>
The yield is the net annualized SEC yield based on a specified 30-day
(or one month) period assuming semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the
period, including (except for mortgage or
receivable-backed obligations) the
amortization of market premium or accretion
of market discount. For mortgage or
receivables-backed obligations, this amount
includes realized gains or losses based on
historic cost for principal repayments
received.
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.
Yield for the 30-day period
Fund ended September 30, 1995
---- ------------------------
AARP GNMA and U.S. Treasury 6.61%
AARP High Quality Bond 5.94
AARP Insured Tax Free General Bond 4.76
d) AARP Insured Tax Free General Bond and AARP High Quality Tax Free Money
Fund
The tax equivalent yield is the net annualized after-tax yield based on
a specified seven day period for money market funds or on a specified 30-day
(one month) period for non-money market funds assuming a reinvestment of all
dividends paid during the period, i.e., compounding. Tax equivalent yield is
calculated by dividing that portion of the Fund's yield (as computed in the
yield description above) which is tax-exempt by one minus a stated income tax
rate and adding the product to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Equivalent Taxable Yields
period ended September 30, 1995
-------------------------------
Fund Tax Bracket: 28% 31%
AARP High Quality Tax Free Money 4.68% 4.88%
AARP Insured Tax Free General Bond 6.61% 6.90%
(e) General Performance Information
Quotations of an AARP Fund's performance are based on historical
earnings and are not intended to indicate future performance of the 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 the Fund's expenses. In periods of declining interest rates a
Fund's quoted yield and 30-day current yield will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest rates a Fund's
quoted yield and 30-day current yield will tend to be somewhat lower.
Comparison of non-standard performance data of 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
effect 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.
45
<PAGE>
From time to time, in marketing and other AARP Fund literature, these
AARP Funds' performances may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations, such as Lipper Analytical Services, Inc. ("Lipper"), Investment
Company Data, Inc. ("ICD"), CDA Investment Technologies, Inc. ("CDA"), Value
Line Mutual Fund Survey, Morningstar, Inc. and other independent organizations.
For instance, AARP Growth Funds will be compared to funds in the growth fund
category; and so on. In similar fashion, the performance of the AARP GNMA and
U.S. Treasury Fund will be compared to that of certificates of deposit.
Evaluations of AARP Fund performance made by independent sources or independent
experts may also be used in advertisements concerning the AARP Funds, including
reprints of, or selections from, editorials or articles about these Funds.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to unmanaged
indices which may assume reinvestment of dividends or interest but generally do
not reflect deductions for administrative and management costs. Indices with
which the Fund may be compared include but are not limited to, the following:
Standard & Poor's 500 Stock Index (S&P 500), The Europe/Australia/Far East
(EAFE) Index, Morgan Stanley Capital International World Index, J.P. Morgan
Global Traded Bond Index, and Salomon Brothers World Government Bond Index.
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.
Evaluation of Fund performance 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 AARP Fund
performance information and articles about the AARP Funds may include, but are
not limited to, 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.
Federal Reserve Bulletin, a monthly publication that reports domestic and
international financial statistics, including short-term certificate of deposit
interest rates.
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.
46
<PAGE>
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/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity, and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue'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 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.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
47
<PAGE>
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 business 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 Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
TRUST ORGANIZATION
(See "FUND ORGANIZATION" in the Prospectus.)
Each of the AARP Funds is a separate series of a Massachusetts business
trust. AARP GNMA and U.S. Treasury Fund and AARP High Quality Bond Fund are
series of AARP Income Trust. AARP High Quality Tax Free Money Fund and AARP
Insured Tax Free General Bond Fund are series of AARP Tax Free Income Trust
which changed its name from AARP Insured Tax Free Income Trust on August 1,
1991. AARP Balanced Stock and Bond Fund, AARP Growth and Income Fund, AARP
Global Growth Fund and AARP Capital Growth Fund are series of AARP Growth Trust.
Each of the above Trusts was established under a separate Declaration of Trust
dated June 8, 1984. AARP High Quality Money Fund is a separate series of the
AARP Cash Investment Funds, which was established under a Declaration of Trust
dated January 20, 1983. The original name of AARP Cash Investment Funds was
Master Investment Services Fund. That name was changed to AARP Money Fund Trust
on February 6, 1985, and to its present name on May 24, 1985. Each Trust's
shares of beneficial interest of $.01 (AARP High Quality Tax Free Money Fund
$.001) par value per share are issued in separate series. AARP Cash Investment
Funds has three series in addition to AARP High Quality Money Fund that are not
currently offered. None of the other Trusts has an existing series which is not
currently being offered. Other series may be established and/or offered by the
Trusts in the future. Each share of a series represents an interest in that
series which is equal to each other share of that series.
The assets 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 that series and constitute
the underlying assets of that series. The underlying assets of each series are
segregated on the books of account of the Trust, and are to be charged with the
liabilities of that series. The Trustees have determined that expenses with
respect to all series in a Trust are to be allocated in proportion to the net
asset value, or such other reasonable basis, of the respective series in that
Trust except where allocations of direct expenses can otherwise be more fairly
made. The officers of each Trust, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to all the
series in a Trust. Each Trust's Declaration of Trust provides that allocations
so made to each series shall be binding on all persons. While each Declaration
of Trust provides that liabilities of a series may be satisfied only out of the
assets of that series, it is possible that if a series were unable to meet its
obligations, a court might find that the assets of other series in the Trust
should satisfy such obligations. In the event of the dissolution or liquidation
of a Trust, the holders of the shares of each series are entitled to receive as
a class the underlying assets of that series available for distribution to
shareholders.
48
<PAGE>
Shareholders are entitled to one vote per share. Separate votes are
taken by each series on all matters except where the 1940 Act requires that a
matter be decided by the vote of shareholders of all series of a Trust voting
together or where a matter affects only one of the series, in which case only
shareholders of that series shall vote thereon. For example, a change in
investment policy for a series would be voted upon only by shareholders of the
series involved. Additionally, approval of each Trust's investment advisory
agreement is a matter to be determined separately by each series in that Trust.
Approval of the agreement by the shareholders of one series in a Trust is
effective as to that series whether or not enough votes are received from the
shareholders of other series in the Trust to approve such agreement as to the
other series.
The Trustees of each Trust have the authority to establish additional
series and to designate the relative rights and preferences as between the
series. All shares issued and outstanding of each series that is offered by a
Trust will be fully paid and non-assessable by the Trust, and redeemable as
described in this Statement of Additional Information and in the Prospectus.
Each 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 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 any of the Declarations of Trust protects or indemnifies a Trustee or
officer against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
MANAGEMENT OF THE FUNDS
(See "FUND ORGANIZATION" in the Prospectus.)
Each Trust has retained Scudder, Stevens & Clark, Inc., a Delaware
corporation (the "Fund Manager"), to perform management and investment advisory
services for the Funds pursuant to Investment Management and Advisory Agreements
with each Trust ("Management Agreement") dated February 1, 1994.
Each Management Agreement provides that the Fund Manager will regularly
provide, or cause to be provided, to the AARP Funds investment research, advice
and supervision and furnish continuously an investment program for the AARP
Funds consistent with each Fund's investment objective and policies.
The Fund Manager assumes responsibility for the compensation and
expenses of all officers and executive employees of each Trust and makes
available or causes to be made available, without expense to the Trusts, the
services of such of its partners, directors, officers and employees as may duly
be elected officers or Trustees of a Trust, subject to their individual consent
to serve and to any limitations imposed by law, and pays the Trusts' office rent
and provides, or causes to be provided, investment advisory, research and
statistical facilities and related clerical services. For these services the
AARP Funds pay the Fund Manager a monthly fee consisting of a base fee and an
individual Fund fee. The base fee is based on average daily net assets of all
Funds in the AARP Investment Program, as follows:
Program Assets Annual Rate at Each
(Billions) Asset Level
---------- -----------
First $2 0.35%
Next $2 0.33
Next $2 0.30
Next $2 0.28
Next $3 0.26
Next $3 0.25
Over $14 0.24
Total program assets as of September 30, 1995 were over $12 billion.
All AARP Funds pay a flat individual Fund fee based on the net assets
of that Fund.
49
<PAGE>
The individual Fund fees are as follows:
AARP High Quality Money Fund, 10/1200 of 1% (or approximately .10 of 1%
on an annual basis);
AARP GNMA and U.S. Treasury Fund, 12/1200 of 1% (or approximately .12
of 1% on an annual basis);
AARP High Quality Bond Fund, 19/1200 of 1% (or approximately .19 of
1% on an annual basis);
AARP High Quality Tax Free Money Fund, 10/1200 of 1% (or approximately
.10 of 1% on an annual basis);
AARP Insured Tax Free General Bond Fund, 19/1200 of 1% (or
approximately .19 of 1% on an annual basis);
AARP Balanced Stock and Bond Fund, 19/1200 of 1% (or approximately .19
of 1% on an annual basis);
AARP Growth and Income Fund, 19/1200 of 1% (or approximately .19 of
1% on an annual basis);
AARP Global Growth Fund, 55/1200 of 1% (or approximately .55 of 1% on
an annual basis);
AARP Capital Growth Fund, 32/1200 of 1% (or approximately .32 of 1%
on an annual basis).
The advisory fees for the fiscal years ended September 30, 1993 and up
to January 31, 1994 under the previous Investment Management and Advisory
Agreements and under the present Investment Management Agreement from February
1, 1994 to September 30, 1994 and for the fiscal year ended September 30, 1995
were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund $ 1,358,702 $ 1,244,322 $ 1,492,545
AARP GNMA and U.S. Treasury Fund 26,404,563 26,198,841 22,095,173
AARP High Quality Bond Fund 2,344,628 2,952,999 2,600,629
AARP High Quality Tax Free Money Fund 637,451 568,107 493,693
AARP Insured Tax Free General Bond Fund 8,631,469 9,944,429 8,813,051
AARP Balanced Stock and Bond Fund* n.a. 365,435 960,412
AARP Growth and Income Fund 5,405,394 9,533,476 12,406,325
AARP Global Growth Fund** n.a. n.a. n.a.
AARP Capital Growth Fund 3,176,921 4,184,437 3,988,023
</TABLE>
Each Management Agreement provides that the Fund Manager will reimburse
the AARP Funds or the Trust for annual expenses in excess of the lowest expense
limitation imposed by the states in which the Funds of the particular Trust are
at the time offering their shares for sale, although no payments are required to
be made by the Fund Manager pursuant to this reimbursement provision in excess
of the annual fee paid by the funds of a Trust to the Fund Manager. Management
has been advised that the lowest such limitation is currently 2 1/2% of the
first $30,000,000 of such net assets, 2% of the next $70,000,000 of such net
assets and 1 1/2% of such net assets in excess of $100,000,000. Certain expenses
such as brokerage commissions, taxes, extraordinary expenses and interest are
excluded from such limitation. The Fund Manager has agreed that its obligation
to reimburse the Funds will not be restricted to the amounts of the management
fees. Such agreement may be modified or withdrawn without shareholder approval.
The expense ratios, net of voluntary and statutory fee waivers and
reimbursements of expenses, for the periods ended September 30, 1993, 1994 and
1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund 1.31% 1.13% .98%
AARP GNMA and U.S. Treasury Fund .70 .66 .67
AARP High Quality Bond Fund 1.01 .95 .95
AARP High Quality Tax Free Money Fund .93 .90 .87
AARP Insured Tax Free General Bond Fund .72 .68 .69
AARP Balanced Stock and Bond Fund* n.a. 1.31 1.01
AARP Growth and Income Fund .84 .76 .72
AARP Global Growth Fund n.a. n.a. n.a.
AARP Capital Growth Fund 1.05 .97 .95
</TABLE>
For the fiscal years ended September 30, 1993, 1994 and 1995, the
reimbursements by the Fund Manager based on the expense limitation then in
effect were as follows:
50
<PAGE>
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
AARP High Quality Money Fund -- -- --
AARP GNMA and U.S. Treasury Fund -- -- --
AARP High Quality Bond Fund -- -- --
AARP High Quality Tax Free Money Fund $278,471 $8,083 --
AARP Insured Tax Free General Bond Fund -- -- --
AARP Balanced Stock and Bond Fund* n.a. -- --
AARP Growth and Income Fund -- -- --
AARP Global Growth Fund** n.a. n.a. n.a.
AARP Capital Growth Fund -- -- --
</TABLE>
*AARP Balanced Stock and Bond Fund commenced operations on February 1, 1994.
**AARP Global Growth Fund commenced operations on February 1, 1996.
If reimbursement is required, it will be made as promptly as
practicable after the end of each Trust's fiscal year. However, no fee payment
will be made to the Fund Manager during any fiscal year which will cause
year-to-date expenses to exceed the cumulative pro rata expense limitation at
the time of such payment. The amortization of organizational costs is described
herein under "ADDITIONAL INFORMATION - Other Information."
Under the Management Agreements, each Trust is responsible for all of
its other expenses including organizational expenses; clerical salaries; fees
and expenses incurred in connection with membership in investment company
organizations; brokers' commissions; any fees for portfolio pricing paid to a
pricing agent; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the cost of preparing share
certificates, if any, and any other expenses including clerical expenses of
issue, redemption or repurchase of shares; the expenses and fees for registering
or qualifying securities for sale; the fees and expenses of the Trustees of the
Trust who are not affiliated with the Fund Manager, Scudder, Stevens & Clark,
Inc., AARP Financial Services Corporation or AARP; the cost of preparing and
distributing reports and notices to shareholders; and the fees and disbursements
of custodians. Each Trust may arrange to have third parties assume all or part
of the expenses of sale, underwriting and distribution of shares of the Trust.
Each Trust is also responsible for its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto. The custodian
agreement for each Trust provides that the custodian shall compute the net asset
value for that Trust.
Each Management Agreement provides that the Fund Manager shall not be
required to pay expenses of distribution of the Funds' shares to the extent that
(i) such distribution expenses are, pursuant to a written contract, to be borne
by a principal underwriter of the Trust ("Scudder Investor Services, Inc." is
principal underwriter for the AARP Trusts), (ii) the Trust shall have adopted a
plan in conformity with Rule 12b-1 under the 1940 Act ("Rule 12b-1 plan")
providing for the Trust (or the Funds or some other party) to assume some or all
of such expenses, or (iii) such expenses are required to be paid by Scudder,
Stevens & Clark, Inc. To the extent such expenses of distribution are not to be
borne by a principal underwriter, or are not permitted to be paid by the Trust
(or a Fund or such other party) pursuant to a Rule 12b-1 plan, they are to be
assumed by the Fund Manager. (The adoption of a Rule 12b-1 plan by a Trust would
require the approval of the Trustees, including a majority of those Trustees who
are not interested persons of the Trust, and of a majority of the outstanding
voting securities of each Fund.)
The Management Agreements for all Funds except AARP Global Growth Fund
will remain in effect until August 31, 1996 and from year to year thereafter
only if their continuance is specifically approved at least annually by the vote
of a majority of those Trustees who are not parties to such Agreements or
"interested persons" of the Fund Manager, Scudder, Stevens & Clark, Inc. or the
particular Trust cast in person at a meeting called for the purpose of voting on
such approval and either by vote of a majority of the Trustees or, with respect
to each Fund, by a majority of the outstanding voting securities of that Fund.
The Supplement to Investment Management Agreement for the AARP Global Growth
Fund will remain in effect until August 31, 1997 and from year to year
thereafter only if its continuance is specifically approved at least annually by
the vote of a majority of those Trustees who are not parties to such Agreement
or "interested persons" of the Fund Manager, Scudder, Stevens & Clark, Inc. or
the particular Trust cast in person at a meeting called for the purpose of
voting on such approval and either by vote of a majority of the Trustees or, by
a majority of the outstanding voting securities of the AARP Global Growth Fund.
In the event a Management Agreement is approved by the shareholders of one of
the Funds but not by the shareholders of the other Fund, the Management
51
<PAGE>
Agreement will continue in effect as to the former Fund but not the latter. The
Management Agreements for all Funds except AARP Global Growth Fund were last
approved by the Trustees (including a majority of the Trustees who are not
"interested persons") on June 28, 1995 and by the shareholders on January 13,
1994. The Supplement to Investment Management Agreement for AARP Global Growth
Fund dated February 1, 1996 was approved by the Trustees on December 13, 1995
and by the initial shareholder on January 24, 1996. Each Agreement may be
terminated at any time without payment of penalty by either party on sixty days'
written notice, and automatically terminates in the event of its assignment.
Scudder, Stevens & Clark, Inc. is one of the most experienced
investment management firms in the United States. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual Fund to the public. In 1953, Scudder introduced Scudder International
Fund, the first Fund available in the U.S. investing internationally in
securities of issuers in several foreign countries. The principal source of the
Fund Manager's income is professional fees received from providing continuous
investment advice, and the firm derives no income from banking, 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, Scudder Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder Portfolio Trust, 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, Scudder World Income Opportunities Fund, Inc., The Argentina
Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund, Inc., The Korea Fund,
Inc., The Japan Fund, Inc., and The Latin America Dollar Income Fund, Inc. Some
of the foregoing companies or trusts have two or more series.
The Fund Manager maintains a large research department, which conducts
continuous studies of the factors that affect the condition of various
industries, companies and individual securities. In this work, the Fund Manager
utilizes certain reports and statistics from a wide variety of sources,
including brokers and dealers who may execute portfolio transactions for the
Fund and for clients of the Fund Manager, but conclusions are based primarily on
investigations and critical analyses by its own research specialists.
Certain investments may be appropriate for more than one Fund and also
for other clients advised by the Fund Manager. Investment decisions for each
Fund and for 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
Fund or client or in different amounts and at different times for more than one
but less than all Funds or other clients. Likewise, a particular security may be
bought for one or more Funds or clients when one or more other Funds or clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more Funds or clients on the same date. In such event
such transactions will be allocated among the Funds and/or clients in a manner
believed by the Fund Manager 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 Funds or clients of the Fund Manager in the interest of most
favorable net results to the particular Fund.
Each Management Agreement provides that the Fund Manager shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with matters to which the respective agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on the part of the Fund Manager in the performance of its duties or from
reckless disregard by the Fund Manager of its obligations and duties under the
respective agreement.
In reviewing the terms of each Management Agreement and in discussions
with the Fund Manager concerning such agreements, the Trustees of each Trust who
are not "interested persons" of that Trust have been represented by independent
counsel at the Trust's expense. Dechert Price & Rhoads acts as general counsel
for the Trusts.
52
<PAGE>
Pursuant to a Member Services Agreement with the Fund Manager, dated
February 1, 1994, AARP Financial Services Corp. ("AFSC") provides the Fund
Manager with nondistribution related service and advice primarily concerning
designing and tailoring the AARP Investment Program from Scudder and its Funds
to meet the needs of AARP's members on an ongoing basis. AARP Financial Services
Corp. receives, as compensation for its services, a Monthly Member Services fee.
The fee paid to AFSC is calculated on a daily basis and depends on the level of
total assets of the AARP Investment Program. The fee rate decreases as the level
of total assets increases. The fee rate for each level of assets is .07 of 1%
for the first $6 billion, .06 of 1% for the next $10 billion and .05 of 1%
thereafter.
The Member Services Agreement will remain in effect until August 31,
1996 and from year to year thereafter only if its continuance is specifically
approved at least annually by the vote of a majority of those Trustees who are
not "interested persons" of the Fund Manager, AFSC, or the Funds cast in person
at a meeting called for the purpose of voting on such approval and either by
vote of a majority of the Trustees or, with respect to each Fund, by a majority
of the outstanding voting securities of that Fund. The continuance of the Member
Services Agreement was last approved by the Trustees (including a majority of
the Trustees who are not such "interested persons") on June 28, 1995 and by
shareholders on January 13, 1994. The Member Services Agreement may be
terminated at any time without payment of penalty by the Funds on sixty days'
written notice, or by AFSC upon six months' notice to the Funds and to the Fund
Manager, and automatically terminates in the event of its assignment or the
assignment of the Management Agreement.
Pursuant to a Service Mark License Agreement, dated November 30, 1984
(February 18, 1985 in the case of AARP Cash Investment Funds), among the Trusts,
the Fund Manager and AARP, use of the AARP service marks by a Trust and its
Funds will be terminated, unless otherwise agreed to by AARP, upon termination
of that Trust's Management Agreement.
Officers and employees of the Fund Manager from time to time may have
transactions with various banks, including the AARP Funds' custodian bank. It is
the Fund Manager's opinion that the terms and conditions of those transactions
which have occurred were not influenced by existing or potential custodial or
other Fund relationships.
None of the officers or Trustees of a Trust may have dealings with that
Trust as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Funds.
Personal Investments by Employees of Scudder
Employees of Scudder are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in Scudder'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.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
<S> <C> <C> <C>
Cuyler W. Findlay#* Chairman of the Managing Director of Scudder, Senior Vice President
Board and Trustee Stevens & Clark, Inc. and Director
Horace B. Deets+* Vice Chairman and Executive Director, American -
Trustee Association of Retired Persons
53
<PAGE>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Linda Coughlin#* President and Managing Director of Scudder, Director
Trustee Stevens & Clark, Inc.
Carole Lewis Anderson Trustee (1,2) President, MASDUN Capital -
3616 Reservoir Road, N.W. Advisors; Formerly Principal,
Washington, DC Suburban Capital Markets, Inc.;
Director, VICORP Restaurants,
Inc.; Member of the Board,
Association for Corporate Growth
of Washington, D.C.; Trustee,
Hasbro Children's Foundation and
Mary Baldwin College
Adelaide Attard Trustee (2,4) Gerontology Consultant; Member, -
270-28N Grand Central Parkway New York City Department of
Floral Park, NY Aging Advisory Council -
Appointed by Mayor (1995); Board
Member, American Association on
International Aging (1981 to
present); Commissioner, County
of Nassau, New York, Dept. of
Senior Citizen Affairs
(1971-1991); Chairperson,
Federal Council on Aging
(1981-1986)
Cyril F. Brickfield+* Trustee (2,3,4), Honorary President and Special -
Honorary Trustee Counsel, American Association of
(1) Retired Persons
Robert N. Butler, M.D. Trustee (2,4) Director, International -
211 Central Park West Longevity Center and Professor
Apt. 7F of Geriatrics and Adult
New York, NY Development; Chairman, Henry L.
Schwartz Department of
Geriatrics and Adult
Development, Mount Sinai Medical
Center (1982 to present);
Formerly Director, National
Institute on Aging, National
Institute of Health (1976-1982)
54
<PAGE>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Esther Canja+ Trustee Vice President, American
Association of Retired Persons;
Trustee and Chair, AARP Group
Health Insurance Plan; Board
Liaison, National Volunteer
Leadership Network Advisory
Committee; Chair, Board
Operations Committee; AARP State
Director of Florida (1990-1992)
Edgar R. Fiedler Trustee (1,2,3) Vice President and Economic -
845 Third Ave. Counselor, The Conference Board,
New York, NY Inc.
Lt. Gen. Eugene P. Forrester Trustee (2,3) Lt. General (Retired), U.S. -
1101 S. Arlington Ridge Rd. Army; International Trade
Arlington, VA Counselor (1983 to present);
Consultant
Wayne F. Haefer* Trustee (2,3,4) Director, Membership Division of -
AARP; Formerly Secretary,
Employee's Pension and Welfare
Trusts of AARP and Retired
Persons Services, Inc.
George L. Maddox, Jr. Trustee (2,3) Professor Emeritus and Director, -
P.O. Box 2920 Long Term Care Resources
Duke Univ. Medical Center Program, Duke University Medical
Durham, NC Center; Professor Emeritus of
Sociology, Departments of
Sociology and Psychiatry, Duke
University
55
<PAGE>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Robert J. Myers Trustee (1,2,4) Actuarial Consultant (1983 - -
9610 Wire Ave. present); Formerly Chairman,
Silver Spring, MD Commission on Railroad
Retirement Reform (1988-90);
Deputy Commissioner, U.S. Social
Security Administration
(1981-1982); Member, National
Commission on Social Security
(1978-1981); Formerly Executive
Director, National Commission on
Social Security Reform
(1982-1983); Director, NASL
Series Fund, Inc.; Director:
NASL Series Trust, Inc. and
North American Funds, Inc.;
Member, U.S. Office of
Technology Assessment,
Prospective Payment Assessment
Commission.
James H. Schulz Trustee (3,4) Professor of Economics and -
158 Scruton Pond Road Kirstein Professor of Aging
Barrington, NH 03825 Policy, Policy Center on Aging,
Florence Heller School, Brandeis
University
Gordon Shillinglaw Trustee (1,3,4) Professor Emeritus of -
196 Villard Ave. Accounting, Columbia University
Hastings-on-Hudson, NY Graduate School of Business
Thomas W. Joseph## Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer and
Assistant Clerk
David S. Lee## Vice President and Managing Director of Scudder, President, Assistant
Assistant Treasurer Stevens & Clark, Inc. Treasurer and Director
Thomas F. McDonough## Vice President and Principal of Scudder, Stevens & Clerk
Assistant Secretary Clark, Inc.
Pamela A. McGrath## Vice President and Managing Director of Scudder, -
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
James W. Pasman## Vice President Principal of Scudder, Stevens & -
Clark, Inc.
56
<PAGE>
Position with
Underwriter,
Name Position Principal Scudder Investor
and Address with Trusts Occupation** Services, Inc.
- ----------- ----------- ------------ --------------
Kathryn L. Quirk# Vice President and Managing Director of Scudder, Vice President
Secretary Stevens & Clark, Inc.
Howard Schneider# Vice President Managing Director of Scudder, -
Stevens & Clark, Inc.
Cornelia M. Small# Vice President Managing Director of Scudder, -
Stevens & Clark, Inc.
1) AARP Cash Investment Funds 3) AARP Tax Free Income Trust
2) AARP Income Trust 4) AARP Growth Trust
* Messrs. Brickfield, Deets, Findlay, Haefer and Ms. Canja and Ms. Coughlin are Trustees of each of the Trusts
and are considered by the Trusts and their counsel to be persons who are "interested persons" of the Trusts
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
# Address: 345 Park Avenue, New York, New York
## Address: Two International Place, Boston, Massachusetts
+ Address: 601 E Street, N.W., Washington, D.C.
</TABLE>
As of December 31, 1995, all Trustees and officers of the Funds as a
group owned beneficially (as that term is defined under Section 13(d) of the
Securities Exchange Act) less than 1% of the outstanding shares of each Fund. To
the best of the Trusts' knowledge as of December 31, 1995 no person owned
beneficially more than 5% of the outstanding shares of any of the Trusts.
REMUNERATION
Several of the officers and Trustees of the Trusts may be officers or
employees of Scudder, Stevens & Clark, Inc., Scudder Service Corporation,
Scudder Investor Services, Inc., or Scudder Trust Company and will participate
in the fees received by such entities. No individual affiliated with AARP will
participate directly in any such fees. The Trusts pay no direct remuneration to
any officer of the Trusts. However, each of the Trustees who is not affiliated
with Scudder, Stevens & Clark, Inc. or AARP will be paid by the Trust(s) for
which he or she serves as Trustee. Each of these unaffiliated Trustees will
receive an annual fee of $2000 from each Fund for which he or she serves plus
$270 for each Trustees' meeting and $200 for each audit committee meeting or
meeting held for the purpose of considering arrangements between the Fund and
the Fund Manager or any of its affiliates attended. Each unaffiliated Trustee
also receives $100 per committee meeting, other than an audit committee meeting,
attended. If any such meetings are held jointly with meetings of one or more
mutual funds advised by the Fund Manager, a maximum fee of $800 for meetings of
the Board, meetings of the unaffiliated members of the Board for the purpose of
considering arrangements between the Fund and the Fund Manager or any of its
affiliates or the audit committees of such Funds, and $400 for all other
committee meetings or meetings of the unaffiliated members of the Board is paid,
to be divided equally among the Funds. For the year ended September 30, 1995,
the Trustees' fees and expenses for eight of the Funds were as follows:
AARP High Quality Money Fund $ 19,837
AARP GNMA and U.S. Treasury Fund 29,332
AARP High Quality Bond Fund 31,055
AARP High Quality Tax Free Money Fund 30,610
AARP Insured Tax Free General Bond Fund 30,826
AARP Balanced Stock and Bond Fund 23,992
AARP Growth and Income Fund 28,774
AARP Capital Growth Fund 28,697
57
<PAGE>
The following Compensation Table provides, in tabular form, the following data:
Column (1): all Trustees who receive compensation from the Trusts.
Column (2): aggregate compensation received by a Trustee from all the series of
a Trust.
Columns (3) and (4): pension or retirement benefits accrued or proposed be paid
by the Trusts. The AARP Trusts do not pay their Trustees such benefits.
Column (5): total compensation received by a Trustee from the Trusts, plus
compensation received from all Funds that are advised by the Fund Manager
(the "Fund Complex") for which a Trustee serves. The total number of Funds
from which a Trustee receives such compensation is also provided.
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995
===================== ===================================================================== =========== ============ ===============
(1) (2) (3) (4) (5)
Aggregate Compensation from
(d)
AARP Growth
Trust
(b) (c) consisting of four
AARP Income AARP Tax Free Funds: AARP
(a) Trust Income Trust Balanced Stock Pension or
AARP Cash consisting of two consisting of and Bond Fund, Retirement Total
Investment Funds: two Funds: AARP AARP Growth and Benefits Compensation
Fund AARP GNMA and High Quality Tax Income Fund, Accrued As Estimated from the
consisting of one U.S. Treasury Free Money Fund AARP Global Part of Annual AARP Trusts
Fund: AARP Fund and AARP and AARP Insured Growth Fund*, and Fund Benefits and Scudder
Name of Person, High Quality High Quality Tax Free General AARP Capital Complex Upon Fund Complex
Position Money Fund Bond Fund Bond Fund Growth Fund Expenses Retirement Paid to Trustee
===================== =============== ================ ================== ================= =========== ============ ===============
<S> <C> <C> <C> <C> <C> <C> <C>
Carole L. Anderson, $538 $1076 - - N/A N/A $1614
Trustee (3 funds)
Adelaide Attard, $3177 $7387 - $11,677 N/A N/A $22,241
Trustee (6 funds)
Robert N. Butler, - $7140 - $10,110 N/A N/A $17,250
Trustee (5 funds)
Mary Johnston $3477 - $6553 $10,430 N/A N/A $33,460
Evans, Retired (7 funds)
Trustee as of May
31, 1996
Edgar R. Fiedler, $3720 $8000 $7600 - N/A N/A $81,713**
Trustee (6 funds)
Eugene P. - $8160 $8560 - N/A N/A $16,720
Forrester, Trustee (4 funds)
William B. - - $7680 $10,920 N/A N/A $18,600
Macomber, Retired (5 funds)
Trustee as of March
31, 1996
George L. Maddox, - $8560 $8960 - N/A N/A $17,520
Jr., Trustee (4 funds)
Robert J. Myers, $3950 $7892 - $11,238 N/A N/A $23,080
Trustee (6 funds)
James H. Schulz, - $5968 $7006 $11,108 N/A N/A $24,082
Trustee (7 funds)
Gordon Shillinglaw, $4008 - $8026 $12,046 N/A N/A $102,097
Trustee (15 funds)
* AARP Global Growth Fund commenced operations on February 1, 1996.
** Mr. Fiedler received $48,143 through a deferred compensation program. As of December 31, 1995, Mr. Fiedler had
a total of $414,218 accrued in a deferred compensation program for serving on the Board of Directors of Scudder
Institutional Fund, Inc. and Scudder Fund, Inc.
</TABLE>
58
<PAGE>
DISTRIBUTOR
Each of the Trusts has an underwriting agreement with Scudder Investor
Services, Inc. (the "Distributor"), a Massachusetts corporation, which is a
subsidiary of Scudder, Stevens & Clark, Inc., a Delaware corporation. The
underwriting agreements dated September 4, 1985 will remain in effect until
August 31, 1996 and from year to year thereafter only if their continuance is
approved annually by a majority of the members of the Board of Trustees of each
Trust who are not parties to such agreement or interested persons of any such
party and either by vote of a majority of the Board of Trustees of each Trust or
a majority of the outstanding voting securities of each Trust.
Under each Trust's principal 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 its 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 or dealer; 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 Trust; 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; the cost of wiring funds for share
purchases and redemptions (unless paid by the shareholder who initiates the
transaction); and the cost of printing and postage of business reply envelopes.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of shares of the
Funds to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of shares of the Funds 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
customer 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 each Trust.
Note: Although each Trust does not currently have a Rule 12b-1 Plan and
shareholder approval would be required in order to adopt one, the underwriting
agreements provide that the Trust will also pay those fees and expenses
permitted to be paid or assumed by that Trust pursuant to a Rule 12b-1 Plan, if
any, adopted by each Trust, notwithstanding any other provision to the contrary
in the underwriting agreement and each Trust 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 shares of the Funds to
investors in all states. Each underwriting agreement provides that the
Distributor accepts orders for shares at net asset value because no sales
commission or load is charged the investor. The Distributor has made no firm
commitment to acquire shares of any of the Funds.
TAXES
(See "ADDITIONAL INFORMATION ABOUT DISTRIBUTIONS AND TAXES" in the Prospectus.)
Each AARP Fund has qualified and elected to be taxed as a regulated
investment company under Subchapter M of the United States Internal Revenue Code
(the "Code"), as amended, since its inception and intends to continue to so
qualify. (Such qualification does not involve supervision of management or
investment practices or policies by a government agency.) In any year in which a
Fund so qualifies and distributes at least 90% of its investment company taxable
income, and at least 90% of its net tax-exempt income, if any, the Fund
generally is not subject to Federal income tax to the extent that it distributes
to shareholders its investment company taxable income and net realized capital
gains in the manner required under the Code.
Each AARP Fund must distribute its taxable income according to a
prescribed formula and will be subject to a 4% nondeductible excise tax on
amounts not so distributed. The formula requires a Fund to distribute each
calendar year at least 98% of its ordinary income (excluding tax-exempt income)
59
<PAGE>
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 of such year, and any ordinary income and
capital gains for prior years that was not previously distributed.
To qualify under Subchapter M, gains from the sale of stock, securities
and certain options, futures and forward contracts held for less than three
months must be limited to less than 30% of each Fund's annual gross income.
Moreover, short-term gains (i.e., gains from the sale of securities held for one
year or less) are taxed as ordinary income when distributed to shareholders.
Options, futures and forward activities of the AARP Funds may increase the
amount of the short-term gains and gains that are subject to the 30% limitation.
The determination of the nature and amount of investment company
taxable income of a Fund will be based solely on the transactions in, and on the
income received and expenses incurred by or allocated to, the Fund. Each AARP
Fund intends to offset any realized net capital gains against any capital loss
carryforward before making capital gains distributions to shareholders.
Distributions of any investment company taxable income (which includes
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss, less expenses) are taxable to shareholders as ordinary
income.
Generally, each Fund will distribute any net capital gains (the excess
of its net realized long-term capital gain over its net realized short-term
capital loss). If a Fund retains its net capital gains for investment, requiring
Federal income tax to be paid thereon by the Fund, the Fund intends to elect to
treat such capital gains as having been distributed to its shareholders. As a
result, shareholders (a) will be required to include in income for Federal
income tax purposes, as long-term capital gains, their proportionate share of
such undistributed amounts and (b) will be entitled to credit their
proportionate share of the Federal income tax paid thereon by the Fund against
their Federal income tax liability. In the case of shareholders whose long-term
capital gains would be taxed at a lower rate, the amount of the credit for tax
paid by a Fund in excess of the shareholder's actual tax on capital gains may be
applied to reduce the net amount of tax otherwise payable by such shareholders
in respect of their other income or, if no tax is payable, the excess may be
refunded. For Federal income tax purposes, the tax basis of shares owned by a
shareholder of a Fund will be increased by an amount equal to the difference
between its pro rata share of such gains and its tax credit. If a Fund retains
net capital gains, it may not be treated as having met the excise tax
distribution requirement.
Distributions of net capital gains are taxable to shareholders as
long-term capital gain, regardless of the length of time the shares of the Fund
have been held by such shareholders. 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 by a Fund will be taxable as described above, whether made 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 received equal to the net asset value of a share of the Fund on the
reinvestment date.
Distributions by a Fund reduce 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 nevertheless would 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 be careful to 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 return of capital upon
distribution which will nevertheless be taxable to them.
Shareholders who redeem, sell or exchange shares of a Fund may realize
gain or loss if the proceeds are more or less than the shareholder's purchase
price. Such gain or loss generally will be a capital gain or loss if the Fund
shares were capital assets in the hands of the shareholder, and generally will
be long- or short-term, depending on the length of time the Fund shares were
held. However, if a shareholder realizes a loss on the sale of a share held at
the time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. A gain realized on a redemption, sale
or exchange will not be affected by a reacquisition of shares. A loss realized
60
<PAGE>
on a redemption, sale or exchange, however, will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Fund will be subject to tax under Section 1234 of the Code. In
general, no loss is recognized by a Fund upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e., long-term or short-term) will generally depend in the case of
a lapse or sale of the option on the Fund's holding period for the option and in
the case of an exercise of a put option on the Fund's holding period for the
underlying security. The purchase of a put option may constitute a short sale
for federal income tax purposes, causing an adjustment in the holding period of
the underlying security or a substantially identical security of the Fund. If a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as a
short-term capital gain or loss. If a call option written by a Fund is
exercised, the character of the gain or loss depends on the holding period of
the underlying security. The exercise of a put option written by a Fund is not a
taxable transaction for the Fund.
Many futures contracts, certain foreign currency forward contracts and
all listed nonequity options (including options on debt securities, options on
futures contracts, options on securities indices and options on broad-based
stock indices) will constitute "section 1256 contracts." 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 losses. Also, section 1256 contracts held by the
Funds at the end of each taxable year (and, for purposes of the 4% excise tax,
on October 31) are "marked to market" with the result that unrealized gains or
losses are treated as though they were realized and the resulting gain or loss
is treated 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.
Positions of a Fund which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes the Fund's risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by a Fund.
Positions of a Fund which consist of at least one position not governed
by Section 1256 and at least one futures contract, foreign currency forward
contract or nonequity option governed by Section 1256 which substantially
diminishes the Fund's risk of loss with respect to such other position will be
treated as a "mixed straddle." Although mixed straddles are subject to the
straddle rules of Section 1092 of the Code, certain tax elections exist for them
which reduce or eliminate the operation of these rules. Each Fund will monitor
its transactions in options and futures and may make certain tax elections in
connection with these investments.
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 futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
If a Fund invests in stock of certain foreign investment companies, 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
61
<PAGE>
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.
Proposed regulations have been issued which may allow the Fund to 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. No mark to market losses may
be recognized. 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.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by those countries.
Certain of the debt securities acquired by the Funds may be treated as
debt securities that were originally issued at a discount. Original issue
discount represents interest for Federal income tax purposes and can generally
be defined as the difference between the price at which a security was issued
and its stated redemption price at maturity. Although no cash income is actually
received by the Funds, original issue discount earned in a given year generally
is treated for Federal income tax purposes as income earned by the Funds, and
therefore is subject to the distribution requirements of the Code. The amount of
income earned by the Funds is determined on the basis of a constant yield to
maturity which takes into account at least semi-annual or annual compounding
(depending on the date of the security) of accrued interest.
In addition, some of the debt securities may be purchased by the Funds
at a discount which exceeds the original issue discount on such debt securities,
if any. This additional discount represents market discount for Federal income
tax purposes. The gain realized on the disposition of many debt securities,
including tax-exempt securities having market discount will be treated as
ordinary income to the extent it does not exceed the accrued market discount on
such debt security. Generally, market discount accrues on a daily basis for each
day the debt security is held by the Funds at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Funds, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest.
The Funds will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. All such distributions and proceeds 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 Funds with their taxpayer identification
numbers and with required certifications regarding their status under Federal
income tax laws. 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 or proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Investors may wish to consult their tax advisers about the applicability of the
backup withholding provisions.
In addition to Federal taxes, shareholders of the Funds may be subject
to state and local taxes on distributions from the Funds. Under the laws of
certain states, distributions of investment company taxable income are taxable
to shareholders as dividend income even though a substantial portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by the resident of such state, would be exempt from such
state's income tax. Shareholders should consult their own tax advisers with
respect to the tax status of distributions from the Funds in their own state and
localities.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable 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 consult his or her tax adviser regarding the U.S. and foreign
tax consequences of ownership of shares of the Fund, including the likelihood
that such a shareholder would be subject to a U.S. withholding tax at a rate of
31% (or at a lower rate under a tax treaty) on amounts constituting ordinary
income to him or her.
62
<PAGE>
Special Information Regarding AARP High Quality Tax Free Money Fund and
AARP Insured Tax Free General Bond Fund: Each of the AARP Tax Free Income Funds
intends to qualify to pay "exempt-interest dividends" to its shareholders. Each
Fund will be so qualified if, at the close of each quarter of its taxable year,
at least 50% of the value of its total assets consists of securities of states,
U.S. possessions, their political subdivisions, and the District of Columbia,
the interest on which is exempt from Federal tax. To the extent that the Funds'
dividends distributed to shareholders are derived from earnings on interest
income exempt from Federal tax and are designated as "exempt-interest dividends"
by the Funds, they will be excludable from a shareholder's gross income for
Federal income tax purposes. "Exempt-interest dividends," however, must be taken
into account by shareholders in determining whether their total incomes are
large enough to result in taxation of up to 85% of their Social Security
benefits. In addition, interest on certain municipal obligations (private
activity bonds) will be treated as a preference item for purposes of calculating
the alternative minimum tax for individuals and for corporations. Similarly,
income distributed by the Funds, including exempt-interest dividends, may
constitute an adjustment to alternative minimum taxable income of corporate
shareholders. The Funds do not intend to purchase any private activity bonds.
The Funds will inform shareholders annually as to the portion of the
distributions from the Funds which constituted "exempt-interest dividends."
To the extent that the Funds' dividends are derived from interest on
their temporary taxable investments or from an excess of net short-term capital
gain over net long-term capital loss, they are considered ordinary taxable
income for Federal income tax purposes. Distributions, if any, of net long-term
capital gains from the sale of securities are taxable at long-term capital gain
rates regardless of the length of time the shareholder has owned Fund shares.
However, if a shareholder realizes a loss on the sale of a share held at the
time of sale for six months or less, such loss will be treated as long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period. Furthermore, a loss realized by a
shareholder on the sale of shares of the Funds with respect to which
exempt-interest dividends have been paid will be disallowed if such shares have
been held by the shareholder for six months or less (to the extent of
exempt-interest dividends paid).
Under the Code, a shareholder's interest expense deductions with
respect to indebtedness incurred or continued to purchase or carry shares of an
investment company paying exempt-interest dividends, such as either of the AARP
Tax-Free Funds, may be limited. In addition, under rules issued by the Internal
Revenue Service for determining when borrowed Funds are considered used for the
purposes of purchasing or carrying particular assets, the purchase of shares may
be considered to have been made with borrowed Funds even though the borrowed
Funds are not directly traceable to the purchase of shares.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the issuer. Neither AARP, the Fund Manager, nor Counsel to the Funds
makes any review of proceedings relating to the issuer of municipal securities
or the bases of such opinions.
The foregoing description regarding the AARP Tax-Free Funds relates
only to Federal income tax law. Investors should consult with their tax advisers
as to exemption from other state or local law. Persons who may be "substantial
users" (or "related persons" of substantial users) of facilities financed by
industrial development bonds should consult their tax advisers before purchasing
shares of the Funds.
BROKERAGE AND PORTFOLIO TURNOVER
Brokerage Commissions
To the maximum extent feasible the AARP Funds' investment adviser will
place orders for portfolio transactions through the Distributor, which in turn
will place orders on behalf of the AARP Funds with other brokers and dealers.
The Distributor receives no commission, fees or other remuneration from the
Funds for this service.
Allocation of brokerage is supervised by the Fund Manager.
Purchases and sales of fixed-income securities for the AARP Funds are
generally placed by the Fund Manager with primary market makers for these
securities on a net basis, without any brokerage commission being paid by a
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
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<PAGE>
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The primary objective of the Fund Manager in placing orders for the
purchase and sale of assets for the AARP Funds' portfolios is to obtain the most
favorable net results, taking into account such factors as price, commission
(which is negotiable in the case of national securities exchange transactions),
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Fund Manager seeks to evaluate the overall reasonableness of
brokerage commissions paid through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by the AARP Funds to reported commissions paid by others. The
Fund Manager reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Fund Manager's practice to place such orders
with brokers and dealers who supply market quotations to Scudder Fund Accounting
Corporation for appraisal purposes, or who supply research, market and
statistical information to the Funds or the Fund Manager. The term "research,
market and statistical information" includes advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and concerning the performance
of accounts. The Fund Manager is not authorized, when placing portfolio
transactions for the AARP Funds, to pay a brokerage commission in excess of that
which another broker might have charged for executing the same transaction
solely on account of the receipt of research, market or statistical information.
The Fund Manager will not place orders with brokers or dealers on the basis that
the broker or dealer has or has not sold shares of the Funds. Except for
implementing the policy stated above, there is no intention to place portfolio
transactions with particular brokers or dealers or groups thereof. 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 otherwise.
Subject to obtaining the most favorable results, the Fund Manager may
place particular transactions through the Distributor, with the net commission
or fee being credited against the fee payable to the Fund Manager. The
Distributor, however, does not intend to engage in a general brokerage business.
Also subject to obtaining the most favorable net results, the Fund Manager may
place brokerage transactions with Bear, Stearns & Co. A credit against the
custodian fee due to State Street Bank and Trust Company equal to one-half of
the commission on any such transaction will be given on any such transaction.
The Fund did not enter into any such transactions during its fiscal year.
Although certain research, market and statistical information from
brokers and dealers can be useful to the AARP Funds and to the Fund Manager, it
is the opinion of the Fund Manager that such information is only supplementary
to its own research effort since the information must still be analyzed,
weighed, and reviewed by the Fund Manager's staff. Such information may be
useful to the Fund Manager in providing services to clients other than the AARP
Funds, and not all such information is used by the Fund Manager in connection
with the AARP Funds. Conversely, such information provided to the Fund Manager
by brokers and dealers through whom other clients of the Fund Manager effect
securities transactions may be useful to the Fund Manager in providing services
to the AARP Funds.
For the fiscal years ended September 30, 1993, 1994 and 1995 the AARP
Growth and Income Fund paid brokerage commissions of $1,369,243, $2,319,113 and
$1,690,604 and the AARP Capital Growth Fund paid brokerage commissions of
$1,154,049, $1,156,320 and $2,636,662, both respectively. For the fiscal year
ending September 30, 1995 and the period ending September 30, 1994, the AARP
Balanced Stock and Bond Fund paid brokerage commissions of $149,816 sand
$152,376, respectively. In the fiscal year ended September 30, 1995, $1,628,800
(96%) of the total brokerage commissions paid by AARP Growth and Income Fund and
$2,498,680 (95%) by AARP Capital Growth Fund resulted from orders placed,
consistent with the policy of obtaining the most favorable net results, with
brokers and dealers who provided supplementary research information to the Funds
or the Fund Manager. The amount of such transactions aggregated $1,512,564,677
for the AARP Capital Growth Fund, (93% of all brokerage transactions) and
$939,644,432 (95%) of all brokerage transactions) for the AARP Growth and Income
Fund. The balance of such brokerage was not allocated to any particular broker
or dealer or with regard to the above-mentioned or other special factors. For
the fiscal year ended September 30, 1995, $143,133 (96%) of the total brokerage
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commissions paid by AARP Balanced Stock and Bond Fund resulted from orders
placed, consistent with the policy of obtaining the most favorable net results,
with brokers and dealers who provided supplementary research information to the
Funds or the Fund Manager. The amount of such transactions aggregated
$250,877,319 for AARP Balanced Stock and Bond Fund, (98% of all brokerage
transactions). The balance of such brokerage was not allocated to any particular
broker or dealer or with regard to the above-mentioned or other special factors.
The Trustees review from time to time whether the recapture for the
benefit of the Funds of some portion of the brokerage commissions or similar
fees paid by the Funds on portfolio transactions is legally permissible and
advisable. To date, no recapture has been effected.
Portfolio Turnover
Fund securities may be sold to take advantage of investment
opportunities arising from changing market levels or yield relationships.
Although such transactions involve additional costs in the form of spreads or
commissions, they will be undertaken in an effort to improve the overall
investment return of a Fund, consistent with that Fund's objectives. The
portfolio turnover rate of a Fund is defined in a Rule of the SEC as the lesser
of the value of securities purchased or securities sold during the year,
excluding all securities whose maturities at the time of acquisition were one
year or less, divided by the average monthly value of such securities owned
during the year. The average annual portfolio turnover rates for the fiscal
years ended September 30, 1993, 1994, and 1995 for five of the non-money market
Funds were: AARP GNMA and U.S. Treasury Fund, 105.49%, 114.54% and 70.35%; AARP
High Quality Bond Fund, 100.98%, 63.75% and 201.07%; AARP Insured Tax Free
General Bond Fund, 47.96%, 38.39% and 17.45%; AARP Growth and Income Fund,
17.44%, 31.82% and 31.26%; AARP Capital Growth Fund, 100.63%, 79.65% and 98.44%,
all respectively. The average annual portfolio turnover rate for fiscal year
ending September 30, 1995 and the period ending September 30, 1994 for the AARP
Balanced Stock and Bond Fund was 63.77%, and 49.32%, respectively. Under normal
investment conditions, it is anticipated that the AARP Global Growth Fund's
annual portfolio turnover rate will not exceed 75% for the initial fiscal year.
NET ASSET VALUE
AARP Money Funds
The net asset value per share of the Fund is computed twice daily as of
twelve o'clock noon and the close of regular trading on the Exchange, normally 4
p.m. eastern time, on each day when the Exchange is open for trading. The
Exchange is normally closed on the following national holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. Net asset value is determined by dividing the total
assets of the Fund, less all of its liabilities, by the total number of shares
of the Fund outstanding. The Fund uses the penny-rounding method of security
valuation as permitted under Rule 2a-7 under the 1940 Act. Under this method,
portfolio securities for which market quotations are readily available and which
have remaining maturities of more than 60 days from the date of valuation are
valued at the mean between the over-the-counter bid and asked prices. Securities
which have remaining maturities of 60 days or less are valued by the amortized
cost method; if acquired with remaining maturities of 61 days or more, the cost
thereof for purposes of valuation is deemed to be the value on the 61st day
prior to maturity. Other securities are appraised at fair value as determined in
good faith by or on behalf of the Trustees of the Fund. For example, securities
with remaining maturities of more than 60 days for which market quotations are
not readily available are valued on the basis of market quotations for
securities of comparable maturity, quality and type. Determinations of net asset
value per share for the Fund made other than as of the close of the Exchange may
employ adjustments for changes in interest rates and other market factors.
AARP Non-Money Market Funds
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading.
The Exchange is scheduled to be closed on the following holidays: New Year's
Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. 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.
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<PAGE>
An exchange-traded equity security is valued at its most recent sale
price. Lacking any sales, the security is valued at the calculated mean between
the most recent bid quotation and the most recent asked quotation (the
"Calculated Mean"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any sales, the security is valued
at the high or "inside" bid quotation. The value of an equity security not
quoted on the NASDAQ System, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, 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.
Trading in securities on foreign securities exchanges is normally
completed before the close of regular trading on the Exchange. Trading on these
foreign exchanges may not take place on all days on which there is regular
trading on the Exchange, or may take place on days on which there is no regular
trading on the Exchange. If events materially affecting the value of a Fund's
portfolio securities occur between the time when these foreign exchanges close
and the time when the Fund's net asset value is calculated, such securities will
be valued at fair value as determined by each Trust's Board of Directors.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The financial statements of the AARP Funds included in the Annual
Report to shareholders dated September 30, 1995, have been examined by Price
Waterhouse LLP, independent accountants, and are incorporated by reference into
this Statement of Additional Information in reliance upon the accompanying
report of said firm, which report is given upon their authority as experts in
accounting and auditing.
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Shareholder Indemnification
Each of the Trusts 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. Each 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. Each Declaration of Trust also
provides for indemnification out of the Trust 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 a Trust itself would be unable to meet its
obligations. No series of one Trust is liable for the obligations of another
series in the AARP Complex.
Ratings of Corporate Bonds
The three highest ratings of Moody's for corporate bonds are Aaa, Aa
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. 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. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa securities. Bonds rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Although factors
giving security to principal and interest on bonds rated A are adequate, other
elements may be present which suggest a susceptibility to impairment sometime in
the future.
The three highest ratings of S&P for corporate bonds are AAA (Prime),
AA (High-grade) and A. 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 rating issues only in small degree. Bonds
rated A have a strong capacity to pay principal and interest, although they are
more susceptible to the adverse effects of changes in circumstances and economic
conditions.
Ratings of Commercial Paper
The ratings Prime-1 and Prime-2 are the highest commercial paper
ratings assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; 6) trend of
earnings over a period of ten years; (7) financial strength of a parent company
and the relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
Prime-2 ratings are assigned by Moody's to commercial paper issuers
which have a strong capacity for meeting their obligations in a timely fashion.
However, their financial, economic and managerial capacities will be less than
that of Prime-1 borrowers. Financial characteristics such as earnings, coverage
ratios and capitalization will be more affected by external economic factors
than Prime-1 borrowers. Liquidity is still believed to be ample.
The two highest ratings of S&P for commercial paper are A-1 and A-2.
Commercial paper rated A-1 or better by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; the reliability and quality of
management are unquestioned.
S&P will assign an A-2 rating to the commercial paper of companies
which have the capacity for timely payment on issues. However, the relative
degree of safety is less than for issuers rated A-1.
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Ratings of Municipal Bonds
The three highest ratings of Moody's for municipal bonds are Aaa, Aa,
and A. Bonds rated Aaa are judged by Moody's to be of the best quality. 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. Moody's
states that Aa bonds are rated lower than the best bonds because margins of
protection or other elements make long-term risks appear somewhat larger than
for Aaa municipal bonds. Municipal bonds which are rated A by Moody's possess
many favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A rated
municipal bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The three highest ratings of S&P for municipal bonds are AAA (Prime),
AA (High-grade), and A (Good grade). Bonds rated AAA have the highest rating
assigned by S&P to a municipal 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. Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat susceptible to the adverse effects of
changes in circumstances and economic conditions.
Moody's ratings for municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG1 are of the best quality, enjoying strong protection by
establishing cash flows of Funds for their servicing or by established and
broad-based access to the market for refinancing, or both. Loans bearing the
designation MIG2 are of high quality, with margins of protection ample although
not as large as in the preceding group.
S&P's top ratings for municipal notes are SP-1 and SP-2. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
The ratings F-1+ and F-1 are the two highest ratings assigned by Fitch.
Among the factors considered by Fitch in assigning these rating are: (1) the
issuer's liquidity; (2) its standing in the industry; (3) the size of its debt;
(4) its ability to service its debt; (5) its profitability; (6) its return on
equity; (7) its alternative sources of financing; and (8) its ability to access
the capital markets. Analysis of the relative strength or weakness of these
factors and others determines whether an issuer's commercial paper is within
these two ratings.
Other Information
Each AARP Fund has a fiscal year ending on September 30.
Portfolio securities of the AARP Funds except AARP Global Growth Fund
are held separately, pursuant to a custodian agreements with each Trust, by
State Street Bank and Trust Company of Boston as Custodian.
Portfolio securities of AARP Global Growth Fund are held separately,
pursuant to a custodian agreement with AARP Growth Trust on behalf of AARP
Global Growth Fund, by Brown Brothers Harriman & Co. of Boston as Custodian.
Each Trust has shareholder servicing agreements with Scudder Service
Corporation ("SSC"), a subsidiary of Scudder, Stevens & Clark, Inc. SSC is the
transfer agent, dividend disbursing and shareholder service agent for each Fund.
Shareholder service expenses charged by SSC were for AARP High Quality Money
Fund, $1,533,555; AARP GNMA and U.S. Treasury Fund, $8,104,169; AARP High
Quality Bond Fund, $1,720,303; AARP High Quality Tax Free Money Fund, $347,016;
AARP Insured Tax Free General Bond Fund, $2,148,893; AARP Balanced Fund,
$513,031; AARP Growth and Income Fund, $3,249,295; and AARP Capital Growth Fund,
$1,171,702, for the fiscal year ended September 30, 1995. Not all of these fees
were paid in full at the fiscal year end.
The firm of Dechert Price & Rhoads of Washington, D.C. is counsel for
the Trusts.
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Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02110-4103, a subsidiary of Scudder, Stevens & Clark, Inc.,
computes net asset value for each Fund. AARP High Quality Money Fund and AARP
High Quality Tax Free Money Fund each pay Scudder Fund Accounting an annual fee
equal to 0.020% on the first $150 million of average daily net assets, 0.0060%
of such assets in excess of $150 million, up to and including $1 billion and
0.0035% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. AARP Insured Tax Free General Bond Fund pays Scudder
Fund Accounting an annual fee equal to 0.024% on the first $150 million of
average daily net assets, 0.0070% on such assets in excess of $150 million up to
and including $1 billion, and 0.0040% of such assets in excess of $1 billion,
plus holding and transaction charges for this service. AARP GNMA and U.S.
Treasury Fund and AARP High Quality Bond Fund each pay Scudder Fund Accounting
an annual fee equal to 0.025% of the first $150 million of average daily net
assets, 0.0075% of such assets in excess of $150 million up to and including $1
billion, and 0.0045% of such assets in excess of $1 billion, plus holding and
transaction charges for this service. AARP Balanced Stock and Bond Fund, AARP
Growth and Income Fund and AARP Capital Growth Fund each pay Scudder Fund
Accounting an annual fee equal to 0.025% on the first $150 million of average
daily net assets, 0.0075% of such assets in excess of $150 million up to and
including $1 billion, and 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges. AARP Global Growth Fund pays Scudder Fund
Accounting Corporation an annual fee equal to 0.065% on the first $150 million
of average daily net assets, 0.0400% of such assets in excess of $150 million up
to and including $1 billion, and 0.0200% of such assets in excess of $1 billion,
plus holding and transaction charges for this service.
Many of the investment changes in the Funds will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders. These transactions will reflect investment decisions
made by the Fund Manager in light of the objectives and policies of the Funds,
and such factors as its other portfolio holdings and tax considerations, and
should not be construed as recommendations for similar action by other
investors.
Costs incurred in connection with subsequent registrations of shares
are being amortized on a pro-rata basis as the related shares are issued. If
other Funds are added to a Trust, the Trustees will determine whether such Funds
should bear any of such costs.
Each Trust is located at Two International Place, Boston, Massachusetts
02110-4103 (telephone: 1-800-253-2277). Each has filed with the Securities and
Exchange Commission, Washington, D.C. 20549, a Registration Statement under the
Securities Act of 1933, as amended, with respect to the shares of the Funds
offered by the Prospectus. The Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statements, certain parts of which are omitted in accordance with Rules and
Regulations of the SEC. The Registration Statements may be inspected at the
principal office of the SEC at 450 Fifth Street, N.W., Washington, D.C. and
copies thereof may be obtained from the SEC at prescribed rates.
The following chart demonstrates that tax-free yields are equivalent to
higher taxable yields due to their tax-exempt status. For example, tax-free
interest of 5% is the equivalent of 6.94% taxable in a 28% tax bracket.
Please refer to the chart for more examples.
Tax-Exempt Income vs. Taxable Income
The following table illustrates comparative yields from taxable and
tax-exempt obligations under federal income tax rates in effect for the 1995
calendar year.
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<TABLE>
<CAPTION>
1995 Taxable Income To Equal Hypothetical Tax-Free Yields of 5%, 7%
Brackets and 9%, a Taxable Investment Would
Have To Earn**
Individual Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
<S> <C> <C> <C> <C>
$0 - $23,350 15.0% 5.88% 8.24% 10.59%
$23,351 - $56,550 28.0% 6.94% 9.72% 12.50%
$56,551 - $117,950 31.0% 7.25% 10.14% 13.04%
$117,951 - $256,500 36.0% 7.81% 10.94% 14.06%
Over $256,500 39.6% 8.28% 11.59% 14.90%
Joint Federal
Return Tax Rates 5% 7% 9%
------ --------- -- -- --
$0 - $39,000 15.0% 5.88% 8.24% 10.59%
$39,001 - $94,250 28.0% 6.94% 9.72% 12.50%
$94,251 - $143,600 31.0% 7.25% 10.14% 13.04%
$143,601 - $256,500 36.0% 7.81% 10.94% 14.06%
Over $256,500 39.6% 8.28% 11.59% 14.90%
** These illustrations assume the Federal alternative minimum tax is not applicable, that an individual is not
a "head of household" and claims one exemption and that taxpayers filing a joint return claim two
exemptions. Note also that these federal income tax brackets and rates do not take into account the effects
of (i) a reduction in the deductibility of itemized deductions for taxpayers whose federal adjusted gross
income exceeds $114,700 ($57,350 in the case of a married individual filing a separate return), or of (ii)
the gradual phaseout of the personal exemption amount for taxpayers whose federal adjusted gross income
exceeds $114,700 (for single individuals) or $172,050 (for married individuals filing jointly). The
effective federal tax rates and equivalent yields for such taxpayers would be higher than those shown above.
</TABLE>
Example:*
Based on 1995 federal tax rates, a married couple filing a joint return
with two exemptions and taxable income of $40,000 would have to earn a
tax-equivalent yield of 6.94% in order to match a tax-free yield of 5%.
There is no guarantee that a Fund will achieve a specific yield. While
most of the income distributed to the shareholders of each Fund will be exempt
from federal income taxes, portions of such distributions may be subject to
federal income taxes. Distributions may also be subject to state and local
taxes.
* Net amount subject to federal income tax after deductions and
exemptions, exclusive of the alternative minimum tax.
FINANCIAL STATEMENTS
The financial statements and notes, including the investment portfolio,
of each AARP Fund, together with the Report of Independent Accountants and
Supplementary Information are incorporated by reference and attached hereto on
pages 25 through 84 inclusive, in the Mid-Year Report to the Shareholders of the
AARP Funds dated March 31, 1996, and are hereby deemed to be a part of this
Statement of Additional Information.
70
<PAGE>
Mid-Year Report
To Shareholders
March 31, 1996
AARP Investment Program
from Scudder
<PAGE>
TABLE OF CONTENTS
-----------------
Letter to Shareholders 2
AARP Fund Reports 7
AARP High Quality Money Fund 8
AARP High Quality Tax Free Money Fund 9
AARP GNMA and U.S. Treasury Fund 10
AARP High Quality Bond Fund 12
AARP Insured Tax Free General Bond Fund 14
AARP Balanced Stock and Bond Fund 16
AARP Growth and Income Fund 18
AARP Global Growth Fund 20
AARP Capital Growth Fund 22
AARP Funds' Investment Portfolios 24
Financial Statements 68
Financial Highlights 75
Notes to Financial Statements 80
Officers and Trustees 86
Service Information 88
<PAGE>
LETTER TO SHAREHOLDERS
----------------------
AARP Investment Program
from Scudder
Dear Shareholders,
The period covered by this Mid-Year Report was a favorable yet
volatile time for most investors, including those in the AARP Investment
Program from Scudder. Despite some short-term volatility, all of the AARP
Mutual Funds provided healthy returns for the six-month period ended March
31, 1996. Descriptions elaborating on the performance of the AARP Funds
begin on page eight. Before you turn to the performance of your particular
Fund(s), we encourage you to read this letter. We discuss the performance
of the stock and bond markets over the past six months, including the
reasons for recent volatility, and provide an outlook for the next few
months and beyond.
THE STOCK MARKET
The fourth quarter of 1995 ended a stellar year for the stock
market. The unmanaged Dow Jones Industrial Average (the price-weighted
average of 30 actively traded blue-chip stocks) continued to hit new highs
as slow growth, moderate inflation and falling interest rates provided a
favorable economic climate. While strong stock market performance
continued into 1996, it has not come easily. If you look at the graph on
page three, you see that stock market volatility, as measured by the Dow,
has increased significantly since the beginning of the year. What's
compelling about this graph is that the Dow not only survived several
setbacks, but sometimes recouped most of its losses within a day or two.
From October 1, 1995 to March 31, 1996, the Dow rose from 4761.26 to
5587.14, posting a 17.35% gain. The unmanaged Standard & Poor's 500 Stock
Price Index returned 11.71% for the period.
THE BOND MARKET
Following a favorable fourth quarter of 1995, in which declining
interest rates caused bond prices to rise, the bond market reversed course
in the first quarter of 1996 and interest rates rose rapidly. As you can
see in the graph on page three, long-term interest rates, as measured by
the 30-year Treasury bond, rose from 6.57% on October 1, 1995 to 6.67% on
2
<PAGE>
March 31, 1996. If you look closely, you will see that long-term rates
were as low as 5.95% back in early January and as high as 6.74% in
mid-March.
Unlike long-term rates, short-term interest rates are directly
driven by actions of the Federal Reserve Board (the Fed) and have remained
low over this period. Short-term rates (as measured by the three-month
Treasury bill) continued to decline over the past six months, from 5.40%
on October 1, 1995 to 5.18% on March 31, 1996.
LINE CHART TITLE: Stock Market
------------
CHART PERIOD:
(Plotted weekly from October 1, 1995 to March 31, 1996)
CHART DATE:
10/1/95 4789
4769
4794
4795
11/3/95 4755
4870
4990
5049
12/1/95 5074
5157
5177
5098
1/5/96 5117
5181
5061
5185
2/2/96 5395
5542
5503
5630
3/1/96 5486
5470
5585
5637
3/31/96 5587
CAPTION TO PRECEDING CHART:
The stock market, as measured by the unmanaged Dow Jones Industrial
Average, gained 17.35% over the last six months.
LINE CHART TITLE: Long-Term Interest Rates
------------------------
CHART PERIOD:
(Plotted weekly from October 1, 1995 to March 31, 1996)
CHART DATA:
10/1/95 6.57%
6.42
6.3
6.35
11/03/95 6.33
6.32
6.23
6.25
12/1/95 6.13
6.05
6.09
6.05
1/5/96 5.95
6.04
6.16
5.97
2/2/96 6.03
6.1
6.22
6.41
3/1/96 6.47
6.69
6.74
6.64
3/31/96 6.67
CAPTION TO PRECEDING CHART:
Long-term interest rates, as measured by the 30-year Treasury Bond,
were 6.57% on October 1, 1995 and 6.67% at the end of March 1996.
THE REASONS FOR RECENT VOLATILITY
Stock and bond market volatility began in mid-January as the U.S.
economy seemed to strengthen and doubt grew about whether the Fed would
keep lowering short-term interest rates. On Friday, March 8 an
unanticipated strong jobs report from the Federal Government heightened
inflation fears, which drove the Dow down by as much as 217 points before
ending the day down 171 points. It was the largest one-day drop in more
than four years and the third largest point drop ever, although it
represented only a 3.03% decline of the stock market and was ranked 18th
in overall percentage drops. That same day the yield on the 30-year
Treasury bond rose from 6.46% to 6.69%, causing bond prices to decline.
The following business day was a different story. With stock prices down
from the previous day's trading, many investors (both individuals and
professionals, including mutual fund portfolio managers) saw buying
opportunities, and the Dow rose again by 110 points.
By the end of March, volatility had diminished, with the range
between the highs and lows of major indicators such as the Dow narrowing
from the swings of early March. Investors and traders seemed to have
weighed the Government statistics and concluded the economy was expanding
only moderately.
3
<PAGE>
The bond market also ended the quarter on a favorable note. The
30-year Treasury bond declined to 6.67% by quarter end as reports on
manufacturing and housing suggested that the U.S. economy was expanding
slowly enough to keep inflation from accelerating.
THE OUTLOOK
Over the next few months, we believe that the economy will grow
very slowly. We even think that there is significant probability that
output could decline, which would qualify as a recession. However, if we
look ahead to 1997, we believe the outlook should brighten with a quick
return to growth. Even better for investors, we do not expect inflation to
be a problem. It could decline to below 2%.
The economy began to slow down in response to decisive interest
rate hikes made by the Fed during 1994 and early 1995. Even though the Fed
has eased interest rates three times in the past year, interest rates are
far above inflation. This means that monetary policy remains "tight."
Government spending has also slowed, even as taxes have risen rapidly,
which means that fiscal policy is also "tight." Meanwhile, consumer
spending has slowed down. Americans are somewhat concerned about their
jobs, so families have been trying to save a little more and borrow a
little less. These are all classic signs that a business expansion is
coming to an end.
Even if the economy does experience a recession, it is likely to
be short and mild. The economy has many strengths including global
technological advancements and a sound banking system.
WHAT THIS MEANS FOR INVESTORS
As an investor, you may be tempted to get distracted by the
current volatility in the markets and lose sight of your long-term
investments goals. However, history tells us that long-term investors are
best served by putting the inevitable short-term volatility of the markets
into proper perspective. If you can accept that both the bond and stock
markets will have volatility, the short-term downturns in the markets
should not be cause for alarm. In fact, these downturns often provide
buying opportunities for investors. It is also important to diversify your
assets in a mix of different investments such as stocks, bonds, and money
market investments. This sensible strategy often provides a degree of
protection from market volatility.
THE AARP INVESTMENT PROGRAM FROM SCUDDER
The AARP Mutual Funds are managed conservatively as the portfolio
management teams try to provide competitive returns while moderating the
share price volatility of your investment. This makes the AARP Funds
distinct from many other mutual funds which may seek higher returns, but
do not focus on reducing share price fluctuation. It is this commitment to
conservative investing that has continued to appeal to AARP members. As of
4
<PAGE>
March 31, 1996, there were more than 650,000 investors participating in
the Program and nearly $13 billion in assets under management.
Of course, while the AARP Mutual Funds are conservatively
managed, it is important that you realize that your principal is never
insured or guaranteed, and the value of your investment and your return
will move up and down as market conditions change.
The Program prides itself on the introduction of new services and
features that will help meet shareholders' changing needs. We are pleased
to note the following services and enhancements:
Introduction of the AARP Global Growth Fund
We were pleased to offer our newest AARP Mutual Fund to
shareholders on February 1, 1996 -- the AARP Global Growth Fund. You can
read about this Fund in the current Prospectus and other communications,
and can find information about it on page 20 of this Report.
New Easy-Access Line Enhancements
In October 1995 we significantly enhanced our toll-free 24-hour
automated Easy-Access Line by making it easier to use, providing help when
you need it, and offering more information with enhanced security. Then,
based on shareholder reaction, we subsequently improved the service by
allowing you to get price, yield, and total return information without
having to give your Social Security number. When you call our toll-free
number at 1-800-631-4636, you now have a choice. You can press the star
key ("*") on your touch-tone phone to receive only prices, yields, total
returns, or AARP Fund descriptions or enter your Social Security number
and PIN to receive information on your specific account.
New Statement Enhancements
- Average Cost Information
Average cost information was added to your monthly
consolidated statement (it does not appear on quarterly IRA
statements) in January. As you know, the IRS requires you to
report any gains or losses from the sale or exchange of non-money
market mutual fund shares. To determine your gain or loss, first
you need to know how much you paid for the shares you sold. To
help you better manage your investment, we now provide you with
an estimate of the price you paid to obtain the shares. This
amount now appears on each of your monthly statements.
5
<PAGE>
- Year-to-Date Information
The Account Activity section of your statement now
includes year-to-date activity. This is beneficial since it
allows you to view all activity for the year on a monthly basis.
You can then decide whether to keep or discard previous
statements.
- Investment Flow Summary
The Investment Flow Summary section was added to the
consolidated statement of retirement plan shareholders in their
first quarter statement mailed in April, and will be rolled out
to other shareholders in May. It summarizes the flow of your
transactions and market activity for each of the AARP Mutual
Funds in your portfolio. This allows you to see easily the
progress of your portfolio. The section adds up all your
additions (new share purchases) then subtracts any withdrawals
(shares sold) and notes any market value changes.
- New Funds Center in New York
The newest Scudder Funds Center opened in New York City
in March. When you visit us on the northwest corner of 51st
Street and Lexington Avenue, you can obtain information on the
AARP Mutual Funds and speak face-to-face with one of our AARP
Mutual Fund Representatives. If you live in the New York area and
need help in allocating your assets, have questions about
planning for retirement, or want to learn more about the AARP
Mutual Funds, stop in and see us. For directions, please call us
at 1-800-253-2277.
If you have any questions about your AARP Funds or the
information provided in this Report, please call our knowledgeable AARP
Mutual Fund Representatives between the hours of 8:00 A.M. to 8:00 P.M.,
Monday through Friday, eastern time at 1-800-253-2277.
Sincerely,
/s/Cuyler W. Findlay /s/Linda C. Coughlin /s/Douglas M. Loudon
Cuyler W. Findlay Linda C. Coughlin Douglas M. Loudon
Chairman President Investment Director
6
<PAGE>
AARP Fund Reports
-----------------
The following pages contain a summary of each Fund in the AARP Investment
Program from Scudder. Each AARP Mutual Fund report, except the AARP Global
Growth Fund, contains the one-year total return, five-year total return, and
ten-year total return (or Life of Fund total return if the Fund is less than
10 years old). Because a one-year total return could be high or low depending
on market conditions over a 12-month period, it is useful to have the
perspective of the five-year and ten-year total return figures. Within each
Fund description (except for the AARP Money Funds), one-year total return is
broken down into two components: distribution of income and capital change.
Distribution of income is defined to include reinvested dividends. Capital
change is defined as the change in the price per share including any
reinvested capital gains distributions.
You will also note that all of the AARP Funds, except the AARP Money Funds
and the AARP Global Growth Fund, have been compared to market indices. We are
providing these comparisons to comply with the Securities and Exchange
Commission's (SEC) disclosure requirements. Under these requirements, all
mutual funds (except money funds) are required to compare their performance
over the past ten years (or Life of Fund) to that of a broad-based securities
market index. It is important to note, however, that these indices may have
limited relevance to the performance of mutual funds. They do not reflect the
deduction of any servicing, investment management, or administration
expenses.
Also, the AARP Mutual Funds are unique in the emphasis on seeking to reduce
share price fluctuation. This, in turn, can have significant impact on
performance. Therefore, when comparing an AARP Mutual Fund's performance with
that of a major market index, remember that any comparison may be of limited
value.
7
<PAGE>
AARP HIGH QUALITY MONEY FUND
----------------------------
FUND OVERVIEW
This Fund is designed to preserve your principal while you earn money market
returns. The AARP High Quality Money Fund has quality standards high enough to
have secured a AAAm rating from Standard & Poor's (S&P)*, a leading national
independent rating firm. The Fund seeks to maintain a $1.00 share price,
although there may be circumstances under which this goal cannot be achieved. It
is important to note that unlike bank savings accounts, the Fund is not insured
or guaranteed by the U.S. Government and the yield of the Fund will fluctuate.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors who have short-term needs or who do
not want the risks associated with investing in stocks or bonds. These investors
include those seeking money market income to help meet regular day-to-day needs,
those who need immediate access to their assets through free checkwriting, those
who want to diversify their assets with an investment designed to provide a
degree of safety and stability, and those seeking a short-term investment prior
to making longer-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
Stephen L. Akers
Lead Portfolio Manager
K. Sue Cote
Debra A. Hanson
Robert T. Neff
Portfolio Managers
*The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
How the Fund has Performed
As with all money funds, the performance of the AARP High Quality Money
Fund mirrored what happened to short-term interest rates. Short-term interest
rates, as measured by the three-month U.S. Treasury Bill, declined from 5.40%
to 5.18% over the past six months. This trend caused a gradual decline in the
Fund's 7-day net annualized yield from 4.97% on September 30, 1995 to 4.38% as
of March 31, 1996.
The Fund's one-year total return was 4.87%, which was made up entirely
of income. The five-year cumulative total return was 20.69%; the five-year
average annualized total return was 3.83%; the 10-year cumulative total return
was 67.04%; and the 10-year average annualized total return was 5.26%. Of
course past performance is not a guarantee of future results, and yield will
fluctuate.
The Fund's Recent Investment Strategy
As interest rates remained low over the past six months, our aim was to
continue to keep a long average maturity in the Fund. We maintained a barbell
strategy in which approximately 28% of the portfolio was invested in securities
that mature in one month or less, and 19% was invested in securities maturing
in six to 12 months.
As of March 31, 1996, the average maturity of the Fund was 52 days,
which is slightly shorter than the 55 days at the beginning of October 1995. We
have allowed the average maturity to decline somewhat by reinvesting all cash
in securities with maturities of 60 days or less. We have taken this step as a
result of the recent upward pressure on short-term interest rates. Although we
do not expect short-term rates to rise in the next few months, we do expect
continued volatility, and will therefore remain cautious as we work to offer
you competitive yields and stability.
8
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
-------------------------------------
FUND OVERVIEW
The AARP High Quality Tax Free Money Fund is designed to offer you stability of
principal, along with income free from federal taxes.^1 The quality of the Fund
is high enough to have secured a AAAm rating from Standard & Poor's (S&P), a
leading national independent rating firm.^2 The AARP High Quality Tax Free Money
Fund is designed to maintain a $1.00 share price, although there may be
circumstances under which this goal cannot be achieved. It is important to note
that, unlike bank savings accounts, the Fund is not insured or guaranteed by the
U.S. Government, and yield will fluctuate.
FOR WHOM THE
FUND IS DESIGNED
This Fund may be appropriate for investors seeking tax-free income or who do not
want the risks associated with investing in stocks or bonds. These investors
include those seeking money market income to meet regular day-to-day expenses,
those needing immediate access to their assets through free checkwriting, those
creating a diversified portfolio who want a portion of their assets in a
conservative investment designed to offer stability, and those seeking a
short-term investment prior to making longer-term investment choices.
PORTFOLIO
MANAGEMENT TEAM
K. Sue Cote
Lead Portfolio Manager
Donald C. Carleton
Portfolio Manager
^1 It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Capital gains, if any,
may be subject to taxes as well.
^2 The rating for the Fund is historical and is based on an analysis of the
portfolio's credit quality, market price exposure, and management.
How the Fund has Performed
Over the past six months, the yield on the AARP High Quality Tax Free
Money Fund declined as short-term interest rates declined. The Fund's 7-day net
annualized yield fell from 3.37% on September 30, 1995 to 2.56% on March 31,
1996. This is a taxable equivalent yield of 4.24% for shareholders in the 39.6%
tax bracket. The Fund's one-year total return was 3.00%, which was made up
entirely of income. The five-year cumulative total return was 13.13%; the
five-year average annualized total return was 2.50%, the ten-year cumulative
total return was 46.41%; and the ten-year average annualized total return was
3.89%.*
Please note that the five-year and ten-year figures include the
performance of the AARP Insured Tax Free Short Term Fund, which changed its name
and objective to the AARP High Quality Tax Free Money Fund on August 1, 1991. Of
course, past performance is not a guarantee of future results and yield will
fluctuate.
The Fund's Recent Investment Strategy
As interest rates remained low, our aim was to keep our average
maturity extended as long as possible by investing in tax-exempt commercial
paper maturing in six to 12 months. As of March 31, 1996, the average maturity
of the Fund was 47 days. We would have liked to have maintained an even longer
average maturity, but the supply of longer-term securities in the six- to
12-month range was limited.
As always, all securities we bought over the past six months are rated
within the two highest quality ratings of at least one of the three leading
national independent rating firms: Fitch Investors Service Inc., Moody's
Investor Services Inc., or S&P. For those funds rated by S&P, there are
particular guidelines with which any tax-free money fund must comply in order to
maintain its AAAm rating. In addition, Scudder credit analysts approve only a
small percentage of securities that fit within the S&P criteria. Therefore, the
number of securities that we have to choose from is much smaller and we believe
generally of better quality than other tax-free money funds.
We expect short-term interest rates in the municipal market to remain
stable or decrease over the next six months. Consequently, the yield of the AARP
High Quality Tax Free Money Fund should decline slightly. However, we will keep
the Fund's average maturity as long as prudently possible by investing in
longer-maturity securities that are fairly valued. We believe this strategy
should continue to offer shareholders competitive tax-free income and stability.
* Total returns would have been lower had certain expenses not been reduced.
9
<PAGE>
AARP GNMA AND U.S. TREASURY FUND
--------------------------------
FUND OVERVIEW
The AARP GNMA and U.S. Treasury Fund seeks to produce monthly income from a
conservatively managed high-quality portfolio. Although your principal is not
guaranteed as it is with an insured fixed-rate Certificate of Deposit (CD) or
savings account, the Fund is managed to help reduce share price fluctuation.
While the securities in the Fund are guaranteed as to the timely payment of
principal and interest, the guarantee is not related to the Fund's yield or
share price, both of which will fluctuate daily.
Total Return
------------
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 8.62% 10.84%
5 yr. 39.23% 48.20%
10 yr. 105.72% 139.35%
AVERAGE ANNUAL
FUND INDEX^+
---- ------
1 yr. 8.62% 10.84%
5 yr. 6.84% 8.18%
10 yr. 7.48% 9.11%
How the Fund has Performed
As stated in the Letter to Shareholders, the last quarter of 1995 was
favorable but the first quarter of 1996 was a volatile time for bond investors.
After a year of mostly declining interest rates, long-term interest rates began
to rise in 1996. Shareholders in the AARP GNMA and U.S. Treasury Fund were
shielded from some of this volatility because of the Fund's unique strategy to
keep 20% to 50% of its assets in short-term securities. It is this strategy,
however, that often causes the Fund to lag the unmanaged Lehman Brothers
Mortgage GNMA Index. When we look to the chart below, the AARP GNMA and U.S.
Treasury Fund's one-year total return of 8.62% (representing 7.07% in
distributions of income and 1.55% in capital change) underperformed the index
return of 10.84%. It is important to note that the index return does not reflect
investment in cash equivalents or the deduction of any servicing, investment
management, or administrative expenses as a mutual fund does.
While 12-month returns for the Fund will vary from year to year, by
maintaining a long-term focus and staying invested through good and bad times,
your investment has the opportunity to grow over time and overcome down periods
in the market. As the graph to the right shows, if you invested $10,000 in the
Fund on March 31, 1986, your investment would have grown to $20,572. If you took
your distributions in cash, the value of your investment would have been $9,348,
and you would have received $7,563 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended March 31
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- ---------------------
1986 $10000 $10000
1987 10952 11039
1988 11339 11736
1989 11892 12395
1990 13160 14172
1991 14775 16150
1992 16335 18051
1993 18087 20096
1994 18154 20321
1995 18939 21594
1996 20572 23935
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended March 31
(Total Return %)
CHART DATA:
AARP GNMA and U.S. Lehman Brothers
Treasury Fund Mortgage GNMA Index^+
------------- --------------------
1992 10.55% 11.77%
1993 10.73 11.34
1994 0.37 1.13
1995 4.32 6.26
1996 8.62 10.84
^+ The unmanaged Lehman Brothers Mortgage GNMA Index is a market value weighted
measure of all fixed-rate securities backed by mortgage pools of the GNMA.
Index returns are calculated monthly and assume reinvestment of dividends.
Unlike Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
10
<PAGE>
The Fund's Recent Investment Strategy
Through most of 1995, we shifted assets from shorter-term instruments
into GNMA securities, which were selling at attractive price levels. As of
year-end, approximately 75% of the portfolio was invested in GNMA securities,
with a third of the Fund's assets invested in 7% to 7 1/2% coupon mortgages.
This strategy proved successful in providing shareholders with more income
during a period of declining interest rates.
We continued to favor GNMA securities in the first quarter of 1996, as
illustrated in the chart below. However, beginning in February we replaced our 7
1/2% coupon mortgages with lower-coupon bonds in the vicinity of 6% to 7%.
Despite their lower relative coupons, the bonds in the portfolio still produced
income above most other high-quality fixed-income investments such as
Treasuries.
CALLOUT
It has been an ongoing strategy to keep 20% to 50% of the Fund's assets in
short-term U.S. Treasury obligations and cash equivalents to help moderate share
price volatility.
The remainder of the portfolio was invested in short-term U.S. Treasury
obligations and cash equivalents with maturities of three years or less. These
shorter-term securities helped moderate share price fluctuation. It has been an
ongoing strategy to keep some of the Fund's assets in shorter maturity bonds to
help dampen share price volatility.
We have maintained a consistent strategy in the Fund for the past 10
years. Shareholders in this Fund should feel comfortable that the current blend
of GNMA securities will provide a competitive stream of income, while the
short-term Treasury securities and cash equivalents will continue to dampen
share price volatility.
PIE CHART TITLE: Asset Allocation
----------------
CHART PERIOD: As of March 31, 1996
CHART DATA:
Government National Mortgage
Association 70%
U.S. Treasury Obligations 29%
Cash Equivalents 1%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for conservative investors who want relatively high current
income and a degree of protection from day-to-day share price volatility.
Investors should be seeking to invest for the longer term (at least one to three
years) and be comfortable with fluctuation in the value of their principal and
yield.
PORTFOLIO
MANAGEMENT TEAM
David H. Glen
Lead Portfolio Manager
Mark S. Boyadjian
Portfolio Manager
11
<PAGE>
AARP HIGH QUALITY BOND FUND
---------------------------
FUND OVERVIEW
The AARP High Quality Bond Fund offers you monthly income and the opportunity
for higher returns than you can expect from the AARP GNMA and U.S. Treasury
Fund. In pursuing higher returns, fluctuation in the value of your principal may
also be greater. The Fund has quality standards that are among the highest of
any general bond fund currently available, with at least 65% of the portfolio
invested in AAA-rated and AA-rated issues, and the other 35% in nothing less
than A-rated bonds.
Total Return
------------
CUMULATIVE
FUND INDEX^+
---- ------
1 yr. 10.22% 10.79%
5 yr. 45.99% 50.29%
10 yr. 110.48% 128.59%
AVERAGE ANNUAL
FUND INDEX^+
---- ------
1 yr. 10.22% 10.79%
5 yr. 7.86% 8.48%
10 yr. 7.73% 8.61%
How the Fund has Performed
As stated in the Letter to Shareholders, the last quarter of 1995 was
favorable but the first quarter of 1996 was a volatile period for bond
investors. After a year of mostly declining interest rates, long-term interest
rates began to rise in 1996. The AARP High Quality Bond Fund was negatively
impacted by this because as interest rates rise, bonds prices fall. In addition,
the Fund's conservative strategy often causes the Fund to lag the unmanaged
Lehman Brothers Aggregate Bond Index when the bond market rallies, as it did in
1995. When we look to the chart below, the AARP High Quality Bond Fund's
one-year total return of 10.22% (representing 6.30% in distributions of income
and 3.92% in capital change) underperformed the index return of 10.79%. It is
important to note that the quality of the securities in the portfolio is higher
than those in the index, and the index return does not reflect investment in
cash equivalents or the deduction of any servicing, investment management, or
administrative expenses, as a mutual fund does.
While 12-month returns for the Fund will vary from year to year, by
maintaining a long-term focus and staying invested through good and bad times,
your investment has the opportunity to grow over time and overcome down periods
in the market. As the graph to the right shows, if you invested $10,000 in the
Fund on March 31, 1986, your investment would have grown to $21,048. If you took
your distributions in cash, the value of your investment would have been $9,864,
and you would have received $7,303 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended March 31
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------
1986 $10000 $10000
1987 10780 10873
1988 11162 11404
1989 11806 11992
1990 12960 13472
1991 14417 15209
1992 15936 16945
1993 18009 19197
1994 18515 19653
1995 19096 20633
1996 21048 22859
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended March 31
(Total Return %)
CHART DATA:
AARP High Quality Lehman Brothers
Bond Fund Aggregate Bond Index^+
--------- ---------------------
1992 10.54% 11.43%
1993 13.01 13.3
1994 2.8 2.37
1995 3.14 4.99
1996 10.22 10.79
^+ The unmanaged Lehman Brothers Aggregate Bond Index is a market value weighted
measure of treasury issues, agency issues, corporate bond issues and mortgage
securities. Index returns are calculated monthly and assume reinvestment of
dividends. Unlike Fund returns, Index returns do not reflect any fees or
expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
12
<PAGE>
The Fund's Recent Investment Strategy
In keeping with the Fund's objective of managing share price
volatility, our investment strategy changed in early 1995 and has remained
consistent ever since. During the six-month period covered by this report, we
decided to add income to the portfolio from attractively priced mortgage-backed
and corporate securities. We put a large portion of the Fund's assets into
mortgage-backed securities (approximately 32% as of March 31, 1996) because of
their high quality, income potential, and attractive prices. We also continued
to invest in corporate securities which included issues from some of the
country's leading consumer staples, durable goods manufacturing, financial, and
transportation companies.
We favored intermediate-term bonds in anticipation of a steeper yield
curve, which is when short-term yields decline faster than long-term yields.
This strategy proved positive for the Fund because intermediate-term bonds were
the best-performers over the past six months.
CALLOUT
The Fund attempts to reduce share price fluctuation by investing in a variety of
different sectors.
The Fund continued to maintain its objective of investing in
high-quality securities. As of March 31, 1996, 67% of the portfolio was invested
in government, AAA-rated or AA-rated securities; 17% of the Fund was invested in
A-rated bonds; and 16% was invested in cash equivalents.
We believe that the AARP High Quality Bond Fund's current portfolio is
well positioned and major changes are not expected over the near term. This Fund
should continue to provide shareholders with high income and less share price
fluctuation than a long-term bond. Our emphasis remains on delivering both
competitive yields and potential price appreciation, as well as on maintaining
high credit quality and diversification across various types of issues.
PIE CHART TITLE: Asset Allocation
----------------
CHART PERIOD: As of March 31, 1996
CHART DATA:
U.S. Government Agency Pass-Thrus 31%
U.S. Treasury Obligations 27%
Corporate Bonds 20%
Commercial Paper 16%
Foreign Bonds--U.S. $ Denominated 5%
Asset Backed 1%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors who want competitive returns from a portfolio
of high credit quality. Investors should be seeking to invest for the longer
term (at least one to three years) and be comfortable with fluctuation in the
value of their principal and yield.
PORTFOLIO
MANAGEMENT TEAM
David H. Glen
Lead Portfolio Manager
William M. Hutchinson
Stephen A. Wohler
Portfolio Managers
13
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
---------------------------------------
FUND OVERVIEW
The AARP Insured Tax Free General Bond Fund seeks to pay high monthly income
that is free from federal taxes.* The Fund invests in a portfolio consisting
primarily of high-grade municipal securities that are insured against default.
This insurance does not apply to the value of your shares or the yield of the
Fund, both of which will fluctuate daily. The Fund also aims to keep the value
of its shares more stable than that of a long-term municipal bond.
Total Return
------------
CUMULATIVE
FUND INDEX^+
---- ------
1 yr. 7.23% 8.38%
5 yr. 45.13% 47.45%
10 yr. 112.79% 117.13%
AVERAGE ANNUAL
FUND INDEX^+
---- ------
1 yr. 7.23% 8.38%
5 yr. 7.73% 8.07%
10 yr. 7.84% 8.05%
* It is the policy of the Fund not to invest in taxable issues. However, the
Fund's income may be subject to state and local taxes. Gains on sales of Fund
shares and distributions of capital gains may be subject to federal, state and
local taxes.
How the Fund has Performed
As stated in the Letter to Shareholders, the last quarter of 1995 was
favorable but the first quarter of 1996 was a volatile period for bond
investors, including those in the municipal market. Since January 1996, with
rising long-term interest rates, the value of the securities held by the Fund
decreased and the net asset value declined. When we look at the annualized total
return, as illustrated in the chart below, the AARP Insured Tax Free General
Bond Fund's one-year total return of 7.23% (representing 5.06% in distributions
of income and 2.17% in capital change) underperformed the unmanaged Lehman
Brothers Municipal Bond Index return of 8.38%. It is important to note that due
to the Fund's objective to reduce share price volatility, it will often lag
other municipal funds when the bond market rallies, as it did in 1995. However,
it may also shield the Fund when the market declines, as it did during the first
quarter of 1996.
It is important to note that 12-month returns for the Fund will vary
from year to year. However, by maintaining a long-term focus and staying
invested through good and bad times, your investment has the opportunity to grow
over time and overcome down periods in the market. As the graph to the right
shows, if you invested $10,000 in the Fund on March 31, 1986, your investment
would have grown to $21,279. If you took your distributions in cash, the value
of your investment would have grown to $11,004, and you would have received
$6,914 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended March 31
CHART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------
1986 $10000 $10000
1987 11233 11097
1988 11104 11376
1989 12322 12196
1990 13470 13482
1991 14662 14726
1992 16024 16197
1993 18266 18225
1994 18595 18648
1995 19844 20034
1996 21279 21713
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended March 31
(Total Return %)
CHART DATA:
AARP Insured Tax Free Lehman Brothers
General Bond Fund Municipal Bond Index^+
----------------- ---------------------
1992 7.23% 8.38%
1993 9.28 10.01
1994 14.0 12.51
1995 1.79 2.32
1996 6.71 7.43
^+ The unmanaged Lehman Brothers Municipal Bond Index is a market value weighted
measure of municipal bonds with a maturity of at least two years. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
14
<PAGE>
The Fund's Recent Investment Strategy
Through the end of 1995, the portfolio management team continued to
shift a majority of the portfolio from long-term bonds with maturities of over
20 years to bonds with maturities of under 15 years. It continues to be heavily
weighted in intermediate-term bonds, with 42% of the portfolio invested in bonds
maturing in 10 to 15 years. This strategy has added to the Fund's favorable
performance over the past few months, because bonds with maturities in the
15-year range that were non-callable performed better than longer-term bonds.
In addition, as of March 31, 1996, approximately 90% of the portfolio
was invested in insured securities (or securities escrowed in U.S. Treasuries
which provide the backing of the U.S. Government). Remember that this insurance
protects the bond from default but does not apply to the value of your shares or
to the yield of the Fund, both of which will fluctuate daily.
CALLOUT
Investing in insured securities of varying maturities helps dampen the price
volatility of this Fund.
As always, we invested in securities rated within the top three ratings
by Moody's Investor Services Inc. and Standard & Poor's -- two independent
rating services.
We believe that the Fund's strategy will continue to provide
shareholders with high income free from federal taxes as we seek to keep its
share price more stable than a long-term municipal bond.
PIE CHART TITLE: Asset Allocation -- Municipal Bond Effective Maturities
CHART PERIOD: As of March 31, 1996
CHART DATA:
Less than 1 year 8%
1 to less than 5 years 10%
5 to less than 10 years 17%
10 to less than 15 years 42%
Greater than 15 years 23%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors in higher tax brackets who want income that
is free from federal income taxes. Investors should be seeking to invest for the
longer term (at least one to three years) and be comfortable with fluctuation in
the value of their principal and yield.
PORTFOLIO
MANAGEMENT TEAM
Donald C. Carleton
Lead Portfolio Manager
Philip G. Condon
Portfolio Manager
15
<PAGE>
AARP BALANCED STOCK AND BOND FUND
---------------------------------
Fund Overview
Through a combination of stocks, bonds, and cash reserves, the AARP Balanced
Stock and Bond Fund seeks to offer you long-term growth of capital and quarterly
income. The Fund attempts to keep the value of its shares more stable than other
potentially higher returning, higher risk balanced mutual funds.
Total Return
------------
CUMULATIVE
BLENDED
FUND INDEX^+
---- ------
1 yr. 21.04% 22.90%
Life of
Fund* 25.09% 28.93%
AVERAGE ANNUAL
BLENDED
FUND INDEX^+
---- ------
1 yr. 21.04% 22.90%
Life of
Fund^* 10.91% 12.49%
How the Fund has Performed
The AARP Balanced Stock and Bond Fund performed well over the past six
months. While the Fund provided a solid one-year total return of 21.04%
(representing 4.43% in distributions of income and 16.61% in capital change)
over this period, it slightly underperformed the blended index's one-year total
return of 22.90%, primarily because of the Fund's conservative investment
strategy to reduce share price volatility. The blended index is made up of the
S&P Stock Price Index 50%, the Lehman Brothers Aggregate Bond Index 40%, and the
3-Month Treasury Bill Index 10%.
It is important to note that 12-month returns for the Fund will vary
from year to year. However, by maintaining a long-term focus and staying
invested through good and bad times, your investment has the opportunity to grow
significantly over time. As the graph to the right shows, if you invested
$10,000 in the Fund when it was introduced in February of 1994, your investment
would have grown to $12,509. If you took your distributions in cash, the value
of your investment would have grown to $11,440, and you would have received $939
in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Quarterly Periods from February 1, 1994
to March 31, 1996
CHART DATA:
AARP Balanced Standard & Poor's Lehman Brothers
Stock and Bond 500 Stock Price Aggregate Bond Blended
Fund Index Index Index^+
---- ----- ----- -----
2/1/94* $10000 $10000 $10000 $10000
3/31/94 9520 9304 9584 9456
6/30/94 9623 9344 9485 9450
9/30/94 9922 9800 9543 9740
12/31/94 9837 9799 9579 9761
3/31/95 10335 10753 10062 10491
6/30/95 11077 11779 10675 11308
9/30/95 11589 12716 10885 11929
12/31/95 12184 13481 11349 12543
3/31/96 12509 14205 11147 12893
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended March 31
(Total Return %)
CHART DATA:
AARP Balanced Blended
Stock and Bond Fund Index^+
------------------- -----
2/1/94*--
3/31/94 -4.8 % -5.08%
1995 8.56 10.17
1996 21.04 22.9
^+ The performance of the blended benchmark is a weighting comprised of 50%
Standard & Poor's 500 Stock Price Index (S&P), 40% Lehman Brothers
Aggregate Bond Index (LBAB), and the 3-Month Treasury Bill Index (10%). The
50/40/10 measure is meant to reflect the anticipated long range asset mix
of the Fund, which may change over time. The unmanaged Standard & Poor's
500 Stock Price Index is a market value-weighted measure of 500 widely held
common stocks listed on the New York Stock Exchange, American Stock
Exchange, and Over-the-Counter market. The unmanaged Lehman Brothers
Aggregate Bond Index is a market value-weighted measure of treasury issues,
agency issues, corporate bond issues and mortgage securities. Index returns
are calculated monthly and assume reinvestment of dividends. Unlike Fund
returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all
dividends and capital gains and is not indicative of future results.
Investment return and principal value will fluctuate so an investor's
shares, when redeemed, may be worth more or less than when purchased.
^* The Fund commenced operations on February 1, 1994.
16
<PAGE>
The Fund's Recent Investment Strategy
In general, the stock portion of the Fund (representing 53% of the
portfolio as of March 31, 1996) uses an approach similar to the AARP Growth and
Income Fund. We will usually invest in stocks that are believed to have
favorable long-term capital appreciation outlooks and have above-average
dividend yields. Since the stock portion of the Fund is managed by the same team
and with the same strategy as the AARP Growth and Income Fund, refer to the AARP
Growth and Income Fund Report on page 18 for details on specific stock
selection. (The Fund may invest up to 70% of its assets in stocks.)
The portion of the Fund invested in bonds (representing 29% of the
portfolio as of March 31, 1996) can include corporate issues, U.S. Government
securities, mortgage-backed obligations, and other fixed-income securities. At
least 75% of these securities will be securities rated within the three highest
quality ratings by Moody's Investor Services Inc. or Standard & Poor's,
independent rating organizations. (At all times, at least 30% of the Fund's
assets will be a combination of bonds and cash equivalents.) We continued to
favor intermediate-term bonds over the past six months in anticipation of a
steeper yield curve (short-term yields moving down faster than long-term
yields). The remaining 18% of the portfolio as of March 31, 1996 were invested
in cash equivalents.
CALLOUT
The Fund attempts to reduce share price fluctuation by following the strict
yield discipline of the AARP Growth and Income Fund in the stock section of the
portfolio, by investing in securities with varying maturities on the bond side,
and by maintaining a significant cash position.
We continue to believe that stocks will outperform bonds and cash over
the longer term and therefore a majority of the portfolio will continue to be
invested in stocks. While we are comfortable with our current asset allocation
of 53% stocks, 29% bonds, and 18% cash equivalents, this allocation may be
gradually changed depending upon our expectations for the financial markets.
PIE CHART TITLE: ASSET ALLOCATION
CHART PERIOD: As of March 31, 1996 CHART DATA:
Stocks 53%
Bonds 29%
Cash Equivalents 18%
----
100%
====
For Whom the
Fund is Designed
This Fund is designed for investors who are seeking long-term growth of their
assets, but who want less risk than an investment solely in stocks. Investors
should be able to invest for the longer term (three years or more) and be
comfortable with the value of their principal fluctuating up and down.
Portfolio
Management Team
Robert T. Hoffman
Lead Portfolio Manager
William M. Hutchinson
Benjamin W. Thorndike
Portfolio Managers
17
<PAGE>
AARP GROWTH AND INCOME FUND
---------------------------
FUND OVERVIEW
The AARP Growth and Income Fund is a conservatively managed stock fund that
provides the potential for long-term growth and quarterly income, while still
seeking to moderate risk. It invests in above-average dividend-yielding stocks
that may offer the opportunity for long-term growth of capital.
Total Return
------------
CUMULATIVE
FUND INDEX^+
---- -------
1 yr. 31.91% 32.10%
5 yr. 109.01% 98.22%
10 yr. 235.12% 269.70%
AVERAGE ANNUAL
FUND INDEX^+
---- -------
1 yr. 31.91% 32.10%
5 yr. 15.89% 14.65%
10 yr. 12.85% 13.96%
How the Fund has Performed
The AARP Growth and Income Fund performed well over the past six
months. While providing a strong one-year total return of 31.91% (representing
3.62% in distributions of income and 28.29% in capital change), it slightly
underperformed the unmanaged Standard & Poor's Stock Price Index of 32.10%. The
Fund was able to perform well relative to the index for this one-year period,
and even outperform the index during the last six months. That was because the
stock market rally during the last six months was not driven by the technology
sector, as it was during the previous six months. Our strict valuation
discipline sometimes precludes us from investing in certain sectors of the
market, such as technology stocks, which are characterized by a high degree of
price volatility and minimal or nonexistent dividends.
It is important to note that 12-month returns for the Fund will vary
from year to year. However, by maintaining a long-term focus and staying
invested through good and bad times, your investment has the opportunity to grow
significantly over time. As the graph to the right shows, if you invested
$10,000 in the Fund on March 31, 1986, your investment would have grown to
$33,512. If you took your distributions in cash, your investment would have
grown to $19,391, and you would have received $6,696 in distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended March 31
CHART DATA:
AARP Growth and Standard & Poor's
Income Fund 500 Stock Price Index^+
----------- -----------------------
1986 $10000 $10000
1987 11904 12620
1988 11070 11569
1989 12587 13668
1990 14022 16302
1991 16034 18652
1992 18397 20711
1993 21279 23865
1994 22443 24217
1995 25404 27987
1996 33512 36970
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended March 31
(Total Return %)
CHART DATA:
AARP Growth and Income Standard & Poor's 500
Fund Stock Price Index+
---- ------------------
1992 14.74% 11.03%
1993 15.67 15.22
1994 5.47 1.48
1995 13.20 15.57
1996 31.91 32.10
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
18
<PAGE>
The Fund's Recent Investment Strategy
As always, our strict valuation discipline focused our attention on
those companies whose fundamental outlooks may have been misperceived by
investors, as reflected by such stocks' higher-than-average dividend yields.
With this in mind, over the period covered by this Report, we continued to favor
the health, finance, and manufacturing sectors. The Fund's largest holding in
the financial sector-- the Student Loan Marketing Association (Sallie Mae) --
turned in an exceptional performance. Sallie Mae was a unique opportunity where
unfavorable political and corporate developments had driven the stock to a
depressed level by late 1994. We began to buy the stock at that time and it
became one of the Fund's largest holdings. Sallie Mae returned 108% in 1995.
Health stocks, such as Eli Lilly, Schering Plough, and Baxter, added to the
Fund's favorable performance as the profit outlook for the industry continues to
be strong. The portfolio also benefited significantly from the dramatic
outperformance of such durable goods holdings as United Technologies, Lockheed
Martin and Rockwell. These stocks appreciated significantly as the market
rewarded them for strong and sustainable earnings, cash flow and dividend
growth, and superior management.
Recently we have begun to reduce our exposure to some of these top
performers because we believe that their stocks are approaching fair valuation.
We have taken some profits in Sallie Mae, and trimmed several of our bank
holdings. We also reduced our position in Lockheed Martin and United
Technologies. Within the healthcare sector, we have taken partial profits from
Eli Lilly and Schering Plough. Proceeds from these sales were used to purchase
such companies as Zeneca and Bausch and Lomb -- two undervalued healthcare
stocks that we believe offer attractive total return prospects. We also
purchased some paper and forest products stocks such as Georgia Pacific and
Weyerhaeuser. We believe that their attractive valuations are already fully
discounting the possibility of a U.S. recession. (Please note that portfolio
changes should not be considered recommendations for action by individual
investors.)
CALLOUT
The Fund focuses on stocks with above-average dividends and sound fundamentals
to help reduce share price volatility.
In general, our focus on high dividend-paying stocks tends to lead us
in the direction of value investing. This has and should continue to benefit the
Fund over time as the market recognizes the intrinsic worth of individual
stocks. We think this is a good position to be in as the economy winds down and
market leadership becomes less driven by earnings.
PIE CHART TITLE: ASSET ALLOCATION - SECTORS OF EQUITY HOLDINGS
CHART PERIOD: As of March 1, 1996
CHART DATA:
Financial 20%
Manufacturing 18%
Health 12%
Consumer Staples 9%
Energy 9%
Durables 8%
Communications 7%
Consumer Discretionary 5%
Utilities 4%
Other 8%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is suitable for investors who are seeking long-term growth of their
assets and the opportunity to keep ahead of inflation. Investors should be able
to invest for at least three years or more and be comfortable with fluctuation
to the value of their principal that is associated with investing in stocks.
PORTFOLIO
MANAGEMENT TEAM
Robert T. Hoffman
Lead Portfolio Manager
Lori J. Ensinger
Kathleen T. Millard
G. Todd Silva
Benjamin W. Thorndike
Portfolio Managers
19
<PAGE>
AARP GLOBAL GROWTH FUND
-----------------------
FUND OVERVIEW
The AARP Global Growth Fund seeks to offer long-term capital growth through a
globally diversified portfolio, and to keep the value of its shares more stable
than other global stock funds.
How the Fund has Performed
Because the AARP Global Growth Fund is so new, you will not find
performance information in this Report. However, you can all us at
1-800-253-2277 for more information.
Since the Fund was introduced in February, the portfolio management
team has concentrated on getting the Fund's assets invested. The portfolio is
currently broadly diversified among 17 countries, including the United States,
Germany, and the United Kingdom, and more than 70 different companies.
The Fund's Recent Investment Strategy
The strategy of the Fund is to develop global themes and search for the
appropriate stock values to represent them, rather than weight the portfolio
according to countries or economic sectors. For example, we target companies
with new technologies that secure large market shares and set the standards to
which other companies must conform. An example in the portfolio includes SAP, a
German-based software applications developer.
Another theme focuses on corporations that are changing their structure
in order to concentrate resources on their highest value-added activities. To
succeed, these companies will also need to control the entities to whom they
outsource. Our portfolio position in Xerox currently demonstrates the successful
application of this strategy. Given the world's demographics, we believe
pharmaceutical products and health providers will continue to thrive. We favor
companies such as Sandoz and Ciba-Geigy. (Please note that portfolio changes
should not be considered recommendations for action by individual investors.)
CALLOUT
The Fund seeks to offer less share price volatility than many global growth
funds by maintaining core holdings that are from well-established companies of
mature countries.
We expect to diversify the Fund's assets further in the coming months
and adhere to a "theme approach" of investing these assets. We also expect the
shareholders in this Fund to benefit from many global trends underway: the
global economy and capital markets in aggregate are functioning well; growth,
albeit moderate, is being achieved without inflation; and new technologies are
emerging and old industries are restructuring.
20
<PAGE>
PIE CHART TITLE: Asset Allocation -- Countries of Equity Holdings
CHART PERIOD: As of March 31, 1996
CHART DATA:
United States 29%
Germany 19%
United Kingdom 10%
Switzerland 8%
The Netherlands 6%
Japan 6%
Canada 5%
Sweden 5%
Brazil 3%
Other 9%
---
100%
====
PIE CHART TITLE: Asset Allocation -- Sectors of Equity Holdings
CHART PERIOD: As of March 31, 1996
CHART DATA:
Financial 21%
Manufacturing 21%
Metals and Minerals 13%
Service Industries 7%
Construction 6%
Utilities 6%
Consumer Staples 5%
Technology 5%
Media 4%
Other 12%
---
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund, which commenced operations on February 1, 1996, is suitable for
investors who want to add worldwide stock opportunities to their portfolio.
Investors should invest for the longer term (at least five years or more) and be
comfortable with the value of their principal fluctuating up and down. Because
the Fund invests globally, it will be affected by up and down movements in U.S.
and international stock markets. The Fund will also be subject to international
investments risks such as currency exchange risk.
Since the Fund is so new, the Growth of $10,000 Investment chart and the Annual
Investment Returns are not included.
PORTFOLIO
MANAGEMENT TEAM
William E. Holzer
Lead Portfolio Manager
Nicholas Bratt
Alice Ho
Portfolio Managers
21
<PAGE>
AARP CAPITAL GROWTH FUND
------------------------
FUND OVERVIEW
The AARP Capital Growth Fund is designed to help investors take advantage of the
high growth potential of stocks while attempting to keep the value of its shares
more stable than other potentially higher returning, higher risk capital growth
mutual funds.
Total Return
------------
CUMULATIVE
FUND INDEX^+
---- ------
1 yr. 30.75% 32.10%
5 yr. 79.05% 98.22%
10 yr. 205.56% 269.70%
AVERAGE ANNUAL
FUND INDEX^+
---- ------
1 yr. 30.75% 32.10%
5 yr. 12.36% 14.65%
10 yr. 11.82% 13.96%
How the Fund has Performed
The AARP Capital Growth Fund performed well over the past six months.
It provided a strong one-year total return of 30.75% (representing 1.30% in
distributions of income and 29.45% in capital change), although it
underperformed the unmanaged Standard & Poor's 500 Stock Price Index of 32.10%.
The Fund's objective to moderate share price fluctuation may cause it to
slightly underperform the index when the stock market strongly advances, as it
has over the past six months.
It is important to note that 12-month returns for the Fund will vary
from year to year. However, by maintaining a long-term focus and staying
invested through good and bad times, your investment has the opportunity to grow
significantly over time. As the graph to the right shows, if you invested
$10,000 in the Fund on March 31, 1986, your investment would have grown to
$30,556. If you took your distributions in cash, the value of your investment
would have grown to $18,351, and you would have received $6,500 in
distributions.
LINE CHART TITLE: GROWTH OF A $10,000 INVESTMENT
CHART PERIOD: Yearly Periods ended March 31
CHART DATA:
AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
1986 $10000 $10000
1987 11752 12620
1988 1122 11569
1989 14779 13668
1990 15673 16302
1991 17066 18652
1992 19663 20711
1993 22063 23865
1994 22455 24217
1995 23370 27987
1996 30556 36970
BAR CHART TITLE: ANNUAL INVESTMENT RETURNS
CHART PERIOD: Yearly Periods ended March 31
(Total Return %)
CHART DATA:
AARP Capital Standard &
Growth Poor's 500 Stock
Fund Price Index^+
---- ------------
1992 15.22% 11.03%
1993 12.21 15.22
1994 1.78 1.48
1995 4.08 15.57
1996 30.75 32.10
^+ The unmanaged Standard & Poor's 500 Stock Price Index is a market value
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-the-Counter market. Index
returns are calculated monthly and assume reinvestment of dividends. Unlike
Fund returns, Index returns do not reflect any fees or expenses.
All performance is historical and assumes reinvestment of all dividends and
capital gains and is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than when purchased.
22
<PAGE>
The Fund's Recent Investment Strategy
Over the past six months, we continued to emphasize our strategy of
maintaining a quality portfolio diversified across many economic sectors. The
top sectors include health, finance, and technology. Health and finance, in
particular, were two of the top performing sectors of the market in late 1995.
While we continue to believe that healthcare still exhibits promising growth
prospects, we reduced positions that we thought were fully valued near term,
such as Johnson & Johnson and Merck. During the past six months, we have
purchased economically sensitive stocks whose valuations are currently more
attractive such as Lockheed Martin, TRW, and AMR Corp. Lockheed Martin is a
manufacturer of aircraft and space equipment and TRW manufactures defense
electronics, automotive parts and systems.
We believe technology has been and will continue to be a fruitful
sector for above-average growth opportunities. Since technology stocks are
characterized by a high degree of share price volatility, we have focused our
investments in high-quality, top-tier companies such as Hewlett-Packard, Cisco
Systems and Applied Materials -- market leaders in their particular
technological niche. (Please note that portfolio changes should not be
considered recommendations for action by individual investors.)
CALLOUT
Through a broadly diversified portfolio consisting primarily of high quality,
medium- to large-sized companies with strong competitive positions in their
industries, the Fund seeks to offer less share price volatility than many growth
funds.
Given the uncertain outlook for economic growth and individual company
profits, we continue to emphasize quality companies such as Columbia Healthcare,
McDonald's and Fannie Mae, whose profits, in our opinion, are sustainable
through varying market conditions.
PIE CHART TITLE: ASSET ALLOCATION -- SECTORS OF EQUITY HOLDINGS
CHART PERIOD: As of March 31, 1996
CHART DATA:
Financial 16%
Technology 15%
Health 14%
Manufacturing 13%
Energy 9%
Consumer Discretionary 9%
Consumer Staples 5%
Durables 5%
Transportation 3%
Other 11%
----
100%
====
FOR WHOM THE
FUND IS DESIGNED
The Fund is designed for investors seeking long-term growth of their principal.
Investors should be able to invest for the longer term (five years or more) and
be comfortable with the short-term fluctuation of their principal that is
associated with investing in stocks.
PORTFOLIO
MANAGEMENT TEAM
William F. Gadsden
Lead Portfolio Manager
Bruce F. Beaty
Portfolio Manager
23
<PAGE>
I N V E S T M E N T P O R T F O L I O S,
F I N A N C I A L S T A T E M E N T S
A N D A D D I T I O N A L
I N F O R M A T I O N
24
<PAGE>
AARP HIGH QUALITY MONEY FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS 5.1%
5,000,000 Repurchase Agreement with State Street Bank and Trust Company
dated 3/29/96 at 5% to be repurchased at $5,002,083 on
4/1/96 collateralized by a $4,120,000
U.S. Treasury Bond, 8.75%, 5/15/17 ...................... 5,000,000
14,535,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 3/29/96 at 5.35% to be repurchased at $14,541,480 on
4/1/96 collateralized by a $14,600,000
U.S. Treasury Note, 5.625%, 1/31/98 ..................... 14,535,000
-----------
TOTAL REPURCHASE AGREEMENTS (COST $19,535,000) ............ 19,535,000
-----------
COMMERCIAL PAPER 43.5%
HEALTH 4.3%
Pharmaceuticals
6,500,000 Warner-Lambert Co., 5.45%, 5/6/96 ......................... 6,466,849
10,000,000 Warner-Lambert Co., 4.82%, 8/16/96 ........................ 9,801,050
-----------
16,267,899
-----------
COMMUNICATIONS 8.3%
Telephone/Communications
17,000,000 American Telephone & Telegraph Co., 5.13%, 7/17/96 ........ 16,735,310
15,000,000 Ameritech Corp., 5.24%, 6/24/96 ........................... 14,814,771
-----------
31,550,081
-----------
FINANCIAL 30.9%
Banks 2.5%
10,000,000 Deutsche Bank Financial Inc., 5.18%, 9/12/96 .............. 9,762,125
-----------
Insurance 3.9%
15,000,000 Prudential, 5.06%, 4/23/96 ................................ 14,951,795
-----------
Other Financial Companies 24.5%
10,000,000 American Express Credit Corp., 5%, 8/27/96 ................ 9,785,192
6,500,000 American General Finance Corp., 5.44%, 5/10/96 ............ 6,462,589
15,000,000 Associates Corp. of North America, 5.06%, 5/8/96 .......... 14,917,983
15,000,000 E.I. duPont de Nemours & Co., 5.25%, 5/16/96 .............. 14,899,374
17,000,000 Ford Motor Credit Corp., 5.23%, 4/11/96 ................... 16,975,303
10,000,000 Nestle Capital Corp., 5.33%, 4/3/96 ....................... 9,995,635
13,500,000 New Center Asset Trust Co., 5.23%, 8/13/96 ................ 13,237,256
7,000,000 PREFCO, 5.57%, 4/25/96 .................................... 6,975,548
-----------
93,248,880
-----------
TOTAL COMMERCIAL PAPER (COST $165,820,397) ................ 165,780,780
-----------
U.S. GOVERNMENT AGENCIES 34.5%
5,000,000 Federal Home Loan Bank, 5.31%, 12/12/96 ................... 4,993,750
17,000,000 Federal National Mortgage Association, 5.17%, 7/14/99* .... 16,770,500
25,000,000 Student Loan Marketing Association, 5.34%, 4/16/96* ....... 25,007,474
20,000,000 Student Loan Marketing Association, 5.49%, 11/27/96* ...... 20,045,600
38,690,000 Student Loan Marketing Association, 5.52%, 1/23/97* ....... 38,797,171
10,000,000 Student Loan Marketing Association, 5.47%, 10/30/97* ...... 9,992,500
16,250,000 Student Loan Marketing Association, 5.17%, 7/12/99* ....... 16,046,875
-----------
TOTAL U.S. GOVERNMENT AGENCIES (COST $131,959,640) ........ 131,653,870
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
25
<PAGE>
AARP HIGH QUALITY MONEY FUND
<TABLE>
<CAPTION>
Principal
Amount ($) Value ($)
- ------------------------------------------------------------------------------------
<S> <C>
MEDIUM-TERM AND SHORT-TERM NOTES 16.2%
FINANCIAL 13.1%
Banks
5,000,000 Comerica Bank, Note, 6.2%, 5/28/96 ..................... 5,004,848
8,000,000 FCC National Bank, Note, 5.8%, 10/10/96 ................ 8,009,541
12,000,000 Federal Farm Credit Bank, 4.81%, 7/30/96 ............... 11,792,040
10,000,000 J.P. Morgan & Co., Inc., 6.2%, 5/13/96 ................. 10,009,086
10,000,000 NBD Bank, NA Medium Term Note, 6.15%, 6/3/96 ........... 10,011,600
5,000,000 Pittsburgh National Bank, Note, 5.65%, 9/18/96 ......... 5,001,485
-----------
49,828,600
-----------
MANUFACTURING 2.0%
Electrical Products
7,765,000 General Electric Co. Global debenture, 7.875%, 5/1/96 .. 7,778,100
-----------
ENERGY 1.1%
Oilfield Services/Equipment
4,160,000 California Petroleum Transportation Corp. 1st Mortgage,
6.71%, 4/1/96 ........................................ 4,160,153
-----------
TOTAL MEDIUM-TERM AND SHORT-TERM NOTES (COST $61,752,903) 61,766,853
-----------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $379,067,940) (a) . 99.3 378,736,503
OTHER ASSETS AND LIABILITIES, NET .................. 0.7 2,483,791
----- -----------
NET ASSETS ......................................... 100.0 381,220,294
===== ===========
</TABLE>
* Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon equivalent of the
U.S. Treasury bill rate. These securities are shown at their rate as of
March 31, 1996.
(a) At March 31, 1996, the net unrealized depreciation on investments based on
cost for federal income tax purposes of $379,067,940 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there
is an excess of value over tax cost ........................................ $ 167,983
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over value ........................................ (499,420)
---------
Net unrealized depreciation ................................................ $(331,437)
=========
</TABLE>
From November 1, 1994 through September 30, 1995, the Fund incurred
approximately $66,921 of net realized capital losses which the Fund intends to
elect to defer and treat as arising in the fiscal year ended September 30, 1996.
Percentage breakdown of investments is based on total net assets of the Fund.
The total net assets of the Fund are comprised of the Fund's investment
portfolio, other assets and liabilities. The percentage of the investment
portfolio may be greater or less than 100% due to the inclusion of the Fund's
assets and liabilities in the calculation. The Fund's other assets and
liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
26
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MUNICIPAL INVESTMENTS 99.1%
ALASKA
Alaska Housing Finance Corp., General Mortgage Revenue,
Series 1991-A, Weekly Demand Note, 3.4%, 6/1/26* .............................. 3,000,000 A-1+ 3,000,000
ARIZONA
Apache County, AZ, Industrial Development Authority, Tucson Electric
Power Co., 1983 Series C, Weekly Demand Note, 3.4%, 12/15/18* ................. 1,000,000 A-1+ 1,000,000
Maricopa County, AZ, Pollution Control Revenue, Public Service of
New Mexico, Weekly Demand Note, 3.35%, 11/1/22 * .............................. 4,000,000 A-1+ 4,000,000
Pima County, AZ, Industrial Development Authority, Tucson Electric Power Co.:
Weekly Demand Note, 3.4%, 10/1/22 * ........................................... 3,900,000 A-1 3,900,000
1982 Series A, Weekly Demand Note, 3.4%, 7/1/22 * ............................. 1,000,000 A-1+ 1,000,000
Pinal County, AZ, Pollution Control Revenue, Magma Copper, Weekly
Demand Note, 3.35%, 12/1/11 * ................................................. 1,900,000 A-1+ 1,900,000
Salt River Agricultural Improvement District, Tax Exempt Commercial
Paper, 3.25%, 8/9/96 .......................................................... 1,000,000 A-1+ 1,000,000
CALIFORNIA
California School, Cash Reserve Program Authority, 1995 Series A,
4.75%, 7/3/96 (c) ............................................................. 1,000,000 SP1+ 1,002,448
California State Revenue Anticipation Warrants, Series C, 5.75%, 4/25/96 ........ 4,500,000 SP-1 4,504,454
Fontana, CA, Unified School District, Tax and Revenue Anticipation Note,
4.5%, 7/5/96 .................................................................. 2,380,000 SP1+ 2,382,067
Los Angeles County, CA, Tax and Revenue Anticipation Note, 4.5%, 7/1/96 ......... 1,500,000 MIG1 1,502,513
Los Angeles County, CA, Local Educational Agencies Pool, Tax and
Revenue Anticipation Note, 4.75%, 7/5/96 ...................................... 2,000,000 SP1+ 2,003,238
South Coast, CA, Local Education Agencies, Pooled Tax and Revenue
Anticipation Note Program, 5%, 8/14/96 ........................................ 1,000,000 SP1+ 1,001,762
COLORADO
Clear Creek County, CO, Colorado Counties Financing Program,
Series 1988, Weekly Demand Note, 3.5%, 6/1/98 * ............................... 305,000 A-1+ 305,000
Colorado Health Facilities Authority, Composite Issue for Kaiser
Permanente, 1995 Series A, Weekly Demand Note, 3.4%, 8/1/15 * ................. 3,000,000 A-1+ 3,000,000
FLORIDA
Dade County, FL, Industrial Development Authority Revenue, Dolphins
Stadium Project:
Series C, Weekly Demand Note, 3.4%, 1/1/16* ................................. 1,000,000 A-1+ 1,000,000
Series D, Weekly Demand Note, 3.4%, 1/1/16* ................................. 1,300,000 A-1+ 1,300,000
Dade County, FL, Water and Sewer System Revenue, Series 1994,
Weekly Demand Note, 3.3%, 10/5/22* (c) ........................................ 2,300,000 A-1+ 2,300,000
Orlando, FL, Waste Water System Revenues, Series 1990 A, Tax Exempt
Commercial Paper, 3.4%, 9/5/96 ................................................ 2,000,000 A-1+ 2,000,000
Putnam County, FL, Pollution Control Revenue, Seminole Electric Cooperative
Finance Corp., 1984 Series H-1, Weekly Demand Note, 3.4%, 3/15/14* ............ 4,250,000 A-1+ 4,250,000
GEORGIA
Gordon County, GA, Development Authority Revenue, Sara Lee Corp.
Project, Series 1989, Weekly Demand Note, 3.45%, 3/1/02* ...................... 1,400,000 A-1+ 1,400,000
ILLINOIS
State of Illinois, Revenue Anticipation Certificates, Series 1995, 4.5%, 6/10/96 1,000,000 MIG1 1,002,253
INDIANA
City of Sullivan, IN, National Rural Utilities Cooperative Finance Corp.,
Hoosier Energy Rural Electric, Commercial Paper, 3.45%, 9/10/96 ............... 3,000,000 A-1+ 3,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements
27
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jasper County, IN, Pollution Control Revenue, Northern Indiana Public
Service, Variable Rate Demand Bond, 3.85%, 6/1/13* .................... 600,000 A-1+ 600,000
IOWA
Iowa School Corporation Warrant Certificates, Cash Anticipation Program:
Series B, 4.25%, 1/30/97 (c) .......................................... 1,750,000 SP1+ 1,761,970
Series A, Daily Demand Note, Capital Guaranty Insured, 4.75%, 6/28/96* 1,500,000 SP1+ 1,503,123
West Des Moines, IA, Commercial Development Revenue, Greyhound
Lines, Weekly Demand Note, 3.35%, 12/1/14* ............................ 6,400,000 A-1+ 6,400,000
KENTUCKY
Kentucky Development Finance Authority, Healthcare System, Appalachian
Regional Health Care, Series 1991, Weekly Demand Note, 3.45%, 9/1/06* . 7,300,000 MIG1 7,300,000
MAINE
State of Maine, Tax Anticipation Notes, Series 1994, 4.5%, 6/28/96 ............ 1,000,000 SP1+ 1,001,740
MARYLAND
Anne Arundel County, MD, Baltimore Gas and Electric, Tax Exempt
Commercial Paper, 3.3%, 4/24/96 ....................................... 1,000,000 A-1 1,000,000
Montgomery County, MD, General Obligation, Tax Exempt Commercial Paper,
3.2%, 4/11/96 ......................................................... 2,000,000 A-1+ 2,000,000
MICHIGAN
Michigan State General Obligation, Unlimited Tax Notes, 4%, 9/30/96 ........... 1,000,000 MIG1 1,004,897
MINNESOTA
Cottage Grove, MN, Minnesota Mining and Manufacturing, Series 1982,
Weekly Demand Note, 3.57%, 8/1/12 * ................................... 300,000 A-1+ 300,000
MISSISSIPPI
Perry County, MS, Pollution Control Revenue, Leaf River Forest Products,
Daily Demand Note, 3.75%, 3/1/02* ..................................... 800,000 P1 800,000
MISSOURI
Missouri State Environmental Improvement and Energy Resource Authority, Union
Electric Company, 1984 Series A, Optional Put, 4%, 6/1/14 ............. 2,000,000 A-1+ 2,000,000
NEVADA
Clark County, NV, Airport System, McCarran International Airport, Series A,
Weekly Demand Note, 3.3%, 7/1/12* (c) ................................. 3,000,000 A-1 3,000,000
NEW HAMPSHIRE
New Hampshire Business Finance Authority, Connecticut Light & Power,
Weekly Demand Note, 3.35%, 12/1/22* ................................... 1,700,000 A-1+ 1,700,000
NEW YORK
New York City, NY, Revenue Anticipation Note, 4.5%, 4/11/96 ................... 2,000,000 MIG1 2,000,342
PENNSYLVANIA
Allegheny County, PA, General Obligation, Tender Option Bond,
Weekly Coupon Reset, Series C38, 3.4%, 9/1/04* (c) .................... 1,000,000 MIG1 1,000,000
Emmaus, PA, General Authority, Local Government Revenue Bond Pool Program:
1989 Series E, Weekly Demand Note, 3.45%, 3/1/24* ..................... 1,800,000 A-1 1,800,000
1989 Series E-6, Weekly Demand Note, 3.4%, 3/1/24* .................... 2,000,000 A-1+ 2,000,000
1989 Series E-8, Weekly Demand Note, 3.4%, 3/1/24* .................... 1,200,000 A-1+ 1,200,000
1989 Series G, Weekly Demand Note, 3.4%, 3/1/24* ...................... 200,000 A-1+ 200,000
Pennsylvania Higher Education Facilities Authority, Temple University,
Series 1995, 5%, 5/22/96 .............................................. 2,000,000 SP1+ 2,001,870
TENNESSEE
Franklin, TN, Industrial Development Revenue, Franklin Oaks Apartments,
Weekly Demand Note, 3.3%, 12/1/07* .................................... 5,000,000 MIG1 5,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements
28
<PAGE>
<TABLE>
<CAPTION>
Principal Credit
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TEXAS
Lone Star, TX, Airport Improvement Authority, 1995 Series A-3,
Daily Demand Note, 3.8%, 12/1/14* ................................ 200,000 MIG1 200,000
Port Development Corp., TX, Marine Terminal Refunding Revenue, Stolt
Terminals, Series 1989, Weekly Demand Note, 3.3%, 1/15/14* ....... 2,500,000 A-1+ 2,500,000
San Antonio, TX, Electric and Gas, City Public Services, Series 1995 A,
Tax Exempt Commercial Paper, 3.05%, 10/25/96 ..................... 1,500,000 A-1+ 1,500,000
San Antonio, TX, Water System Revenue, Series 1995, Tax Exempt
Commercial Paper, 3.4%, 8/22/96 .................................. 1,000,000 A-1+ 1,000,000
State of Texas, Tax and Revenue Anticipation Notes, 4.75%, 8/30/96 ....... 2,800,000 SP1+ 2,808,302
State of Texas, General Obligation, Veterans Housing Assistance
Refunding Bonds, Series 1995, Weekly Demand Note, 3.3%, 12/1/16* . 1,500,000 A-1+ 1,500,000
WASHINGTON
Seattle, WA, Municipal Light & Power, Series 1993, Weekly Demand Note,
3.3%, 11/1/18* ................................................... 1,900,000 A-1+ 1,900,000
Washington General Obligation, Various Purpose, Series B-2, Topstar
Custodial Receipts, Weekly Demand Note, 3.4%, 8/1/02* ............ 2,100,000 A-1+ 2,100,000
Washington Healthcare Facilities Authority, Yakima Valley Memorial
Hospital Association, Series 1996, 3.6%, 12/1/96 ................. 800,000 AAA 800,000
Washington Public Power Supply Authority, Projects #1 & #3,
Series 1993, Weekly Demand Note, 3.200%, 7/1/18* ................. 1,995,000 A-1+ 1,995,000
Washington Public Power Supply System, Nuclear Project #1, Series 1993B,
4.1%, 7/1/96 ..................................................... 1,225,000 AA 1,226,900
WISCONSIN
Milwaukee, WI, Promissory Notes, General Obligation, Series 1996 B-6,
3.8%, 2/15/97 .................................................... 1,495,000 AA 1,503,281
WYOMING
Sweetwater County, WY, Pollution Control Revenue Refunding, Pacificorp
Project, 1990 Series A, Weekly Demand Note, 3.4%, 7/1/15* ........ 2,000,000 MIG1 2,000,000
-----------
TOTAL MUNICIPAL INVESTMENTS (COST $114,361,160) 114,361,160
-----------
% OF NET
SUMMARY ASSETS
TOTAL INVESTMENT PORTFOLIO (COST $114,361,160) (a).................. 99.1 114,361,160
OTHER ASSETS AND LIABILITIES, NET................................... 0.9 1,004,087
----- -----------
NET ASSETS.......................................................... 100.0 115,365,247
===== ===========
</TABLE>
* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of the
U.S. Treasury bill rate. Variable rate demand notes are securities whose
interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. Since these securities
are payable on demand, they are valued at 100% of their principal.
(a) At March 31, 1996, the net unrealized depreciation on investments based on
cost for federal income tax purposes of $114,570,635 was as follows:
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.................. $(209,475)
=========
(b) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are either Standard & Poor's Ratings Group, Moody's Investors Service,
Inc. or Fitch Investors Service, Inc. Unrated securities (NR) and securities
rated by Scudder (SS&C) have been determined to be of comparable quality to
rated eligible securities.
(c) Bond is insured by one of these companies: AMBAC, FGIC, FSA, or MBIA.
The accompanying notes are an integral part of the financial statements
29
<PAGE>
AARP HIGH QUALITY TAX FREE MONEY FUND
At September 30, 1995, and to the extent provided in regulations, the Fund had
capital loss carryforwards of approximately $1,221,584 of which $618,345 expires
September 30, 1996, $170,432 expires September 30, 1997, $19,559 expires
September 30, 1999, $323,801 expires September 30, 2000, $401 expires September
30, 2001, $89,046 expires September 30, 2003. In addition, from November 1, 1994
through September 30, 1995, the Fund incurred approximately $5,140 of net
realized capital losses which the Fund intends to elect to defer and treat as
arising in the fiscal year ended September 30, 1996.
Percentage breakdown of investments is based on total net assets of the Fund.
The total net assets of the Fund are comprised of the Fund's investment
portfolio, other assets and liabilities. The percentage of the investment
portfolio may be greater or less than 100% due to the inclusion of the Fund's
assets and liabilities in the calculation. The Fund's other assets and
liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
30
<PAGE>
AARP FNMA AND U.S. TREASURY FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS 0.7%
34,918,000 Repurchase Agreement with State Street Bank and Trust
Company dated 3/29/96 at 5.15% to be repurchased at
$34,932,986 on 4/1/96, collateralized by a
$36,070,000 U.S. Treasury Bill, 6/27/96,
(COST $34,918,000) .................................. 34,918,000
-------------
U.S. TREASURY OBLIGATIONS 29.1%
150,000,000 U.S. Treasury Note, 6.875%, 10/31/96 ................. 151,266,000
150,000,000 U.S. Treasury Note, 4.75%, 2/15/97 ................... 149,086,500
300,000,000 U.S. Treasury Note, 6.625%, 3/31/97 .................. 303,186,000
200,000,000 U.S. Treasury Note, 5.625%, 8/31/97 .................. 199,844,000
175,000,000 U.S. Treasury Note, 6.125%, 5/15/98 .................. 176,011,500
268,000,000 U.S. Treasury Note, 5%, 1/31/99 ...................... 261,592,120
250,000,000 U.S. Treasury Note, 5.5%, 2/28/99 .................... 247,147,500
-------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $1,494,088,360) 1,488,133,620
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION* 69.6%
833,316,460 6.50% with various maturities to 10/15/25 ............ 789,350,265
1,050,515,001 7.00% with various maturities to 11/15/25 ............ 1,023,565,759
60,437,329 7.50% with various maturities to 9/15/22 ............. 60,635,951
202,582,589 8.00% with various maturities to 7/15/24 ............. 207,461,859
223,648,091 8.50% with various maturities to 9/15/22 ............. 234,543,672
504,383,170 9.00% with various maturities to 11/15/25 ............ 538,712,558
344,392,434 9.50% with various maturities to 9/15/24 ............. 373,695,815
259,222,839 10.00% with various maturities to 3/15/25 ............ 286,565,357
208,493 10.25% with various maturities to 12/15/98 ........... 217,222
22,645,727 10.50% with various maturities to 1/20/21 ............ 24,870,958
5,060,232 11.50% with various maturities to 2/15/16 ............ 5,727,254
9,268,659 12.00% with various maturities to 9/15/15 ............ 10,640,209
6,972,43 12.50% with various maturities to 8/15/15 ............ 8,107,983
1,781,662 13.00% with various maturities to 11/15/15 ........... 2,091,809
1,002,780 13.50% with various maturities to 12/15/14 ........... 1,193,148
336,216 14.00% with various maturities to 11/15/14 ........... 406,236
96,312 14.50% with various maturities to 10/15/14 ........... 116,867
255,549 15.00% with various maturities to 10/15/12 ........... 309,007
325,676 16.00% with various maturities to 2/15/12 ............ 383,991
-------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(COST $3,549,159,375) .............................. 3,568,595,920
-------------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $5,078,165,735)(a) 99.4 5,091,647,540
OTHER ASSETS AND LIABILITIES, NET .................. 0.6 29,432,387
----- -------------
NET ASSETS ......................................... 100.0 5,121,079,927
===== =============
</TABLE>
The accompanying notes are an integral part of the financial statements
31
<PAGE>
AARP FNMA AND U.S. TREASURY FUND
* Effective maturities will be shorter due to amortization and prepayments.
(a) At March 31, 1996, the net unrealized appreciation on investments based on
cost for federal income tax purposes of $5,078,165,735 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ......................................................... $ 57,942,542
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value ............................................................ (44,460,737)
-------------
Net unrealized appreciation ...................................... $ 13,481,805
=============
</TABLE>
Purchases and sales of investment securities, all of which were U.S. Government
obligations and U.S. Government Agencies (excluding short-term investments), for
six months ended March 31, 1996, aggregated $1,829,665,187 and $1,445,069,328,
respectively.
At September 30, 1995, and to the extent provided in regulations, the Fund had
capital loss carryforwards of approximately $348,540,975 all of which expires
September 30, 2003. In addition, from November 1, 1994 through September 30,
1995, the Fund incurred approximately $10,756,284 of net realized capital losses
which the Fund intends to elect to defer and treat as arising in the fiscal year
ended September 30, 1996.
Percentage breakdown of investments is based on total net assets of the Fund.
The total net assets of the Fund are comprised of the Fund's investment
portfolio, other assets and liabilities. The percentage of the investment
portfolio may be greater or less than 100% due to the inclusion of the Fund's
assets and liabilities in the calculation. The Fund's other assets and
liabilities are disclosed in the Statement of Assets and Liabilities.
The accompanying notes are an integral part of the financial statements
32
<PAGE>
AARP HIGH QUALITY BOND FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------
<S> <C>
COMMERCIAL PAPER 17.0%
26,211,795 American Express Credit Corp., 5.4%, 4/1/96 ................. 26,211,795
26,211,795 Associates Corp. of North America, 5.4%, 4/1/96 ............. 26,211,795
11,496,413 Ford Motor Credit Co., 5.38%, 4/1/96 ........................ 11,496,413
26,210,795 Household Finance Corp., 5.4%, 4/1/96 ....................... 26,210,795
-----------
TOTAL COMMERCIAL PAPER (COST $90,130,797) ................... 90,130,798
-----------
U.S. TREASURY OBLIGATIONS 28.3%
30,000,000 U.S. Treasury Note, 6.75%, 5/31/99 .......................... 30,646,800
25,000,000 U.S. Treasury Note, 6.875%, 7/31/99 ......................... 25,652,250
25,000,000 U.S. Treasury Note, 6.875%, 8/31/99 ......................... 25,656,250
22,500,000 U.S. Treasury Note, 6.375%, 1/15/00 ......................... 22,770,675
15,000,000 U.S. Treasury Note, 6.25%, 5/31/00 .......................... 15,093,750
30,000,000 U.S. Treasury Note, 6.125%, 7/31/00 ......................... 30,018,600
-----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $152,054,689) ......... 149,838,325
-----------
U.S. GOVERNMENT AGENCY PASS-THRUS* 31.8%
24,480,503 Federal Home Loan Mortgage Corp., 6.5%, 1/1/26 .............. 23,271,656
7,493,821 Federal National Mortgage Association, 8%, 5/1/07 ........... 7,725,605
10,484,618 Federal National Mortgage Association, 8.5%, 11/1/09 ........ 10,939,965
19,645,281 Federal National Mortgage Association, 6.5%, 2/1/24 ......... 18,650,640
30,000,000 Federal National Mortgage Association, 7%, 3/1/24 ........... 29,231,100
6,914,076 Federal National Mortgage Association, 6.5%, 10/1/25 ........ 6,564,016
29,460,695 Federal National Mortgage Association, 6.5%, 11/1/25 ........ 27,969,100
40,956,071 Government National Mortgage Association, 9%, 2/15/21 ....... 43,724,702
-----------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS (COST $168,783,903) . 168,076,784
-----------
FOREIGN BONDS - U.S.$ DENOMINATED 5.4%
15,000,000 Abbey National PLC, Global Medium Term Note, 6.69%, 10/17/05 14,625,000
15,000,000 Province of Ontario, Global Medium Term Note, 6%, 2/21/06 ... 14,061,150
-----------
TOTAL FOREIGN BONDS - U.S.$ DENOMINATED (COST $29,928,700) .. 28,686,150
-----------
ASSET BACKED 0.9%
MANUFACTURED HOUSING
4,500,000 Merrill Lynch Mortgage Investors Inc., "B", Series 1991-D,
9.85%, 7/15/11 (COST $4,459,219) ............................ 4,723,560
-----------
CORPORATE BONDS 20.3%
CONSUMER STAPLES 3.2%
15,000,000 Coca Cola Enterprises, Inc., 8.5%, 2/1/22 ................... 16,720,650
-----------
FINANCIAL 4.1%
1,500,000 American Express Credit Corp., 11.625%, 12/12/00 ............ 1,657,500
20,000,000 Fleet Financial Group Inc., 6%, 10/26/98 .................... 19,923,600
-----------
21,581,100
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements
33
<PAGE>
AARP HIGH QUALITY BOND FUND
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------
<S> <C>
MANUFACTURING 2.4%
10,000,000 ARCO Chemical Co., 9.8%, 2/1/20 ........................... 12,470,700
-----------
TECHNOLOGY 2.6%
15,000,000 International Business Machines Corp., 7%, 10/30/45 ....... 13,979,400
-----------
ENERGY 6.3%
15,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 .................... 17,944,950
15,000,000 Norsk Hydro AS, 7.75%, 6/15/23 ............................ 15,368,550
-----------
33,313,500
-----------
UTILITIES 1.7%
10,000,000 Public Service Electric & Gas Co., 1st Refunding Mortgage,
6.25%, 1/1/07 ............................................. 9,314,400
-----------
TOTAL CORPORATE BONDS (COST $107,123,958) ................. 107,379,750
-----------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $552,481,266) (a) .. 103.7 548,835,367
OTHER ASSETS AND LIABILITIES, NET ................... (3.7) (19,717,984)
----- -----------
NET ASSETS .......................................... 100.0 529,117,383
===== ===========
<FN>
* Effective maturities will be shorter due to amortization
and prepayments.
(a) At March 31, 1996, the net unrealized depreciation on
investments based on cost for federal income tax
purposes of $552,481,266 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ........................................................... $ 2,932,523
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value .............................................................. (6,578,422)
------------
Net unrealized depreciation ........................................ $ (3,645,899)
============
The aggregate face value of futures contracts opened and closed during the
six months ended March 31, 1996 was $1,340,675,474 and $1,340,675,474,
respectively.
For the six months ended March 31, 1996, purchases and sales of investment
securities (excluding short-term investments) aggregated $74,533,500 and
$53,358,630, respectively. Purchases and sales of U.S. Government
obligations and U.S. Government Agencies aggregated $415,460,419 and
$443,696,208, respectively.
At September 30, 1995, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $8,691,826 which expires
September 30, 2003. In addition, from November 1, 1994 through September 30,
1995, the Fund incurred approximately $1,533,583 of net realized capital
losses which the Fund intends to elect to defer and treat as arising in the
fiscal year ended September 30, 1996.
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
34
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM MUNICIPAL INVESTMENTS (Under 1 year) - 6.2%
ALABAMA
Phenix City, AL, Industrial Development Bond, Mead Coated Board Project,
Daily Demand Note, 3.85%, 10/1/25* ................................. 2,100,000 A-1 2,100,000
CALIFORNIA
State of California Revenue Anticipation Warrants:
Series C, 5.75%, 4/25/96 ........................................... 15,000,000 SP-1 15,019,800
Series D, 6.5%, 4/25/96 ............................................ 5,000,000 SP-2 5,005,900
Irvine, CA, Improvement Bond, Assessment District 89-10, Daily
Demand Bond, 3.5%, 9/2/15* ......................................... 100,000 MIG-1 100,000
DELAWARE
Wilmington DE, Hospital Revenue, Franciscan Health System, Series B,
Daily Demand Note, 3.8%, 7/1/11* ................................... 400,000 A-1+ 400,000
DISTRICT OF COLUMBIA
District of Columbia, General Obligation, Refunding Bonds:
Series A-2, Daily Demand Note, 3.85%, 10/1/07* ..................... 100,000 MIG-1 100,000
Series A-6, Daily Demand Note, 3.85%, 10/1/07* ..................... 400,000 MIG-1 400,000
FLORIDA
Halifax Hospital Medical Center, FL, Hospital Revenue, Auction Reset
Security, Series A, 3.9%, 10/1/19 (c) .............................. 10,000,000 AAA 10,000,000
ILLINOIS
Illinois Educational Facilities Authority, University Pooled Finance Program,
Weekly Demand Note, 4.35%, 12/1/05* (c) ............................ 9,325,000 MIG-1 9,325,000
Illinois Health Facilities Authority Rush Presbyterian, Series 1989 A, Tax
Exempt Commercial Paper, 3.1%, 4/8/96 .............................. 1,100,000 A-1+ 1,100,000
KANSAS
Burlington, KS, Environmental Improvement Revenue, Kansas City
Power & Light, Series B, Municipal Auction Security, 3.47%, 12/1/23 5,000,000 A 5,000,000
LOUISIANA
Louisiana Public Facilities Authority, Industrial Development Authority,
Daily Demand Note, 3.85%, 12/1/15* ................................. 400,000 P-1 400,000
Louisiana Recovery District, Sales Tax Revenue Bonds, Series 1988,
Daily Demand Note, 3.8%, 7/1/97* (c) ............................... 2,200,000 MIG-1 2,200,000
MASSACHUSETTS
Commonwealth of Massachusetts, General Obligation, Dedicated Income Tax:
Series B, Daily Demand Note, 3.5%, 12/1/97* ........................ 1,300,000 MIG-1 1,300,000
Series E, Daily Demand Note, 3.5%, 12/1/97* ........................ 300,000 MIG-1 300,000
MICHIGAN
Michigan State Strategic Funds, Pollution Control Revenue:
Consumers Power Company, Series 1988 A, Daily Demand Note,
3.7%, 4/15/18* ................................................... 300,000 P-1 300,000
Detroit Edison, Daily Demand Note, 3.65%, 9/1/30* .................. 6,100,000 A-1+ 6,100,000
MINNESOTA
Regents of the University of Minnesota, Series 1996 A, Tax Exempt
Commercial Paper, 3.15%, 4/4/96 .................................... 1,000,000 A-1+ 999,980
MISSISSIPPI
Jackson County, MI, Chevron USA Project, Pollution Control Revenue Bonds,
Daily Demand Notes, 3.7%, 12/1/16* ................................. 600,000 MIG-1 600,000
NEW YORK
New York City, NY, Municipal Water Finance Authority:
Series C, Daily Demand Note, 3.8%, 6/15/23* (c) .................... 10,200,000 AAA 10,200,000
Series 4, Tax Exempt Commercial Paper, 3.35%, 5/3/96 ............... 3,400,000 AA-2 3,400,000
</TABLE>
The accompanying notes are an integral part of the financial statements
35
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1994 G, Variable Rate Demand Note, 3.7%, 6/15/24* (c) ......... 3,500,000 MIG-1 3,500,000
New York City, NY, General Obligation, Series A-4, Daily Demand Note,
3.85%, 8/1/22* ....................................................... 800,000 P-1 800,000
New York State Energy Research and Development, Brooklyn Union Gas,
Select Auction Variable Rate Securities, Series 1993, 3.45%, 4/1/20 .. 10,000,000 A 10,000,000
TENNESSEE
Clarksville, TN, Public Building Authority, Pooled Financing Revenue,
Series 1990, Weekly Demand Note, 3.05%, 12/1/00* (c) ................. 1,100,000 AAA 1,100,000
Metropolitan Nashville Airport Authority, TN, Special Facilities Authority,
Daily Demand Note, 3.8%, 10/1/12* .................................... 500,000 A-1+ 500,000
TEXAS
Brazos, TX, Harbor Industrial Development Corporation, Dow Chemical Co.,
Tax Exempt Commercial Paper, 3.15%, 5/8/96 ........................... 3,500,000 P-1 3,500,000
Grapevine, TX, Industrial Development Authority Corp.:
Series A1, Daily Demand Notes, 3.8%, 12/1/24* ........................ 100,000 P-1 100,000
Series B1, Daily Demand Notes, 3.8%, 12/1/24* ........................ 400,000 P-1 400,000
Lone Star, TX, Airport Improvement Authority, Series 1984 B1, Daily
Demand Bond, 3.8%, 12/1/14* .......................................... 600,000 MIG-1 600,000
Texas Tax and Revenue Anticipation Notes, 4.75%, 8/30/96 ..................... 8,000,000 SP-1+ 8,042,880
VIRGINIA
Henrico County, VA, Industrial Development Authority, Health Facility,
Hermitage Project, Daily Demand Note, 3.85%, 5/1/24* ................. 200,000 MIG-1 200,000
Peninsula Port Authority of Virginia, Shell Oil, Daily Demand Note,
3.75%, 12/1/05* ...................................................... 400,000 AAA 400,000
WASHINGTON
Washington Health Care Facilities Authority, Fred Hutchinson Cancer
Research Center, Series A, Daily Demand Note, 3.85%, 1/1/18* ......... 575,000 MIG-1 575,000
WYOMING
Lincoln County, WY, Pollution Control Revenue, Exxon Project:
Series 1984 A, Daily Demand Note, 3.8%, 11/1/14* ..................... 500,000 A-1+ 500,000
Series 1984 B, Daily Demand Note, 3.8%, 11/1/14* ..................... 1,000,000 A-1+ 1,000,000
Daily Demand Note, 3.8%, 8/1/15* ..................................... 700,000 A-1+ 700,000
Sweetwater County, WY, Pollution Control Revenue, PACIFICORP
Project, Series 1984, Daily Demand Note, 3.7%, 12/1/14* .............. 700,000 A-1+ 700,000
Uinta County, WY, Pollution Control Revenue, Chevron U.S.A. Project,
Daily Demand Note, Series 1993, 3.7%, 8/15/20* ....................... 3,100,000 P-1 3,100,000
-----------
Total Short-Term Municipal Investments (COST $110,031,433) ................... 110,068,560
-----------
LONG-TERM MUNICIPAL INVESTMENTS (Over 1 year) - 93.4%
ALASKA
Alaska State Housing Finance Corp., Veterans Mortgage Project,
GNMA Collateralized, Series F, 8.1%, 9/1/20 .......................... 6,050,000 AAA 6,350,080
Anchorage, AK, Electric Utility Revenue, Senior Lien, 6.5%, 12/1/07 (c) ...... 2,620,000 AAA 2,927,169
North Slope Borough, AK, General Obligation:
Capital Appreciation, Series A, Zero Coupon, 6/30/06 (c) ............. 4,000,000 AAA 2,323,280
Capital Appreciation, Series B, Zero Coupon, 6/30/04 (c) ............. 15,500,000 AAA 10,090,035
Capital Appreciation, Series B, Zero Coupon, 6/30/05 (c) ............. 25,600,000 AAA 15,678,208
Series B, Zero Coupon, 1/1/03 (c) .................................... 16,000,000 AAA 11,483,840
ARIZONA
Arizona Municipal Finance Program, Certificate of Participation, Series 25,
7.875%, 8/1/14 (c) ................................................... 3,500,000 AAA 4,485,565
Maricopa County, AZ:
School District #28, Kyrene Elementary, Series B, Zero Coupon, 1/1/04
(c) ................................................................ 6,000,000 AAA 4,084,680
</TABLE>
The accompanying notes are an integral part of the financial statements
36
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
School District #6, Washington Elementary, Series B, 4.1%, 7/1/13 (c) ... 2,950,000 AAA 2,440,801
School District #41, Gilbert School, Capital Appreciation Refunding,
Zero Coupon, 1/1/05 (c) ......................................... 5,280,000 AAA 3,391,555
Unified School District #68, Alhambra Elementary, Zero Coupon:
7/1/03 (c) ...................................................... 2,860,000 AAA 1,995,880
7/1/04 (c) ...................................................... 2,860,000 AAA 1,884,111
7/1/05 (c) ...................................................... 2,850,000 AAA 1,768,938
Scottsdale, AZ, Industrial Development Authority, Scottsdale Memorial Hospital,
8.5%, 9/1/17 (c) ........................................................ 1,050,000 AAA 1,127,039
CALIFORNIA
Alameda County, CA, Certificate of Participation, Santa Rita Jail Project,
5.375%, 6/1/09 (c) ...................................................... 10,415,000 AAA 10,351,052
Banning, CA, Wastewater, Certificate of Participation:
8%, 1/1/19 (c) .......................................................... 960,000 AAA 1,239,418
8%, 1/1/19 (c) .......................................................... 1,080,000 AAA 1,394,345
California Housing Finance Agency Revenue:
5.3%, 8/1/14 (c) ........................................................ 4,000,000 AAA 3,930,200
5.7%, 8/1/16 (c) ........................................................ 7,210,000 AAA 7,048,208
California State Department of Water Resources, Central Valley Project,
Series M, 4.9%, 12/1/09 (c) ............................................. 4,485,000 AAA 4,227,561
California State Public Works Board, Lease Revenue:
Department of Corrections:
Del Norte/Imperial, Series 1993 C, 5%, 12/1/07 (c) .............. 6,000,000 AAA 5,900,700
Series A, 5.25%, 12/1/07 (c) .................................... 9,000,000 AAA 8,991,540
Series A, 5.25%, 12/1/08 (c) .................................... 3,000,000 AAA 2,983,320
Secretary of State, Series A, 6.3%, 12/1/06 (c) ......................... 8,095,000 AAA 8,914,214
California Statewide Communities Development Corporation,
Certificate of Participation, Children's Hospital, 5%, 6/1/06 (c) ....... 2,035,000 AAA 2,010,926
Escondido, CA, Joint Powers Financing Authority, Lease Revenue, Capital
Appreciation, Center for the Arts Projects, Zero Coupon, 9/1/05 (c) ..... 3,255,000 AAA 1,981,091
Irvine Ranch, CA, Water District, Joint Powers Agency, 7.875%, 2/15/23 .......... 3,000,000 A 3,159,660
Los Angeles County, CA, Capital Asset Leasing, 6%, 12/1/06 (c) .................. 9,000,000 AAA 9,690,300
Los Angeles County, CA, Convention & Exhibition Center Authority:
Certificate of Participation, Zero Coupon, 8/15/02 (c) .................. 5,000,000 AAA 3,640,000
Certificate of Participation, Zero Coupon, 8/15/03 (c) .................. 6,270,000 AAA 4,311,754
Los Angeles County, CA, Public Works Finance Authority, Lease
Revenue, Multiple Projects IV, 4.75%, 12/1/10 (c) ....................... 11,140,000 AAA 10,158,566
Madera County, CA, Certificates of Participation, Valley Children's
Hospital Project, Series 1995, 6.5%, 3/15/10 (c) ........................ 2,840,000 AAA 3,102,558
Oakland, CA, Redevelopment Agency, Tax Allocation, 6%, 2/1/07 (c) ............... 2,000,000 AAA 2,137,980
Palomar Pomerado, CA, Health Systems, Series B, Zero Coupon, 11/1/02 (c) ........ 3,080,000 AAA 2,233,092
Riverside, CA, Transportation Commission, Sales Tax Revenue:
Series A, 5.7%, 6/1/06 (c) .............................................. 5,400,000 AAA 5,649,858
Series A, 5.75%, 6/1/07 (c) ............................................. 3,000,000 AAA 3,140,850
San Diego County, CA, Regional Transportation, Community Sales Tax Revenue,
Series A, 5.25%, 4/1/07 (c) ............................................. 2,500,000 AAA 2,497,925
San Diego Water Authority, CA, Certificate of Participation:
5.632%, 4/25/07 (c) ..................................................... 6,300,000 AAA 6,472,053
5.681%, 4/22/09 (c) ..................................................... 4,500,000 AAA 4,574,565
San Francisco, CA, Bay Area Rapid Transit District, Sales Tax Revenue Refunding,
6.75%, 7/1/10 (c) ....................................................... 2,000,000 AAA 2,274,420
San Joaquin, CA, Certificate of Participation, County Public Facilities Project,
5.5%, 11/15/13 (c) ...................................................... 2,000,000 AAA 1,962,260
State of California General, General Obligation, 6.4%, 2/1/06 (c) ............... 4,500,000 AAA 4,962,465
</TABLE>
The accompanying notes are an integral part of the financial statements
37
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sweetwater, CA, Water Revenue, 5.25%, 4/1/10 (c) ............................... 13,240,000 AAA 12,944,880
Three Valleys Municipal Water District, Certificates of Participation,
5%, 11/1/14 (c) ........................................................ 3,000,000 AAA 2,725,830
Whittier, CA, Presbyterian Intercommunity Hospital, Health Facilities Revenue,
6.25%, 6/1/08 (c) ...................................................... 1,780,000 AAA 1,940,129
COLORADO
Castle Rock Ranch, CO, Public Facilities Revenue, Series 1996:
6.3%, 12/1/07 .......................................................... 3,115,000 AA 3,258,913
6.4%, 12/1/08 .......................................................... 3,310,000 AA 3,470,998
6.375%, 12/1/11 ........................................................ 2,000,000 AA 2,040,600
DISTRICT OF COLUMBIA
District of Columbia, General Obligation:
Series A1, 6.5%, 6/1/10 (c) ............................................ 2,270,000 AAA 2,526,828
Refunding, 1993 Series B, 5.875%, 6/1/05 (c) ........................... 4,750,000 AAA 4,931,973
Series A, Prerefunded 6/1/99 at 102, 7.5%, 6/1/09 (c)*** ............... 5,000,000 AAA 5,556,700
Series B, Zero Coupon, 6/1/00 (c) ...................................... 3,500,000 AAA 2,863,385
Series B, 6.125%, 6/1/03 (c) ........................................... 4,000,000 AAA 4,233,520
Series B, 5.4%, 6/1/06 (c) ............................................. 18,905,000 AAA 18,801,212
Series B, 5.4%, 6/1/06 (c) ............................................. 10,000,000 AAA 9,945,100
Series B, 5.5%, 6/1/07 (c) ............................................. 25,000,000 AAA 24,936,000
Series B, 5.5%, 6/1/08 (c) ............................................. 21,300,000 AAA 21,111,921
Series B, 5.5%, 6/1/09 (c) ............................................. 15,150,000 AAA 14,953,353
Series B, 5.5%, 6/1/09 (c) ............................................. 2,840,000 AAA 2,803,137
Series B, 5.5%, 6/1/10 (c) ............................................. 15,590,000 AAA 15,258,713
Series B, 5.5%, 6/1/12 (c) ............................................. 1,050,000 AAA 1,011,812
District of Columbia, Georgetown University, 7.1%, 4/1/12 ...................... 3,000,000 A 3,209,880
FLORIDA
Florida Department of Environmental Preservation, Series A, 4.75%, 7/1/12 ...... 10,000,000 AAA 8,913,200
Florida Municipal Power Agency, Stanton II Project, 4.5%, 10/1/16 .............. 4,400,000 AAA 3,682,008
Orange County, FL, Health Facilities Authority Refunding Program,
1985 Series A, 7.875%, 12/1/25 (c) ..................................... 16,880,000 AAA 17,786,456
Orlando, FL, Utility Commission, Water & Electric Refunding Revenue,
5.9%, 10/1/08 .......................................................... 4,000,000 AA 4,249,040
Sarasota County, FL, School Board Finance Corp., Lease Revenue:
Refunding Revenue, 5%, 7/1/09 (c) ...................................... 5,595,000 AAA 5,389,719
5%, 7/1/10 (c) ......................................................... 5,750,000 AAA 5,473,425
GEORGIA
Cobb County, GA, Kennestone Hospital Authority, Series A, 5.625%, 4/1/11 (c) .. 5,305,000 AAA 5,337,095
Macon-Bibb County, GA, Hospital Authority, Medical Center of Central Georgia,
Series C, 5.25%, 8/1/11 (c) ............................................ 10,225,000 AAA 9,941,052
Municipal Electric Authority of Georgia:
5th Crossover, Project #1, 6.4%, 1/1/13 (c) ............................ 3,500,000 AAA 3,801,420
Power Revenue, 5.5%, 1/1/12 (c) ........................................ 1,600,000 AAA 1,583,248
Putnam County, GA, 7.25%, 7/1/21 (c) ........................................... 3,000,000 AAA 3,083,760
ILLINOIS
Central Lake County, IL, Joint Action Water Agency, Refunding Revenue:
Zero Coupon, 5/1/02 (c) ................................................ 2,245,000 AAA 1,659,998
5.3%, 5/1/06 (c) ....................................................... 2,120,000 AAA 2,143,002
5.4%, 5/1/07 (c) ....................................................... 2,280,000 AAA 2,293,498
Chicago O'Hare International Airport, IL, Revenue Refunding,
Series C, 5%, 1/1/11 (c) ............................................... 6,500,000 AAA 6,117,540
Chicago, IL, Board of Education, 6.125%, 1/1/06 (c) ............................ 4,000,000 AAA 4,286,240
Chicago, IL, Wastewater Transmission Revenue:
5.5%, 1/1/09 (c) ....................................................... 11,990,000 AAA 12,010,743
</TABLE>
The accompanying notes are an integral part of the financial statements
38
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.5%, 1/1/10 (c) ...................................................... 7,220,000 AAA 7,178,052
Chicago, IL, School Finance Authority ,Series A, 5%, 6/1/09 (c) ............... 5,425,000 AAA 5,167,855
Chicago, IL, General Obligation:
6.25%, 1/1/11 (c) ..................................................... 3,000,000 AAA 3,234,540
Emergency Telephone System, 5.55%, 1/1/08 (c) ......................... 5,820,000 AAA 5,925,167
Series A, 5.375%, 1/1/13 (c) .......................................... 15,410,000 AAA 14,856,473
Series B, 5%, 1/1/08 (c) .............................................. 3,485,000 AAA 3,391,149
Series B, 5%, 1/1/10 (c) .............................................. 5,200,000 AAA 4,946,136
Series B, 5%, 1/1/11 .................................................. 1,620,000 AAA 1,524,679
Series B, 5%, 1/1/12 (c) .............................................. 5,000,000 AAA 4,663,450
Series B, 5.125%, 1/1/15 (c) .......................................... 9,550,000 AAA 8,807,774
Chicago, IL, General Obligation Lease, Board of Education, Series A:
6.25%, 1/1/15 (c) ..................................................... 23,000,000 AAA 24,036,840
6.25%, 1/1/10 (c) ..................................................... 6,800,000 AAA 7,369,160
6%, 1/1/16 (c) ........................................................ 11,025,000 AAA 11,426,200
6%, 1/1/20 (c) ........................................................ 36,625,000 AAA 37,799,198
Chicago, IL, Motor Fuel Tax Revenue, Prerefunded 1/1/01 at 100, 6.5%, 1/1/16
(c)*** ................................................................ 2,000,000 AAA 2,164,020
Chicago, IL, Public Building Commission, Building Revenue, Series A:
5.25%, 12/1/07 (c) .................................................... 3,500,000 AAA 3,499,720
5.25%, 12/1/09 (c) .................................................... 10,420,000 AAA 10,239,838
5.25%, 12/1/11 (c) .................................................... 9,705,000 AAA 9,343,101
Chicago, IL, Public Building Commission, Board of Education, Series A,
Zero Coupon, 1/1/06 (c) ............................................... 2,430,000 AAA 1,462,909
Chicago, IL, School Finance Authority, General Obligation,
Series A, 4.8%, 6/1/01 (c) ............................................ 2,255,000 AAA 2,274,370
Cook County, IL, General Obligation:
Zero Coupon, 11/1/04 (c) .............................................. 3,205,000 AAA 2,072,641
Series C, 6%, 11/15/07 (c) ............................................ 5,000,000 AAA 5,345,400
Decatur, IL, General Obligation, Series 1991:
Zero Coupon, 10/1/03 (c) .............................................. 1,455,000 AAA 995,569
Zero Coupon, 10/1/04 (c) .............................................. 1,415,000 AAA 912,873
Decatur, IL, Public Building Commission, General Obligation,
Certificate of Participation:
6.5%, 1/1/03 (c) .............................................. 1,725,000 AAA 1,881,941
6.5%, 1/1/06 (c) .............................................. 1,500,000 AAA 1,648,785
Illinois Dedicated Tax Revenue, Civic Center Project:
Series A, 6.5%, 12/15/07 .............................................. 3,000,000 AAA 3,352,560
Series A, 6.5%, 12/15/08 (c) .......................................... 5,255,000 AAA 5,889,331
6.25%, 12/15/11 (c) ................................................... 3,000,000 AAA 3,244,230
6.25%, 12/15/20 (c) ................................................... 6,975,000 AAA 7,317,682
Illinois Educational Facilities Authority, Loyola University:
Zero Coupon, 7/1/05 (c) ............................................... 4,000,000 AAA 2,460,440
1991 Series A, Zero Coupon, 7/1/04 (c) ................................ 2,860,000 AAA 1,869,010
Illinois Health Facilities Authority, Brokaw-Mennonite Healthcare:
6%, 8/15/06 (c) ....................................................... 1,380,000 AAA 1,466,443
6%, 8/15/07 (c) ....................................................... 1,460,000 AAA 1,545,103
6%, 8/15/08 (c) ....................................................... 1,550,000 AAA 1,637,358
6%, 8/15/09 (c) ....................................................... 1,640,000 AAA 1,723,181
Illinois Health Facilities Authority:
Children's Memorial Hospital, 6.25%, 8/15/13 (c) ...................... 2,000,000 AAA 2,113,340
Felician Healthcare Inc., Series A, 6.25%, 12/1/15 (c) ................ 17,000,000 AAA 18,006,230
Memorial Medical Center, 6.75%, 10/1/11 (c) ........................... 2,135,000 AAA 2,263,997
Methodist Health Service, Series 1985 G, 8%, 8/1/15 (c) ............... 10,110,000 AAA 11,191,669
Sherman Hospital, 6.75%, 8/1/11 (c) ................................... 2,700,000 AAA 2,886,705
</TABLE>
The accompanying notes are an integral part of the financial statements
39
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SSM Healthcare System, 6.4%, 6/1/08 (c) ................................ 1,350,000 AAA 1,488,470
Joliet, IL, Junior College Assistance Corp., Lease Revenue, North Campus
Extension Center, 6.7%, 9/1/12 (c) ..................................... 2,500,000 AAA 2,824,450
Kendall,Kane and Will Counties, IL, Community Unit School District Number 308,
Oswego:
Zero Coupon, 3/1/02 (c) ........................................ 1,055,000 AAA 786,566
Zero Coupon, 3/1/05 (c) ........................................ 1,540,000 AAA 963,994
Zero Coupon, 3/1/06 (c) ........................................ 1,595,000 AAA 938,243
Metropolitan Pier & Exposition Authority, IL, McCormick Place Expansion Project:
Zero Coupon, 12/15/03 (c) .............................................. 3,200,000 AAA 2,166,944
Zero Coupon, 6/15/04 (c) ............................................... 10,300,000 AAA 6,746,500
Northwest Suburban Municipal Joint Action Water Agency, IL, Supply System
Revenue, 6.45%, 5/1/07 (c) ............................................. 2,575,000 AAA 2,829,822
Rosemont, IL, Tax Increment, Series C:
Zero Coupon, 12/1/05 (c) ............................................... 4,455,000 AAA 2,681,019
Zero Coupon, 12/1/07 (c) ............................................... 2,655,000 AAA 1,398,203
State University Retirement System, IL, Special Revenue, Zero Coupon,
10/1/03 (c) ............................................................ 2,750,000 AAA 1,881,660
University of Illinois, Board of Trustees, Series 1991:
Zero Coupon, 4/1/03 (c) ................................................ 3,890,000 AAA 2,729,846
Zero Coupon, 4/1/05 (c) ................................................ 3,830,000 AAA 2,386,971
Will County, IL, Community Unit School District #201-U, Crete-Monee,
Capital Appreciation:
Zero Coupon, 12/15/00 (c) ...................................... 1,325,000 AAA 1,063,564
Zero Coupon, 12/15/01 (c) ...................................... 1,730,000 AAA 1,310,665
INDIANA
Fort Wayne, IN, Parkview Memorial Hospital, Series A, 6.5%, 11/15/12 (c) ....... 1,400,000 AAA 1,477,364
Indiana Health Facilities Finance Authority, Hospital Revenue:
Ancilla Systems Inc., Series A, 6%, 7/1/18 (c) ......................... 27,635,000 AAA 28,388,054
Community Hospital Project, 6.4%, 5/1/12 (c) ........................... 5,000,000 AAA 5,204,300
Indiana Municipal Power Agency:
Power Supply Revenue, 5.8%, 1/1/08 (c) ................................. 10,000,000 AAA 10,484,200
Power Supply System, Series B, 6%, 1/1/12 (c) .......................... 2,000,000 AAA 2,106,440
Indiana University:
Student Fee Revenue, Series J, 5%, 8/1/18 (c) .......................... 4,200,000 AAA 3,729,012
Revenue Refunding:
Series H, Zero Coupon, 8/1/06 (c) .............................. 8,500,000 AAA 4,889,795
Student Fee Revenue, Series H, Zero Coupon, 8/1/08 (c) ......... 10,000,000 AAA 5,016,400
Madison County, IN, Community Hospital of Anderson, Prerefunded 1/1/98
at 102, 8%, 1/1/14 (c)*** .............................................. 7,055,000 AAA 7,661,025
Merrillville, IN, Multiple School Building Corp., First Mortgage,
Zero Coupon, 1/15/11 (c) ............................................... 4,000,000 AAA 1,687,360
Porter County, IN, Hospital Authority, Porter Memorial Hospital, Series 1993,
5.25%, 6/1/14 (c) ...................................................... 8,750,000 AAA 8,111,163
IOWA
Polk County, IA, Mercy Hospital, 6.75%, 11/1/05 (c) ............................ 5,000,000 AAA 5,469,950
KANSAS
Kansas City, KS, Utility System Revenue:
ETM, Zero Coupon, 9/1/04** ............................................. 3,575,000 AAA 2,350,777
ETM, Zero Coupon, 9/1/05** ............................................. 5,300,000 AAA 3,291,565
Zero Coupon, 9/1/04 .................................................... 2,640,000 AAA 1,717,531
Zero Coupon, 9/1/05 .................................................... 3,950,000 AAA 2,419,573
Zero Coupon, 9/1/06 .................................................... 1,875,000 AAA 1,092,206
Zero Coupon, 9/1/06 .................................................... 1,375,000 AAA 791,491
</TABLE>
The accompanying notes are an integral part of the financial statements
40
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOUISIANA
Louisiana Public Facilities Authority, Prerefunded 2/15/08 at 100, 4.75%,
5/1/16*** ............................................................... 5,765,000 AAA 5,527,078
New Orleans, LA, General Obligation:
Zero Coupon, 7/15/06 .................................................... 2,750,000 AAA 1,472,598
Zero Coupon, 9/1/07 (c) ................................................. 10,000,000 AAA 5,368,900
Orleans, LA, Levee District, Levee Improvement Bonds, Series 1986,
5.95%, 11/1/14 (c) ...................................................... 2,000,000 AAA 2,001,560
MASSACHUSETTS
Massachusetts Bay Transportation Authority, General Transportation System,
Series A, 5.4%, 3/1/07 (c) .............................................. 5,000,000 AAA 5,104,900
Massachusetts, General Obligation:
Series A, 7%, 3/1/99 (c) ................................................ 4,850,000 AAA 5,198,909
Series A, 6%, 7/1/05 (c) ................................................ 4,000,000 AAA 4,290,080
Series D, Prerefunded 10/1/99 at 102, 7%, 10/1/03 (c)*** ................ 7,000,000 AAA 7,724,710
Massachusetts Municipal Wholesale Electric Company, Power Supply System
Revenue, Series A, 5.1%, 7/1/07 (c) ..................................... 1,640,000 AAA 1,620,943
MICHIGAN
Brighton, MI, Area School District, Series I, Zero Coupon, Prerefunded 5/1/05
at 34.134, 5/1/20 (c)*** ................................................ 22,000,000 AAA 4,659,820
Detroit, MI, General Obligation, Distributable State Aid Refunding:
5.2%, 5/1/07 (c) ........................................................ 3,000,000 AAA 2,969,730
5.25%, 5/1/08 (c) ....................................................... 1,500,000 AAA 1,477,515
Kalamazoo, MI, Hospital Finance Authority, Hospital Revenue, Borgess
Medical Center, Series A, Prerefunded 7/1/99 at 100, 6%, 7/1/09 (c)*** .. 8,250,000 AAA 8,671,245
Michigan Hospital Finance Authority, Sisters of Mercy Healthcorp
Obligated Group, Series P:
5.1%, 8/15/07 (c) ............................................... 3,000,000 AAA 2,967,450
5.25%, 8/15/08 (c) .............................................. 8,655,000 AAA 8,569,142
Michigan Housing Development Authority, Rental Revenue, Series B,
5.7%, 4/1/12 (c) ........................................................ 6,275,000 A+ 6,146,112
MISSISSIPPI
Mississippi Hospital Equipment Facilities Authority, North Mississippi
Health Services, 5.5%, 5/15/09 (c) ...................................... 4,350,000 AAA 4,317,593
MISSOURI
Missouri Health & Educational Facilities Authority, SSM Healthcare, 1992 Series
AA:
6.35%, 6/1/08 (c) ....................................................... 8,125,000 AAA 8,919,138
6.4%, 6/1/09 (c) ........................................................ 8,640,000 AAA 9,514,800
NEVADA
Clark County, NV, School District, General Obligation, Series B,
Zero Coupon, 3/1/05 (c) ................................................. 8,070,000 AAA 5,073,528
NEW JERSEY
New Jersey Housing and Finance Agency, Home Mortgage Purchase Revenue,
Zero Coupon, 10/1/16 (c) ................................................ 5,155,000 AAA 608,084
New Jersey Turnpike Authority, 6.5%, 1/1/09 (c) ................................. 5,000,000 AAA 5,600,050
NEW YORK
New York City, NY, General Obligation:
5.8%, 8/1/04 ............................................................ 5,000,000 AAA 5,300,450
5.9%, 2/1/05 ............................................................ 5,500,000 AAA 5,843,255
Prerefunded 11/1/97 at 101.50, 8.125%, 11/1/05 (c)*** ................... 1,400,000 AAA 1,513,120
Series A, Prerefunded 11/1/97 at 101.50, 8%, 11/1/01 (c)*** ............. 760,000 AAA 819,956
Series A, ETM, 8%, 11/1/01 (c)** ........................................ 740,000 AAA 813,016
Series A, 3%, 8/15/02 (c) ............................................... 9,000,000 AAA 8,202,240
Series C, 6.4%, 8/1/04 (c) .............................................. 500,000 AAA 545,180
Series C, 6.4%, 8/1/05 (c) .............................................. 430,000 AAA 466,408
</TABLE>
The accompanying notes are an integral part of the financial statements
41
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series C, Prerefunded 8/1/02 at 101.50, 6.4%, 8/1/05 (c)*** ......... 10,000,000 AAA 11,085,800
Series D, 8%, 8/1/05 ................................................ 170,000 AAA 180,880
Series D, Prerefunded 8/1/97 at 102, 8%, 8/1/05*** .................. 830,000 AAA 893,196
Series D, 6%, 8/1/06 (c) ............................................ 140,000 AAA 144,984
Series D, 6%, 8/1/08 (c) ............................................ 370,000 AAA 379,161
Series E, ETM, 7%, 12/1/07 (c)** .................................... 1,385,000 AAA 1,469,042
Series E, 7%, 12/1/07 (c) ........................................... 115,000 AAA 121,211
New York State Dormitory Authority:
College and University Pooled Capital Program, 7.8%, 12/1/05 (c) .... 10,890,000 AAA 11,812,819
State University of New York, 6%, 7/1/09 (c) ........................ 2,000,000 AAA 2,127,980
New York State Dormitory Authority Revenue, City University:
Series C, 7.5%, 7/1/10 (c) .......................................... 5,750,000 AAA 6,964,975
Series D, 7%, 7/1/09 (c) ............................................ 4,000,000 AAA 4,653,720
New York State Energy Research and Development Authority, Pollution
Control Revenue, Electric and Gas, 5.9%, 12/1/06 (c) ................ 5,300,000 AAA 5,638,034
New York State Urban Development Corporation, Correctional Facilities:
Series A, 5%, 1/1/07 (c) ............................................ 4,315,000 AAA 4,279,272
6.5%, 1/1/11 ........................................................ 4,500,000 AAA 4,955,085
Suffolk County, NY, Industrial Development Agency, Southwest Sewer System,
6%, 2/1/07 (c) ...................................................... 8,000,000 AAA 8,593,200
NORTH CAROLINA
North Carolina Eastern Municipal Power Agency:
5.5%, 1/1/07 (c) .................................................... 2,000,000 AAA 2,020,860
Power System Revenue, Series B, 6%, 1/1/18 (c) ...................... 8,775,000 AAA 9,099,938
North Carolina Municipal Power Agency, Catawba Electric Revenue:
5%, 1/1/08 (c) ...................................................... 2,500,000 AAA 2,488,950
6%, 1/1/11 (c) ...................................................... 8,235,000 AAA 8,697,889
7.5%, 1/1/17 ........................................................ 4,520,000 A 4,794,002
NORTH DAKOTA
Bismarck, ND, Hospital Revenue, St. Alexius Medical Center, Series 1991,
Zero Coupon, 5/1/02 (c) ............................................. 2,850,000 AAA 2,107,347
OHIO
Cleveland, OH, Waterworks Revenue Authority, 5.3%, 1/1/05 .................. 3,000,000 AAA 3,073,620
Cleveland, OH, Refunding Revenue, Series 1993, 5.2%, 9/1/06 ................. 4,000,000 AAA 4,070,720
Hamilton County, OH, Electric System Mortgage Revenue, Series B,
Prerefunded 10/15/98 at 102, 8%, 10/15/22 (c)*** .................... 3,720,000 AAA 4,132,250
Ohio Air Quality Development Authority, Ohio Power Company, Series B,
7.4%, 8/1/09 (c) .................................................... 5,000,000 AAA 5,470,200
OKLAHOMA
Tulsa, OK, Industrial Development Authority:
St. John's Medical Center, Zero Coupon, 12/1/02 (c) ................. 3,930,000 AAA 2,813,919
Hospital Revenue, St. John's Medical Center, Zero Coupon, 12/1/04 (c) 5,430,000 AAA 3,487,852
PENNSYLVANIA
Pennsylvania Industrial Development Authority, Economic Development Revenue:
5.8%, 1/1/08 (c) .................................................... 4,250,000 AAA 4,455,785
5.8%, 7/1/08 (c) .................................................... 4,875,000 AAA 5,118,263
5.8%, 1/1/09 (c) .................................................... 2,500,000 AAA 2,606,575
Philadelphia, PA, Water & Wastewater Refunding Revenue, 5.625%, 6/15/09 ..... 20,000,000 AAA 20,466,800
Philadelphia, PA, Water & Wastewater Revenue:
5.5%, 6/15/07 (c) ................................................... 5,000,000 AAA 5,079,050
5.625%, 6/15/08 (c) ................................................. 2,100,000 AAA 2,165,373
5.625%, 6/15/09 (c) ................................................. 10,855,000 AAA 11,108,356
Philadelphia, PA, Municipal Authority Revenue, Justice Lease, Series B,
Prerefunded 11/15/01 at 102, 6.9%, 11/15/03 (c)*** .................. 2,000,000 AAA 2,260,900
</TABLE>
The accompanying notes are an integral part of the financial statements
42
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Westmoreland County, PA, Industrial Development Revenue,
Westmoreland Health System, 5.375%, 7/1/11 (c) ........................ 7,300,000 AAA 7,150,642
PUERTO RICO
Commonwealth of Puerto Rico, Highway & Transportation Authority Revenue,
5.5%, 7/1/09 .......................................................... 10,940,000 AAA 11,145,453
RHODE ISLAND
Rhode Island Clean Water Protection Agency, Pollution Control Revenue,
Revolving Fund, Series A, 5.4%, 10/1/15 (c) ........................... 2,000,000 AAA 1,916,280
Rhode Island Convention Center Authority, Refunding Revenue:
Series 1993 B, 5%, 5/15/10 (c) ........................................ 5,000,000 AAA 4,779,950
1993 Series B, 5.25%, 5/15/15 (c) ..................................... 22,000,000 AAA 20,517,200
Rhode Island Depositors Economic Protection Corp., Special Obligation:
Series B, 5.8%, 8/1/10 (c) ............................................ 6,200,000 AAA 6,394,742
Series B, 5.8%, 8/1/11 (c) ............................................ 4,525,000 AAA 4,631,021
Series B, 5.8%, 8/1/12 (c) ............................................ 2,500,000 AAA 2,547,475
Series B, 5.8%, 8/1/13 ................................................ 7,340,000 AAA 7,443,788
Rhode Island Public Building Authority, Public Projects, Series A,
Prerefunded 2/1/98 at 102, 8.2%, 2/1/08 (c)*** ........................ 2,200,000 AAA 2,403,390
SOUTH CAROLINA
Piedmont Municipal Power Agency, SC, Electric Revenue:
5.5%, 1/1/08 .......................................................... 1,915,000 AAA 1,948,015
Series A, 6.5%, 1/1/16 (c) ............................................ 3,000,000 AAA 3,293,310
Series C, 5.5%, 1/1/12 (c) ............................................ 5,000,000 AAA 4,937,350
SOUTH DAKOTA
South Dakota Building Authority, Certificate of Participation, Series A,
7.5%, 12/1/16 ......................................................... 15,000,000 A 15,563,100
TENNESSEE
Knox County, TN, Health & Educational Hospital Facilities Board,
Fort Sanders Alliance:
5.75%, 1/1/11 (c) ............................................. 15,405,000 AAA 15,726,656
5.75%, 1/1/12 (c) ............................................. 17,880,000 AAA 18,175,378
6.25%, 1/1/13 (c) ............................................. 4,000,000 AAA 4,307,000
7.25%, 1/1/09 (c) ............................................. 3,150,000 AAA 3,723,584
Knox County, TN, Health, Education and Housing Facilities Board,
5.75%, 1/1/14 (c) ..................................................... 2,000,000 AAA 2,028,780
TEXAS
Austin, TX, Utility System, Zero Coupon, 11/15/12 (c) ......................... 3,300,000 AAA 1,254,924
Dallas, TX, Housing Finance Corp., Single Family Mortgage Revenue,
Zero Coupon, 10/1/16 (c) .............................................. 7,450,000 AAA 878,802
Dallas-Fort Worth, TX, Airport Revenue:
7.75%, 11/1/03 (c) .................................................... 1,000,000 AAA 1,177,370
7.8%, 11/1/05 (c) ..................................................... 2,000,000 AAA 2,341,400
7.8%, 11/1/06 (c) ..................................................... 2,025,000 AAA 2,373,604
7.375%, 11/1/08 (c) ................................................... 4,500,000 AAA 5,134,455
7.375%, 11/1/10 (c) ................................................... 3,500,000 AAA 3,981,075
Harris County, TX, General Obligation:
Capital Appreciation Bond, Zero Coupon, 10/1/06 (c) ................... 9,035,000 AAA 5,177,868
Flood Control District, Zero Coupon, 10/1/00 (c) ...................... 1,000,000 AAA 812,210
Toll Road Authority, Subordinate Lien:
Series A, Zero Coupon, 8/15/04 ................................ 2,050,000 AAA 1,336,703
Series A, Zero Coupon, 8/15/05 ................................ 4,025,000 AAA 2,471,229
Series A, Zero Coupon, 8/15/06 (c) ............................ 4,010,000 AAA 2,313,730
Houston, TX, Water & Sewer System Authority, Series C:
Zero Coupon, 12/1/06 (c) .............................................. 14,575,000 AAA 8,279,329
</TABLE>
The accompanying notes are an integral part of the financial statements
43
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon, 12/1/08 (c) ............................................... 19,000,000 AAA 9,412,980
Zero Coupon, 12/1/09 (c) ............................................... 14,750,000 AAA 6,822,023
Lubbock, TX, Health Facilities Development Corp.:
Methodist Hospital, Series B:
5.5%, 12/1/06 (c) .............................................. 3,945,000 AAA 4,037,431
5.6%, 12/1/07 (c) .............................................. 2,415,000 AAA 2,483,634
5.625%, 12/1/08 (c) ............................................ 4,400,000 AAA 4,540,668
Series B, 5.625%, 12/1/09 .............................................. 4,640,000 AAA 4,750,896
Montgomery County, TX, General Obligation, Library Refunding:
Zero Coupon, 9/1/03 (c) ................................................ 3,475,000 AAA 2,396,430
Zero Coupon, 9/1/04 (c) ................................................ 3,475,000 AAA 2,260,766
Zero Coupon, 9/1/05 (c) ................................................ 3,475,000 AAA 2,128,611
North Central Texas Health Facilities Development Corp., Presbyterian
Hospital, Prerefunded 12/1/97 at 102, 8.75%, 12/1/15 (c)*** ............ 5,000,000 AAA 5,499,950
San Antonio, TX, Electric and Gas, Revenue Refunding, Series A:
Zero Coupon, 2/1/05 (c) ................................................ 2,500,000 AAA 1,578,550
Zero Coupon, 2/1/05 (c) ................................................ 8,000,000 AAA 5,051,360
Zero Coupon, 2/1/06 (c) ................................................ 17,900,000 AAA 10,627,230
San Antonio, TX, Electric and Gas, Zero Coupon, 2/1/08 (c) ..................... 8,115,000 AAA 4,210,387
Tarrant County, TX, Health Facilities Development Corp., Hospital Refunding
Revenue, Fort Worth Osteopathic Hospital:
6%, 5/15/11 (c) ................................................ 4,615,000 AAA 4,854,426
6%, 5/15/21 (c) ................................................ 6,235,000 AAA 6,457,278
Texas General Obligation:
Capital Appreciation Bond, Super Collider, Series C, Zero Coupon,
4/1/06 (c) ............................................................. 7,385,000 AAA 4,345,925
Superconductor Revenue, Series C, Zero Coupon, 4/1/05 (c) .............. 8,390,000 AAA 5,251,888
Texas Municipal Power Agency:
6.1%, 9/1/07 (c) ....................................................... 9,250,000 AAA 10,001,285
5.25%, 9/1/07 (c) ...................................................... 1,500,000 AAA 1,514,055
6.1%, 9/1/09 (c) ....................................................... 4,435,000 AAA 4,794,679
5.25%, 9/1/09 (c) ...................................................... 6,235,000 AAA 6,187,302
Texas Municipal Power Agency Revenue, 5.25%, 9/1/12 ............................ 2,900,000 AAA 2,747,083
Texas State Public Finance Authority, Building Authority:
Zero Coupon, 2/1/06 (c) ................................................ 13,915,000 AAA 8,261,336
Series B, 6.25%, 2/1/08 (c) ............................................ 5,190,000 AAA 5,662,031
Texas Turnpike Authority, North Dallas Thruway Revenue, Zero Coupon,
1/1/08 (c) ............................................................. 2,500,000 AAA 1,310,575
UTAH
Associated Municipal Power System, UT, Hunter Project, Refunding Revenue:
Zero Coupon, 7/1/00 (c) ................................................ 2,755,000 AAA 2,258,935
Zero Coupon, 7/1/02 (c) ................................................ 5,200,000 AAA 3,801,720
Zero Coupon, 7/1/04 (c) ................................................ 5,895,000 AAA 3,836,938
Zero Coupon, 7/1/05 (c) ................................................ 5,900,000 AAA 3,612,806
Zero Coupon, 7/1/06 (c) ................................................ 5,895,000 AAA 3,389,448
Zero Coupon, 7/1/07 (c) ................................................ 3,750,000 AAA 2,009,550
Intermountain Power Agency, UT, Power Supply Revenue:
Series A, Zero Coupon, 7/1/02 (c) ...................................... 1,655,000 AAA 1,213,678
Series A, Zero Coupon, 7/1/03 (c) ...................................... 1,000,000 AAA 692,940
Series A, Zero Coupon, 7/1/04 (c) ...................................... 1,730,000 AAA 1,130,555
Series B, Zero Coupon, 7/1/02 (c) ...................................... 8,230,000 AAA 6,035,388
5%, 7/1/12 (c) ......................................................... 1,000,000 AAA 923,370
Intermountain Power Agency, UT, Special Obligation, 2nd Crossover,
7.5%, 7/1/16 (c) ....................................................... 5,000,000 AA 5,138,750
Provo, UT, Electric System Revenue, ETM, 10.375%, 9/15/15** .................... 1,800,000 AAA 2,508,408
</TABLE>
The accompanying notes are an integral part of the financial statements
44
<PAGE>
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VIRGINIA
Roanoke, VA, Industrial Development Authority, Roanoke Memorial
Hospital, Series B, 6.125%, 7/1/17 (c) .................................. 5,500,000 AAA 5,792,270
Southeastern Public Service Authority, VA, Refunding Revenue,
Series A, 5.25%, 7/1/10 (c) ............................................. 7,380,000 AAA 7,270,259
Virginia Beach, VA, Development Authority, Virginia Beach General
Hospital Project:
5%, 2/15/06 (c) ................................................. 1,750,000 AAA 1,752,608
5%, 2/15/07 (c) ................................................. 1,800,000 AAA 1,787,976
5.1%, 2/15/08 (c) ............................................... 1,345,000 AAA 1,333,460
6%, 2/15/11 (c) ................................................. 1,595,000 AAA 1,688,531
5.125%, 2/15/18 (c) ............................................. 3,000,000 AAA 2,761,050
Winchester County, VA, Industrial Development Authority, Hospital Revenue,
6%, 1/1/15 (c) .......................................................... 5,700,000 AAA 5,427,939
WASHINGTON
Clark County, WA, Public Utility District No. 1, 6%, 1/1/06 (c) ................. 7,500,000 AAA 7,965,675
King County, WA, Public Hospital District #1, Valley Medical Center,
Series 1992, 5.5%, 9/1/17 (c) ........................................... 3,500,000 AAA 3,282,335
North Shore, WA, General Obligation, School District #417, 5.6%, 12/1/10 (c) .... 1,650,000 AAA 1,669,652
Snohomish County, WA, School District #6, 6.5%, 12/1/07 (c) ..................... 3,325,000 AAA 3,699,362
Snohomish County, WA, Public Utilities District #1, 5.5%, 1/1/15 (c) ............ 1,350,000 AAA 1,289,088
Tacoma, WA, Electric System Revenue, 6.514%, 1/2/15 (c) ......................... 6,000,000 AAA 6,282,960
Washington Health Care Facilities Authority, Empire Health Services-Spokane:
5.65%, 11/1/05 (c) ...................................................... 2,155,000 AAA 2,242,234
5.7%, 11/1/06 (c) ....................................................... 3,440,000 AAA 3,581,350
5.75%, 11/1/07 (c) ...................................................... 3,675,000 AAA 3,826,337
5.8%, 11/1/09 (c) ....................................................... 4,595,000 AAA 4,771,908
5.8%, 11/1/10 (c) ....................................................... 2,100,000 AAA 2,177,490
Washington Public Power Supply System, Revenue Refunding:
Nuclear Project #1, Series A, Prerefunded 7/1/99 at 102, 7.5%,
7/1/15 (c)*** ......................................................... 2,405,000 AAA 2,678,136
Nuclear Project #1, Series A, 7%, 7/1/11 (c) ............................ 3,830,000 AAA 4,182,054
Nuclear Project #1, Series A, 7.5%, 7/1/15 (c) .......................... 1,595,000 AAA 1,747,992
Nuclear Project #1, Series B, 7.25%, 7/1/12 (c) ......................... 10,895,000 AAA 11,946,803
Nuclear Project #2, Series A, 7.25%, 7/1/03 (c) ......................... 2,000,000 AAA 2,206,840
Nuclear Project #2, Series A, 5.7%, 7/1/08 (c) .......................... 5,000,000 AAA 5,078,000
Nuclear Project #2, Series C, 7%, 7/1/01 (c) ............................ 10,000,000 AAA 10,995,600
Nuclear Project #2, Series C, Prerefunded 1/1/01 at 120, 7.375%,
7/1/11 (c)*** ......................................................... 1,370,000 AAA 1,555,183
Nuclear Project #3, Series A, Prerefunded 7/1/99 at 102, 7.25%,
7/1/16 (c)*** ......................................................... 3,630,000 AAA 4,014,962
Nuclear Project #3, Series A, Zero Coupon, 7/1/04 (c) ................... 3,625,000 AAA 2,359,440
Nuclear Project #3, Series A, Zero Coupon, 7/1/05 (c) ................... 4,125,000 AAA 2,537,329
Nuclear Project #3, 7.5%, 7/1/08 ........................................ 4,000,000 AAA 4,733,560
Washington State Housing Finance, Series A, 7.1%, 12/1/17 ....................... 10,125,000 AAA 10,512,281
WEST VIRGINIA
West Virginia, School Building Authority Revenue, Series B, 6.75%, 7/1/10 ....... 4,000,000 AAA 4,282,000
WISCONSIN
Kenosha, WI, General Obligation, Series C, Zero Coupon, 6/1/04 (c) .............. 3,475,000 AAA 2,289,782
Wisconsin Health & Educational Facilities Authority:
Aurora Medical, 5.75%, 11/15/06 ......................................... 2,000,000 AAA 2,080,520
Aurora Medical, 5.75%, 11/15/07 ......................................... 1,500,000 AAA 1,551,345
Aurora Medical, 6%, 11/15/08 (c) ........................................ 4,085,000 AAA 4,249,993
Aurora Medical, 6%, 11/15/09 (c) ........................................ 4,330,000 AAA 4,552,389
Felician Healthcare Inc., Series B, 6.25%, 1/1/22 (c) ................... 5,285,000 AAA 5,615,101
Hospital Sisters Services Inc., Obligated Group, 5.375%, 6/1/18 ......... 4,800,000 AAA 4,439,889
Riverview Hospital Association Project, 9%, 5/1/11 (c) .................. 2,500,000 AAA 2,560,275
</TABLE>
The accompanying notes are an integral part of the financial statements
45
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
<TABLE>
<CAPTION>
Principal Credit Market
Amount ($) Rating (b) Value ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SSM Healthcare, Series 1992 AA, 6.4%, 6/1/08 (c) .................. 2,335,000 AAA 2,571,862
SSM Healthcare, Series 1992 AA, 6.45%, 6/1/09 (c) ................. 2,485,000 AAA 2,743,291
SSM Healthcare, Series 1992 AA, 6.45%, 6/1/10 (c) ................. 2,650,000 AAA 2,920,088
SSM Healthcare, Series 1992 AA, 6.5%, 6/1/12 (c) .................. 3,000,000 AAA 3,321,750
SSM Healthcare, Series 1992 AA, 6.5%, 6/1/22 (c) .................. 2,820,000 AAA 3,067,793
St. Luke's Medical Center, 7.1%, 8/15/11 (c) ...................... 2,000,000 AAA 2,199,540
Villa St. Francis Inc., Series C, 6.25%, 1/1/22 (c) ............... 9,230,000 AAA 9,806,506
Wheaton Franciscan Services, 6.1%, 8/15/08 ........................ 4,580,000 AAA 4,948,095
-------------
TOTAL LONG-TERM MUNICIPAL INVESTMENTS (COST $1,588,859,499) ............... 1,668,852,111
-------------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $1,698,890,932) (a) ................ 99.6 1,778,920,671
OTHER ASSETS AND LIABILITIES, NET ................................... 0.4 6,919,149
----- -------------
NET ASSETS .......................................................... 100.0 1,785,839,820
===== =============
</TABLE>
* Floating rate demand notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of the
U.S. Treasury bill rate. Variable rate demand notes are securities whose
interest rates are reset periodically at levels that are generally
comparable to tax-exempt commercial paper. These securities are payable on
demand within seven calendar days and normally incorporate an irrevocable
letter of credit or line of credit from a major bank. Since these securities
are payable on demand, they are valued at 100% of their principal.
** ETM: Bonds bearing the description ETM (escrowed to maturity) are
collateralized by U.S. Treasury securities which are held in escrow by a
trustee and used to pay principal and interest on bonds so designated.
*** Prerefunded: Bonds which are prerefunded are collateralized by U.S. Treasury
securities which are held in escrow and are used to pay principal and
interest on tax-exempt issue and to retire the bonds in full at the earliest
refunding date.
(a) At March 31, 1996, the net unrealized appreciation on investments based on
cost for federal income tax purposes of $1,699,187,591 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost................................................................. $ 85,381,864
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value.................................................................... (5,648,784)
------------
Net unrealized appreciation.............................................. $ 79,733,080
============
</TABLE>
(b) All of the securities held have been determined to be of appropriate credit
quality as required by the Fund's investment objectives. Credit ratings
shown are either Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. Unrated securities (NR) and securities rated by Scudder (SS&C)
have been determined to be of comparable quality to rated eligible
securities.
(c) Bond is insured by one of these companies: AMBAC, MBIA, FGIC, FSA or Capital
Guaranty
(d) At March 31, 1996, these securities, in whole or in part, have been pledged
to cover initial margin requirements for open futures contracts.
At March 31, 1996, open futures contracts sold short were as follows
(Note 1):
<TABLE>
<CAPTION>
Aggregate Market
Futures Expiration Contracts Face Value ($) Value ($)
- ------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury Bond ...... June 1996 1,150 129,513,875 128,189,063
----------- -----------
Total net unrealized appreciation on open futures contracts sold short ...... 1,324,812
===========
</TABLE>
The aggregate face value of futures contracts opened and closed during the
six months ended March 31, 1996 was $471,760,636 and $513,132,497,
respectively.
Purchases and sales of investment securities (excluding short-term
investments), for the six months ended March 31, 1996, aggregated
$356,038,954 and $375,096,784, respectively.
At September 30, 1995, and to the extent provided in regulations, the Fund
had capital loss carryforwards of approximately $3,587,586 which expires
September 30, 2003. In addition, from November 1, 1994 through September 30,
1995, the Fund incurred approximately $12,265,621 of net realized capital
losses which the Fund intends to elect to defer and treat as arising in the
fiscal year ended September 30, 1996.
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the inclusion
of the Fund's assets and liabilities in the calculation. The Fund's other
assets and liabilities are disclosed in the Statement of Assets and
Liabilities.
The accompanying notes are an integral part of the financial statements
46
<PAGE>
AARP BALANCED STOCK AND BOND FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS 8.7%
27,910,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 3/29/96 at 5.35% to be repurchased at $27,922,443
on 4/1/96, collateralized by a $28,265,000
U.S. Treasury Bill, 4/18/96 (COST $27,910,000) ................ 27,910,000
----------
COMMERCIAL PAPER 9.4%
10,000,000 American Telephone & Telegraph Co., 5.09%, 5/3/96 ............... 9,951,875
10,000,000 General Electric Capital Corp., 5.16%, 4/25/96 .................. 9,963,056
10,000,000 Prudential Funding Corp., 5.32%, 4/24/96 ........................ 9,964,533
----------
TOTAL COMMERCIAL PAPER (COST $29,886,367) ....................... 29,879,464
----------
U.S. TREASURY OBLIGATIONS 17.5%
4,600,000 U.S. Treasury Bond, 7.25%, 5/15/16 .............................. 4,799,088
750,000 U.S. Treasury Bond, 7.875%, 2/15/21 ............................. 837,420
2,500,000 U.S. Treasury Bond, 6.25%, 8/15/23 .............................. 2,311,325
4,000,000 U.S. Treasury Note, 5.5%, 9/30/97 ............................... 3,990,000
2,500,000 U.S. Treasury Note, 5.13%, 4/30/98 .............................. 2,467,175
2,500,000 U.S. Treasury Note, 5.875%, 3/31/99 ............................. 2,495,300
3,000,000 U.S. Treasury Note, 6.75%, 5/31/99 .............................. 3,064,680
6,000,000 U.S. Treasury Note, 6.875%, 7/31/99 ............................. 6,156,540
4,500,000 U.S. Treasury Note, 6%, 10/15/99 ................................ 4,501,395
2,000,000 U.S. Treasury Note, 6.125%, 7/31/00 ............................. 2,001,240
9,000,000 U.S. Treasury Note, 5.75%, 10/31/00 ............................. 8,869,230
5,000,000 U.S. Treasury Note, 6.375%, 8/15/02 ............................. 5,028,900
4,600,000 U.S. Treasury Note, 5.75%, 8/15/03 .............................. 4,442,588
3,500,000 U.S. Treasury Note, 5.875%, 2/15/04 ............................. 3,395,000
3,500,000 U.S. Treasury Separate Trading Registered Interest and Principal,
2/15/09 (4.67%***) ............................................ 1,479,800
----------
TOTAL U.S. TREASURY OBLIGATIONS (COST $55,644,008) .............. 55,839,681
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION** 0.9%
2,438,030 Government National Mortgage Association, 10%,
2/15/25 (COST $2,624,693) ....................................... 2,698,582
----------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS** 3.4%
5,186,449 Federal National Mortgage Association, 7%, 9/1/25 ............... 5,053,520
2,946,709 Federal National Mortgage Association, 6.5%, 11/1/25 ............ 2,797,517
1,970,731 Federal National Mortgage Association, 6.5%, 1/1/26 ............. 1,870,953
1,221,575 Federal National Mortgage Association, 6.5%, 2/1/26 ............. 1,159,727
----------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE PASS-THRUS (COST $11,156,300) 10,881,717
----------
FOREIGN BONDS - U.S. DENOMINATED 1.2%
1,000,000 ABN-AMRO Bank NV, Subordinated Note, 7.13%, 10/15/2093 ......... 930,790
</TABLE>
The accompanying notes are an integral part of the financial statements
47
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------
<S> <C>
3,000,000 Province of Ontario, Global Medium Term Note, 6%, 2/21/06 .... 2,812,230
----------
TOTAL FOREIGN BONDS - U.S.$ DENOMINATED (COST $3,842,211) .... 3,743,020
----------
FOREIGN BONDS - NON-U.S. DENOMINATED 0.7%
DEM 3,400,000 Federal Republic of Germany, 6.5%, 7/15/03 (COST $2,426,307) . 2,348,115
----------
ASSET BACKED 0.6%
CREDIT CARD RECEIVABLES 0.6%
2,000,000 Sears Credit Account Master Trust Series 1995-4, 6.25%,
1/15/03 (COST $ 1,997,500) ................................. 2,006,860
----------
CORPORATE BONDS 5.0%
CONSUMER STAPLES 0.5%
2,000,000 Borden Inc., 7.875%, 2/15/23 ................................. 1,727,500
----------
COMMUNICATIONS 1.3%
2,000,000 360 Communications Co., 7.5%, 3/1/06 ......................... 1,951,620
2,000,000 TCI Communications, Inc., 8%, 8/1/05 ......................... 2,051,860
----------
4,003,480
----------
FINANCIAL 1.1%
2,000,000 Capital One Bank Medium Term Note, 5.95%, 2/15/01 ............ 1,924,700
1,000,000 General Electric Capital Services, 7.5%, 8/21/35 ............. 1,025,020
575,000 Royal Bank of Scotland, 6.375%, 2/1/11 ....................... 527,988
----------
3,477,708
----------
DURABLES 1.6%
1,000,000 Boeing Co., 6.875%, 10/15/43 ................................. 924,580
1,000,000 Comdisco, Inc., Senior Note, 5.75%, 2/15/01 .................. 962,610
1,000,000 Ford Motor Co., 8.875%, 1/15/22 .............................. 1,139,670
1,000,000 General Motors Acceptance Corp., 5.75%, 4/4/96 ............... 1,000,010
1,000,000 McDonnell Douglas Corp., 9.75%, 4/1/12 ....................... 1,214,530
----------
5,241,400
----------
TECHNOLOGY 0.5%
1,500,000 Loral Corp., 8.375%, 6/15/24 ................................. 1,618,140
----------
TOTAL CORPORATE BONDS (COST $16,032,215) ..................... 16,068,228
----------
CONVERTIBLE BONDS 0.5%
HEALTH 0.1%
Pharmaceuticals
290,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 ......................... 321,900
----------
FINANCIAL 0.1%
Other Financial Companies
200,000 First Financial Management Corp., 5%, 12/15/99 ............... 338,340
----------
SERVICE INDUSTRIES 0.2%
Miscellaneous Commercial Services
1,000,000 ADT Operations Inc., Zero Coupon, Liquid Yield Option
Note, 7/6/10 ............................................... 522,500
----------
TECHNOLOGY 0.1%
Computer Software
410,000 Softkey International, Inc., 5.5%, 11/1/00 ................... 328,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
48
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------
<S> <C>
CONSTRUCTION 0.0%
Homebuilding
30,000 Empresa ICA Sociedad Controladora S.A., 5%,
3/15/04 ......................................... 17,925
---------
TOTAL CONVERTIBLE BONDS (COST $1,300,816) ........... 1,528,665
---------
CONVERTIBLE PREFERRED STOCKS 1.5%
Shares
- ------
HEALTH 0.6%
Health Industry Services
70,400 FHP International Corp.,"A", Cum. $1.25 ............. 1,971,200
---------
FINANCIAL 0.5%
Consumer Finance
33,100 Advanta Corp. 6.75% ................................. 1,539,150
---------
SERVICE INDUSTRIES 0.1%
Miscellaneous Commercial Services
260,000 Jardine Strategic Holdings Ltd., 7.5%, 5/7/49 ....... 288,600
---------
MANUFACTURING 0.3%
Containers & Paper 0.1%
3,300 Boise Cascade Corp. "G", Cum $1.58 .................. 113,850
4,100 Bowater, Inc. 7% "B" ................................ 129,150
2,100 International Paper Co. 5.25% ....................... 97,125
---------
340,125
---------
Industrial Specialty 0.2%
31,300 Cooper Industries, Inc. 6% .......................... 504,713
---------
ENERGY 0.0%
Oil & Gas Production
4,200 Parker & Parsley Capital Corp. ...................... 206,850
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,170,800) 4,850,638
---------
PREFERRED STOCKS 0.1%
FINANCIAL 0.1%
Real Estate
14,600 Security Capital Industrial Trust "B" (COST $365,402) 343,100
---------
COMMON STOCKS 52.0%
CONSUMER DISCRETIONARY 2.7%
Department & Chain Stores 2.4%
43,500 J.C. Penney Co., Inc. ............................... 2,164,125
18,600 May Department Stores ............................... 897,450
21,800 Melville Corp. ...................................... 782,075
57,400 Rite Aid Corp. ...................................... 1,772,225
44,700 Sears, Roebuck & Co. ................................ 2,179,125
---------
7,795,000
---------
Specialty Retail 0.3%
43,000 Intimate Brands, Inc. ............................... 833,125
---------
CONSUMER STAPLES 5.5%
Alcohol & Tobacco 0.6%
26,600 Anheuser Busch Companies, Inc. ...................... 1,792,175
</TABLE>
The accompanying notes are an integral part of the financial statements
49
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- --------------------------------------------------------------------
<S> <C>
3,510 Schweitzer-Mauduit International, Inc.* . 96,525
----------
1,888,700
----------
Food & Beverage 2.3%
1,064 Earthgrains Co.* ........................ 31,787
33,800 General Mills, Inc. ..................... 1,973,075
90,250 H.J. Heinz Co. .......................... 2,989,531
66,800 Quaker Oats Co. ......................... 2,229,450
----------
7,223,843
----------
Package Goods/Cosmetics 2.6%
21,900 Avon Products Inc. ...................... 1,877,925
21,000 Clorox Co. .............................. 1,808,614
11,500 Colgate-Palmolive Co. ................... 895,563
35,100 Kimberly-Clark Corp. .................... 2,614,950
23,300 Tambrands Inc. .......................... 1,089,275
----------
8,286,327
----------
HEALTH 6.9%
Health Industry Services 0.1%
9,300 U.S. HealthCare, Inc. ................... 426,638
----------
Medical Supply & Specialty 0.8%
63,000 Bausch & Lomb, Inc. ..................... 2,331,000
----------
Pharmaceuticals 6.0%
19,200 American Home Products Corp. ............ 2,080,800
67,600 Baxter International Inc. ............... 3,058,900
25,300 Bristol-Myers Squibb Co. ................ 2,166,313
33,100 Eli Lilly & Co. ......................... 2,151,500
47,700 Schering-Plough Corp. ................... 2,772,563
39,200 SmithKline Beecham PLC (ADR) ............ 2,018,800
23,400 Warner-Lambert Co. ...................... 2,416,050
122,100 Zeneca Group PLC ........................ 2,530,786
----------
19,195,712
----------
COMMUNICATIONS 3.6%
Cellular Telephone 0.1%
13,533 360 Communications Co.* ................. 323,100
----------
Telephone/Communications 3.5%
80,600 Alltel Corp. ............................ 2,498,600
51,200 GTE Corp. ............................... 2,246,400
54,600 Hong Kong Telecommunications Ltd. (ADR) . 1,092,000
40,400 Koninklijke PTT Nederland ............... 1,589,492
17,600 NYNEX Corp. ............................. 877,800
47,700 Sprint Corp. ............................ 1,812,600
29,900 Tele Danmark A/S (ADR) .................. 773,663
75,000 Telecom Corp. of New Zealand ............ 337,169
----------
11,227,724
----------
FINANCIAL 10.7%
Banks 3.7%
36,600 Bankers Trust New York Corp. ............ 2,594,025
34,000 Chemical Banking Corp. .................. 2,397,000
54,900 CoreStates Financial Corp. .............. 2,326,388
36,800 First Bank System Inc. .................. 2,194,200
27,300 J.P. Morgan & Co., Inc. ................. 2,265,900
----------
11,777,513
----------
Insurance 2.1%
25,029 Allstate Corp. .......................... 1,054,347
</TABLE>
The accompanying notes are an integral part of the financial statements
50
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- --------------------------------------------------------------------------
<S> <C>
25,800 EXEL, Ltd. ..................................... 1,780,200
17,400 Hartford Steam Boiler Inspection & Insurance Co. 880,875
3,360 Highlands Insurance Group* ..................... 66,360
56,700 Lincoln National Corp. ......................... 2,877,525
---------
6,659,307
---------
Other Financial Companies 2.0%
69,500 Federal National Mortgage Association .......... 2,215,313
53,800 Student Loan Marketing Association ............. 4,115,700
---------
6,331,013
---------
Real Estate 2.9%
65,000 DeBartolo Realty Corp. (REIT) .................. 975,000
11,400 Developers Diversified Realty Corp. (REIT) ..... 334,875
31,872 HGI Realty, Inc. (REIT) ........................ 673,296
57,000 Health Care Property Investment Inc. (REIT) .... 1,795,500
61,700 Meditrust SBI (REIT) ........................... 2,090,088
101,600 Nationwide Health Properties Inc. (REIT) ....... 2,133,600
26,000 Omega Healthcare Investors (REIT) .............. 744,250
32,200 Security Capital Industrial Trust (REIT) ....... 563,500
---------
9,310,109
---------
MEDIA 0.2%
Print Media
17,200 Reader's Digest Association Inc. "A" ........... 812,700
---------
SERVICE INDUSTRIES 1.3%
Miscellaneous Consumer Services 0.8%
70,100 H & R Block Inc. ............................... 2,532,363
---------
Printing/Publishing 0.5%
28,100 Deluxe Corp. ................................... 881,638
11,800 Dun & Bradstreet Corp. ......................... 715,375
---------
1,597,013
---------
DURABLES 4.3%
Aerospace 2.9%
25,700 AAR Corp. ...................................... 523,638
32,672 Lockheed Martin Corp. .......................... 2,478,988
47,900 Rockwell International Corp. ................... 2,820,113
31,400 United Technologies Corp. ...................... 3,524,650
---------
9,347,389
---------
Automobiles 1.4%
33,800 Dana Corp. ..................................... 1,128,075
15,000 Eaton Corp. .................................... 903,750
55,700 Ford Motor Co. ................................. 1,914,688
9,400 Genuine Parts Co. .............................. 423,000
---------
4,369,513
---------
Construction/Agricultural Equipment 0.0%
1,900 PACCAR, Inc. ................................... 92,625
---------
MANUFACTURING 8.3%
Chemicals 2.1%
19,300 Dow Chemical Co. ............................... 1,676,688
36,200 E.I. du Pont de Nemours & Co. .................. 3,004,600
7,000 Lubrizol Corp. ................................. 206,500
55,400 Lyondell Petrochemical Co. ..................... 1,689,700
---------
6,577,488
---------
Containers & Paper 0.4%
30,200 Stone Container Corp. .......................... 422,800
</TABLE>
The accompanying notes are an integral part of the financial statements
51
<PAGE>
AARP BALANCED STOCK AND BOND FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ----------------------------------------------------------------------
<S> <C>
26,100 Westvaco Corp. ........................... 766,688
----------
1,189,488
----------
Diversified Manufacturing 2.2%
56,100 Dresser Industries Inc. .................. 1,711,050
15,200 Olin Corp. ............................... 1,322,400
46,200 TRW Inc. ................................. 4,117,575
----------
7,151,025
----------
Electrical Products 0.7%
17,300 Philips NV (New York shares) ............. 629,288
21,600 Thomas & Betts Corp. ..................... 1,620,000
----------
2,249,288
----------
Industrial Specialty 0.2%
16,100 Corning Inc. ............................. 563,500
----------
Machinery/Components/Controls 0.2%
10,400 Timken Co. ............................... 479,700
----------
Office Equipment/Supplies 1.4%
36,000 Xerox Corp. .............................. 4,518,000
----------
Specialty Chemicals 1.0%
41,900 Betz Laboratories Inc. ................... 1,948,350
38,700 Witco Corp. .............................. 1,364,175
----------
3,312,525
----------
Wholesale Distributors 0.1%
4,700 Alco Standard Corp. (b) .................. 446,500
----------
ENERGY 4.5%
Oil Companies 4.3%
15,000 Exxon Corp. .............................. 1,224,375
41,800 Murphy Oil Corp. ......................... 1,792,175
29,200 Pennzoil Co. ............................. 1,160,700
30,500 Repsol SA (ADR) .......................... 1,139,938
13,800 Royal Dutch Petroleum Co. (New York shares) 1,949,250
47,281 Societe Nationale Elf Aquitaine (ADR) .... 1,601,644
15,700 Texaco Inc. .............................. 1,350,200
49,490 Total SA (ADR) ........................... 1,682,660
95,200 YPF S.A. "D" (ADR) ....................... 1,915,900
----------
13,816,842
----------
Oilfield Services/Equipment 0.2%
8,700 Halliburton Co. .......................... 494,813
----------
METALS & MINERALS 1.1%
Steel & Metals
64,800 Freeport McMoRan Copper & Gold, Inc. "A" . 1,992,600
101,500 Oregon Steel Mills Inc. .................. 1,433,688
----------
3,426,288
----------
CONSTRUCTION 0.7%
Forest Products
23,200 Georgia Pacific Corp. .................... 1,609,500
15,300 Weyerhaeuser Co. ......................... 705,713
----------
2,315,213
----------
TRANSPORTATION 0.3%
Railroads
59,100 Canadian National Railway Co. ............ 1,019,475
----------
UTILITIES 1.9%
Electric Utilities
25,200 CINergy Corp. ............................ 756,000
</TABLE>
The accompanying notes are an integral part of the financial statements
52
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------
<S> <C>
20,700 CMS Energy Corp. .......................... 610,650
42,500 National Power PLC (ADR) .................. 871,250
26,100 PacifiCorp ................................ 544,838
9,800 Pacific Gas & Electric Co. ................ 221,725
44,400 PowerGen PLC (ADR) ........................ 1,065,600
30,900 Southern Company .......................... 737,738
10,500 Texas Utilities Co., Inc. ................. 434,438
35,100 Unicom Corp. .............................. 947,700
-----------
6,189,939
-----------
TOTAL COMMON STOCKS (COST $134,812,021) ... 166,110,798
-----------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO
(COST $292,168,640) (a) .......... 101.5 324,208,868
OTHER ASSETS AND LIABILITIES, NET .. (1.5) (4,873,568)
----- -----------
NET ASSETS.......................... 100.0 319,335,300
===== ===========
<FN>
REIT Real Estate Investment Trust
* Nonincome producing security.
** Effective maturities will be shorter due to amortization and prepayments.
*** Yield; bond equivalent yield to maturity; not a coupon rate.
(a) At March 31, 1996, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $292,302,744 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ...................................... $34,816,838
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ...................................... (2,910,714)
-----------
Net unrealized appreciation ........................ $31,906,124
===========
(b) Security valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $446,500 (0.14% of net assets). The cost of this
security at March 31, 1996 was $363,663.
For the six months ended March 31, 1996, purchases and sales of
investment securities (excluding short-term investments) aggregated
$55,166,965 and $28,972,951, respectively. Purchases and sales of U.S.
Government obligations and U.S. Government Agencies aggregated
$42,069,174 and $18,428,081, respectively.
The aggregate face value of future contracts closed during the six months
ended March 31, 1996 was $3,641,641.
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
53
<PAGE>
AARP GROWTH AND INCOME FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ---------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS 1.2%
45,076,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 3/29/96 at 5.35% to be repurchased at
$45,096,096 on 4/1/96, collateralized by a
$38,098,000 U.S. Treasury Note, 8.5%, 2/15/20 (COST
$45,076,000) ....................................... 45,076,000
----------
COMMERCIAL PAPER 2.6%
20,000,000 American Express Credit Corp., 5.22%, 8/28/96 ........ 19,567,500
30,000,000 American Telephone & Telegraph Co., 5.24%, 7/24/96 ... 29,502,625
15,000,000 Associates Corp. of North America, 5.67%, 4/16/96 .... 14,964,533
10,000,000 Corporate Asset Funding Co., Inc., 5.37%, 5/14/96 .... 9,935,833
20,000,000 Ford Motor Credit Co., 5.31%, 6/6/96 ................. 19,805,328
----------
TOTAL COMMERCIAL PAPER (COST $93,815,822) ........................ 93,775,819
----------
FOREIGN BONDS - NON-U.S. DENOMINATED 0.1%
GBP 2,500,000 National Power PLC, 6.25%, 9/23/08 (COST $4,425,505) . 4,149,627
----------
CORPORATE BONDS 0.2%
FINANCIAL
4,500,000 Siemens Capital Corp. with warrants, 8%, 6/24/02
(COST $5,885,818) .................................. 6,277,500
----------
CONVERTIBLE BONDS 2.6%
CONSUMER DISCRETIONARY 0.1%
Department & Chain Stores
4,000,000 Federated Department Stores, Inc., debenture,
5%, 10/1/03 ........................................ 4,460,000
----------
HEALTH 0.2%
Pharmaceuticals
6,260,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 ................. 6,948,600
----------
COMMUNICATIONS 0.0%
Telephone/Communications
1,000,000 Compania de Telefonos de Chile, S.A., 4.5%, 1/15/03 .. 1,110,000
----------
FINANCIAL 0.7%
Banks 0.5%
17,290,000 MBL International Finance Bermuda, 3%, 11/30/02 ...... 19,062,225
----------
Other Financial Companies 0.2%
5,200,000 First Financial Management Corp., 5%, 12/15/99 ....... 8,796,840
----------
SERVICE INDUSTRIES 0.4%
Miscellaneous Commercial Services
25,000,000 ADT Operations Inc., Zero Coupon, Liquid Yield Option
Note, 7/6/10 ....................................... 13,062,500
----------
DURABLES 0.0%
Automobiles
1,500,000 Magna International, Inc., 5%, 10/15/02 .............. 1,552,500
----------
MANUFACTURING 0.2%
Diversified Manufacturing
5,000,000 Thermo Electron Corp., 4.25%, 1/1/03 ................. 6,050,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
54
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- --------------------------------------------------------------------------------
<S> <C>
TECHNOLOGY 0.4%
Computer Software 0.2%
8,710,000 Softkey International, Inc., 5.5%, 11/1/00 ........ 6,968,000
----------
Electronic Data Processing 0.1%
8,000,000 Silicon Graphics Inc., 11/5/13 .................... 4,080,000
----------
Precision Instruments 0.1%
1,000,000 Thermo Instruments Systems Inc., 6.625%, 8/15/01 .. 3,200,000
----------
CONSTRUCTION 0.2%
Homebuilding
10,670,000 Empresa ICA Sociedad Controladora S.A., 5%, 3/15/04 6,375,325
----------
TRANSPORTATION 0.4%
Airlines
13,500,000 Delta Air Lines, Inc., 3.23%, 6/15/03 ............. 13,871,250
----------
TOTAL CONVERTIBLE BONDS (COST $85,121,323) ........ 95,537,240
----------
CONVERTIBLE PREFERRED STOCKS 2.7%
Shares
-----------
HEALTH 0.8%
Health Industry Services 0.8%
1,091,200 FHP International Corp., "A", Cum. $1.25 .......... 30,553,600
----------
Medical Supply & Specialty 0.0%
25,000 US Surgical Corp. "A" ............................. 815,625
----------
FINANCIAL 0.2%
Consumer Finance
129,000 Advanta Corp. 6.75% ............................... 5,998,500
----------
SERVICE INDUSTRIES 0.2%
Miscellaneous Commercial Services
7,036,000 Jardine Strategic Holdings Ltd., 7.5%, 5/7/2049 ... 7,809,960
----------
MANUFACTURING 0.7%
Containers & Paper 0.1%
61,900 Boise Cascade Corp. "G", Cum $1.58 ................ 2,135,550
50,200 International Paper Co. 5.25% ..................... 2,321,750
----------
4,457,300
----------
Industrial Specialty 0.3%
652,400 Cooper Industries, Inc. 6% ........................ 10,519,950
----------
Wholesale Distributors 0.3%
102,800 Alco Standard Corp. 6.50% (b) ..................... 9,766,000
----------
TECHNOLOGY 0.1%
Electronic Data Processing
50,000 Ceridian Corp. 5.5% ............................... 4,825,000
----------
ENERGY 0.3%
Oil & Gas Production
215,300 Parker & Parsley Capital Corp. .................... 10,603,525
----------
METALS & MINERALS 0.4%
Precious Metals
500,000 Freeport McMoRan Copper & Gold, Inc., Cum. $1.25 .. 14,000,000
----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $86,215,116) .............................. 99,349,460
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
55
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------
<S> <C>
PREFERRED STOCKS 0.2%
COMMUNICATIONS 0.0%
Telephone/Communications
37,100 Philippine Long Distance Telephone Co. ....... 1,919,925
-----------
FINANCIAL 0.2%
Real Estate
302,400 Security Capital Industrial Trust "B" ........ 7,106,400
-----------
TOTAL PREFERRED STOCKS (COST $9,423,310) ..... 9,026,325
-----------
COMMON STOCKS 89.9%
CONSUMER DISCRETIONARY 4.3%
Department & Chain Stores 3.8%
880,200 J.C. Penney Co., Inc. ........................ 43,789,950
126,600 May Department Stores ........................ 6,108,450
426,800 Melville Corp. ............................... 15,311,450
1,165,100 Rite Aid Corp. ............................... 35,972,463
812,900 Sears, Roebuck & Co. ......................... 39,628,875
-----------
140,811,188
-----------
Specialty Retail 0.5%
919,700 Intimate Brands, Inc. ........................ 17,819,188
-----------
CONSUMER STAPLES 9.0%
Alcohol & Tobacco 1.2%
631,300 Anheuser Busch Companies, Inc. ............... 42,533,837
-----------
Consumer Specialties 0.1%
320,900 A.T. Cross Co. "A" ........................... 5,054,175
-----------
Food & Beverage 3.4%
25,252 Earthgrains Co. .............................. 754,404
598,400 General Mills, Inc. .......................... 34,931,600
1,683,900 H.J. Heinz Co. ............................... 55,779,188
1,039,700 Quaker Oats Co. .............................. 34,699,988
-----------
126,165,180
-----------
Package Goods/Cosmetics 4.3%
419,000 Avon Products Inc. ........................... 35,929,250
402,100 Clorox Co. ................................... 34,630,862
136,500 Colgate-Palmolive Co. ........................ 10,629,938
701,300 Kimberly-Clark Corp. ......................... 52,246,850
480,800 Tambrands Inc. ............................... 22,477,400
-----------
155,914,300
-----------
HEALTH 10.9%
Health Industry Services 0.3%
221,900 U.S. HealthCare, Inc. ........................ 10,179,663
-----------
Medical Supply & Specialty 1.3%
1,224,800 Bausch & Lomb, Inc. .......................... 45,317,600
-----------
Pharmaceuticals 9.3%
386,400 American Home Products Corp. ................. 41,876,100
1,166,300 Baxter International Inc. .................... 52,775,075
464,300 Bristol-Myers Squibb Co. ..................... 39,755,686
670,600 Eli Lilly & Co. .............................. 43,589,000
905,500 Schering-Plough Corp. ........................ 52,632,188
661,300 SmithKline Beecham PLC (ADR) ................. 34,056,950
</TABLE>
The accompanying notes are an integral part of the financial statements
56
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------------
<S> <C>
463,300 Warner-Lambert Co. ............................ 47,835,725
1,446,900 Zeneca Group PLC .............................. 29,990,126
300 Zeneca Group PLC (ADR) ........................ 19,125
-----------
342,529,975
-----------
COMMUNICATIONS 6.4%
Cellular Telephone 0.2%
275,400 360 Communications Co. ........................ 6,575,175
-----------
Telephone/Communications 6.2%
1,465,300 Alltel Corp. .................................. 45,424,300
1,068,500 GTE Corp. ..................................... 46,880,438
1,170,500 Hong Kong Telecommunications Ltd. (ADR) ....... 23,410,000
862,000 Koninklijke PTT Nederland ..................... 33,914,412
363,800 NYNEX Corp. ................................... 18,144,525
880,200 Sprint Corp. .................................. 33,447,600
802,100 Tele Danmark A/S (ADR) ........................ 20,754,338
1,565,390 Telecom Corp. of New Zealand .................. 7,037,354
-----------
229,012,967
-----------
FINANCIAL 17.9%
Banks 7.8%
286,000 AmSouth Bancorp. .............................. 11,118,250
590,000 Argentaria Corporacion Bancaria de Espana ..... 24,956,693
804,600 Bankers Trust New York Corp. .................. 57,026,025
649,200 Chemical Banking Corp. ........................ 45,768,600
983,800 CoreStates Financial Corp. .................... 41,688,525
807,200 First Bank System Inc. ........................ 48,129,300
574,800 J.P. Morgan & Co., Inc. ....................... 47,708,400
128,500 Nordbanken AB* ................................ 2,121,840
295,300 Wilmington Trust Corp. ........................ 9,523,425
-----------
288,041,058
-----------
Insurance 3.5%
477,423 Allstate Corp. ................................ 20,111,446
489,550 EXEL, Ltd. .................................... 33,778,950
306,600 Hartford Steam Boiler Inspection & Insurance Co. 15,521,625
71,770 Highlands Insurance Group ..................... 1,417,458
1,110,200 Lincoln National Corp. ........................ 56,342,650
-----------
127,172,129
-----------
Other Financial Companies 3.6%
1,463,900 Federal National Mortgage Association ......... 46,661,813
1,107,700 Student Loan Marketing Association ............ 84,739,050
-----------
131,400,863
-----------
Real Estate 3.0%
245,800 Avalon Properties, Inc. (REIT) ................ 5,284,700
386,200 Camden Property Trust (REIT) .................. 8,930,875
88,500 Charles E. Smith Residential Realty, Inc. (REIT) 2,101,875
235,000 Developers Diversified Realty Corp. (REIT) .... 6,903,125
28,000 Equity Residential Properties Trust (REIT) .... 875,000
836,100 General Growth Properties, Inc. (REIT) ........ 19,648,350
409,800 Health Care Property Investment Inc. (REIT) ... 12,908,700
31,100 Mark Centers Trust (REIT) ..................... 338,213
457,900 Meditrust SBI (REIT) .......................... 15,511,363
680,800 Nationwide Health Properties Inc. (REIT) ...... 14,296,800
71,200 Post Properties Inc. (REIT) ................... 2,314,000
398,500 Security Capital Industrial Trust (REIT) ...... 6,973,750
451,200 South West Property Trust Inc. (REIT) ......... 6,034,800
</TABLE>
The accompanying notes are an integral part of the financial statements
57
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ----------------------------------------------------------------------
<S> <C>
150,000 Spieker Properties, Inc. (REIT) ......... 3,806,250
102,100 Vornado Realty Trust (REIT) ............. 3,879,800
-----------
109,807,601
-----------
MEDIA 0.5%
Print Media
336,400 Reader's Digest Association Inc. "A" .... 15,894,900
-----------
SERVICE INDUSTRIES 2.4%
Miscellaneous Consumer Services 1.5%
1,531,000 H & R Block Inc. ........................ 55,307,375
-----------
Printing/Publishing 0.9%
579,600 Deluxe Corp. ............................ 18,184,950
242,200 Dun & Bradstreet Corp. .................. 14,683,375
-----------
32,868,325
-----------
DURABLES 7.5%
Aerospace 4.9%
459,600 AAR Corp. ............................... 9,364,349
604,700 Lockheed Martin Corp. ................... 45,881,613
934,300 Rockwell International Corp. ............ 55,006,913
638,200 United Technologies Corp. ............... 71,637,950
-----------
181,890,825
-----------
Automobiles 2.5%
706,800 Dana Corp. .............................. 23,589,450
322,000 Eaton Corp. ............................. 19,400,500
1,145,700 Ford Motor Co. .......................... 39,383,438
206,000 Genuine Parts Co. ....................... 9,270,000
-----------
91,643,388
-----------
Construction/Agricultural Equipment 0.1%
59,200 PACCAR, Inc. ............................ 2,886,000
-----------
MANUFACTURING 16.0%
Chemicals 4.0%
518,300 Dow Chemical Co. ........................ 45,027,313
730,400 E.I. du Pont de Nemours & Co. ........... 60,623,200
160,000 Lubrizol Corp. .......................... 4,720,000
1,211,000 Lyondell Petrochemical Co. .............. 36,935,500
-----------
147,306,013
-----------
Containers & Paper 0.7%
842,400 Stone Container Corp. ................... 11,793,600
565,100 Westvaco Corp. .......................... 16,599,813
-----------
28,393,413
-----------
Diversified Manufacturing 3.9%
1,232,300 Dresser Industries Inc. ................. 37,585,150
292,900 Olin Corp. .............................. 25,482,300
887,300 TRW Inc. ................................ 79,080,613
-----------
142,148,063
-----------
Electrical Products 1.3%
209,000 Philips Electronics N.V. ................ 7,602,990
313,700 Philips NV (New York shares) ............ 11,410,838
377,100 Thomas & Betts Corp. .................... 28,282,500
-----------
47,296,328
-----------
Industrial Specialty 0.5%
525,600 Corning Inc. ............................ 18,396,000
-----------
Machinery/Components/Controls 0.8%
925,000 S.K.F. AB "B" (Free) .................... 20,388,302
</TABLE>
The accompanying notes are an integral part of the financial statements
58
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------
<S> <C>
214,500 Timken Co. ............................... 9,893,813
-----------
30,282,115
-----------
Office Equipment/Supplies 2.5%
730,700 Xerox Corp. .............................. 91,702,850
-----------
Specialty Chemicals 2.3%
204,800 ARCO Chemical Co. ........................ 10,624,000
709,000 Betz Laboratories Inc. ................... 32,968,500
306,400 Petrolite Corp. .......................... 9,268,600
849,200 Witco Corp. .............................. 29,934,300
-----------
82,795,400
-----------
ENERGY 7.8%
Oil Companies 7.5%
309,500 Exxon Corp. .............................. 25,262,938
395,300 Murphy Oil Corp. ......................... 16,948,488
564,500 Pennzoil Co. ............................. 22,438,875
545,900 Repsol SA (ADR) .......................... 20,403,013
264,700 Royal Dutch Petroleum Co. (New York shares) 37,388,875
488,800 Societe Nationale Elf Aquitaine .......... 33,136,516
305,100 Texaco Inc. .............................. 26,238,600
544,061 Total SA "B" ............................. 36,720,742
554,825 Total SA (ADR) ........................... 18,864,050
1,941,300 YPF S.A. "D" (ADR) ....................... 39,068,663
-----------
276,470,760
-----------
Oilfield Services/Equipment 0.3%
189,700 Halliburton Co. .......................... 10,789,188
-----------
METALS & MINERALS 0.8%
Precious Metals 0.3%
405,000 De Beers Consolidated Mines Ltd. (ADR) ... 12,757,500
-----------
Steel & Metals 0.5%
579,010 Freeport McMoRan Copper & Gold, Inc. "A" . 17,804,558
-----------
CONSTRUCTION 1.4%
Forest Products
509,600 Georgia Pacific Corp. .................... 35,353,500
353,000 Weyerhaeuser Co. ......................... 16,282,125
-----------
51,635,625
-----------
TRANSPORTATION 1.2%
Railroads
1,200,900 Canadian National Railway Co. ............ 20,715,525
141,100 Norfolk Southern Corp. ................... 11,993,500
165,600 Union Pacific Corp. ...................... 11,364,300
-----------
44,073,325
-----------
UTILITIES 3.8%
Electric Utilities
519,300 CINergy Corp. ............................ 15,579,000
261,200 CMS Energy Corp. ......................... 7,705,400
1,468,800 China Light & Power Co., Ltd. (ADR) ...... 6,653,662
250,000 National Power PLC (ADR) ................. 5,125,000
553,600 PacifiCorp ............................... 11,556,400
237,800 Pacific Gas & Electric Co. ............... 5,380,225
3,256,000 PowerGen PLC ............................. 19,480,964
942,503 PowerGen PLC (ADR) ....................... 22,620,072
636,400 Southern Company ......................... 15,194,050
</TABLE>
The accompanying notes are an integral part of the financial statements
59
<PAGE>
AARP GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------
<S> <C>
224,600 Texas Utilities Co., Inc. ................... 9,292,824
723,900 Unicom Corp. ................................ 19,545,300
-------------
138,132,897
-------------
TOTAL COMMON STOCKS (COST $2,491,658,519).... 3,298,809,747
-------------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO
(COST $2,821,621,413) (a)................. 99.5 3,652,001,718
OTHER ASSETS AND LIABILITIES, NET........... 0.5 16,649,957
----- -------------
NET ASSETS.................................. 100.0 3,668,651,675
===== =============
<FN>
REIT Real Estate Investment Trust
* Nonincome producing security.
(a) At March 31, 1996, the net unrealized appreciation on investments
based on cost for federal income tax purposes of $2,819,638,846 was
as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost.................................................. $854,718,471
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value................................................ (22,355,599)
------------
Net unrealized appreciation............................... $832,362,872
============
(b) Security valued in good faith by the Valuation Committee of the Board of
Trustees amounted to $9,766,000 (0.27% of net assets). The cost of this
security at March 31, 1996 was $7,954,150.
Purchases and sales of investment securities (excluding short-term
investments) for the six months ended March 31, 1996, aggregated
$691,052,550 and $481,803,581 respectively.
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
60
<PAGE>
AARP GLOBAL GROWTH FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- ------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS 6.8%
1,913,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated
3/29/96 at 5.35% to be repurchased at $1,913,853 on 4/1/96,
collateralized by a $1,902,000 U.S. Treasury Note, 6.25%,
1/31/97 (COST $1,913,000) ...................................... 1,913,000
---------
COMMERCIAL PAPER 10.5%
750,000 E.I. duPont de Nemours & Co., 5.25%, 5/16/96 ..................... 744,969
1,000,000 Ford Motor Credit Co., 5.34%, 4/25/96 ............................ 996,306
700,000 General Electric Capital Corp., 5.1%, 5/29/96 .................... 693,977
500,000 Prudential Funding Corp., 5.46%, 4/3/96 .......................... 499,778
---------
TOTAL COMMERCIAL PAPER (COST $2,935,614) ......................... 2,935,030
---------
FIXED TIME DEPOSITS 2.7%
750,000 American Express Credit Corp., 5.06%, 7/30/96 (COST $750,000)..... 749,669
---------
CONVERTIBLE BONDS 0.0%
13,000 Ashanti Capital Corp., 5.5%, 3/15/03 (COST $13,000) .............. 13,390
---------
PREFERRED STOCKS 3.0%
<CAPTION>
Shares
- ------
GERMANY
<S> <C>
17,322 RWE AG (Producer and marketer of petroleum and chemical
products) ........................................................ 523,878
2,125 SAP AG (Computer software manufacturer) .......................... 306,008
---------
TOTAL PREFERRED STOCKS (COST $831,199) ........................... 829,886
---------
COMMON STOCKS 84.4%
AUSTRALIA 1.7%
3,400 Ampol Exploration Ltd.* (Oil and gas exploration company) ........ 11,425
271,698 Foster's Brewing Group, Ltd. (Leading brewery) ................... 469,224
---------
480,649
---------
BERMUDA 0.5%
3,450 Mid Ocean Limited (Property and casualty insurance company) ...... 133,256
---------
BRAZIL 2.3%
36,900 Aracruz Celulose S.A. (ADR) (Producer of eucalyptus kraft
pulp) ............................................................ 295,200
1,275,000 Centrais Eletricas Brasileiras S/A "B" (Electric utility)......... 332,996
771,000 Companhia Energetica de Minas Gerais (Electric power utility) .... 21,619
---------
649,815
---------
CANADA 4.8%
14,960 Barrick Gold Corp. (Gold exploration and production in
North and South America) ......................................... 455,412
21,610 Canadian Pacific Ltd. (Ord.) (Transportation and natural
resource conglomerate) ........................................... 429,981
15,620 Placer Dome Inc. (Gold, silver and copper mining company) ........ 446,859
---------
1,332,252
---------
FRANCE 0.6%
1,825 Alcatel Alsthom (Manufacturer of transportation, telecommunication
and energy equipment) ............................................ 169,150
---------
</TABLE>
The accompanying notes are an integral part of the financial statements
61
<PAGE>
AARP GLOBAL GROWTH FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------------
<S> <C>
GERMANY 13.3%
1,410 Bayer AG (Leading chemical producer) ........................... 480,299
14,215 Bayerische Vereinsbank Girozentrale (Commercial bank) .......... 436,170
938 Daimler-Benz AG (Automobile and truck manufacturer) ............ 510,187
1,410 Hoechst AG (Chemical producer) ................................. 499,495
1,189 Mannesmann AG (Bearer) (Diversified construction and technology
company) ..................................................... 433,286
263 Muenchener Rueckversicherungs AG (Insurance company) ........... 463,169
745 Siemens AG (Bearer) (Manufacturer of electrical and electronic
equipment) ................................................... 410,006
10,016 VEBA AG (Electric utility, distributor of oil and chemicals) ... 486,773
---------
3,719,385
---------
GHANA 1.4%
11,300 Ashanti Goldfields Co., Ltd. (ADS) (Leading gold producer) ..... 282,500
4,100 Ashanti Goldfields Co., Ltd. (GDS) ............................. 102,500
---------
385,000
---------
HONG KONG 1.8%
40,000 Hutchison Whampoa, Ltd. (Container terminal and real estate
company) ..................................................... 251,358
69,000 Television Broadcasts, Ltd. (Television broadcasting) .......... 253,821
---------
505,179
---------
INDONESIA 0.1%
38,500 Indah Kiat Pulp & Paper (Foreign registered) (Producer
of pulp and paper) ........................................... 30,052
1,000 Pabrik Kertas Tjiwi Kimia (Operator of pulp and paper factory).. 973
---------
31,025
---------
JAPAN 5.4%
25,000 Canon Inc. (Leading producer of visual image and information
equipment) ................................................... 476,858
14,000 Hitachi Ltd. (General electronics manufacturer) ................ 136,138
28,000 Matsushita Electrical Industrial Co., Ltd. (Consumer electronic
products manufacturer) ....................................... 455,540
1,000 Nichiei Co., Ltd. (Finance company for small- and medium-sized
firms) ....................................................... 66,854
38,000 Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and
copper mining company) ....................................... 365,965
---------
1,501,355
---------
KOREA 0.6%
3,900 Korea Electric Power Corp. (ADR) (Electric utility) ............ 89,700
5,250 Korea Express Co., Ltd. (EDR) (General freight transport
company) ..................................................... 90,563
---------
180,263
---------
NETHERLANDS 5.4%
11,239 AEGON Insurance Group NV (Insurance company) ................... 530,623
7,273 Internationale-Nederlanden Groep CVA (Banking and insurance
holding company) ............................................. 528,273
3,163 Royal Dutch Petroleum Co. (Majority shareholder of Royal
Dutch/Shell Group of companies, involved in all phases of the
petroleum industry) .......................................... 448,001
54 Royal Dutch Petroleum Co. (New York shares) .................... 7,628
---------
1,514,525
---------
NEW ZEALAND 0.6%
37,400 Telecom Corp. of New Zealand (Telecommunication services) ...... 168,135
---------
SWEDEN 4.4%
10,445 Astra AB "A" (Free) (Pharmaceutical company) ................... 483,077
18,815 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ......... 414,709
15,522 Skandia Foersaekrings AB (Free) (Financial conglomerate) ....... 342,127
---------
1,239,913
---------
SWITZERLAND 6.9%
260 Ciba-Geigy AG (Bearer) (Pharmaceutical company) ................ 322,486
545 Micronas Semiconductor Holding AG* (Bearer) (Developer and
producer of mixed-signal integrated circuits and systems) .... 390,464
374 Nestle SA (Registered) (Food manufacturer) ..................... 422,055
</TABLE>
The accompanying notes are an integral part of the financial statements
62
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C>
2 Sandoz Ltd. AG (Bearer) (Pharmaceutical company) .................. 2,328
102 Sandoz Ltd. AG (Registered) (Pharmaceutical company) .............. 119,652
226 Swiss Reinsurance (Registered) (Life, accident and health insurance
company) ........................................................ 229,193
1,539 Zurich Insurance Group (Registered) (Insurance company) ........... 442,598
----------
1,928,776
----------
UNITED KINGDOM 9.0%
77,208 Carlton Communications PLC (Television post production
products and services) .......................................... 536,184
57,670 Grand Metropolitan PLC (Food and drink producer and retailer) ..... 371,452
68,715 Lonrho PLC (Widely diversified industrial holding company) ........ 224,967
55,455 PowerGen PLC (Electric utility) ................................... 451,560
34,600 RTZ Corp. PLC (Mining and finance company) ........................ 501,167
41,221 Reuters Holdings PLC (International news agency) .................. 447,330
----------
2,532,660
----------
UNITED STATES 25.6%
6,950 AT&T (Telecommunication services and business systems) ............ 425,686
5,960 EXEL, Ltd. (Provider of liability insurance) ...................... 411,240
11,610 Enron Corp. (Major natural gas pipeline system) ................... 428,119
11,650 First Data Corp. (Credit-card processing services) ................ 821,325
1,700 General Re Corp. (Property and casualty reinsurance) .............. 247,775
23,850 Homestake Mining Co. (Major international gold producer) .......... 462,094
3,450 International Business Machines Corp. (Principal manufacturer
and servicer of business and computing machines) ................ 383,381
5,100 J.P. Morgan & Co., Inc. (Commercial banking and financial
services) ....................................................... 423,300
22,400 LaFarge Corp. (Leading cement producer) ........................... 422,800
22,770 Louisiana-Pacific Corp. (Producer of lumber, plywood and
pulp) ........................................................... 555,019
5,510 MBIA Inc. (Insurer of municipal bonds) ............................ 413,250
11,300 National Semiconductor Corp.* (Manufacturer of integrated
circuits and transistors) ....................................... 156,788
7,600 Newmont Mining Corp. (International gold exploration and
mining company) ................................................. 430,350
3,800 Times Mirror Co. "A" (Newspaper publisher) ........................ 149,625
8,600 UNUM Corp. (Provider of disability, health and life insurance
and group pension products) ..................................... 511,700
14,950 WMX Technologies Inc. (Solid and chemical waste management
services) ....................................................... 474,663
3,650 Xerox Corp. (Leading manufacturer of copiers and duplicators) ..... 458,075
----------
7,175,190
----------
TOTAL COMMON STOCKS (COST $23,257,214) ............................ 23,646,528
==========
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $29,700,027) (a) ..... 107.4 30,087,503
OTHER ASSETS AND LIABILITIES, NET ..................... (7.4) (2,078,893)
----- ----------
NET ASSETS ............................................ 100.0 28,008,610
===== ==========
<FN>
* Nonincome producing security.
(a) At March 31, 1996, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $29,700,027 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ................................................... $ 603,012
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value ................................................. (215,536)
---------
Net unrealized appreciation ................................ $ 387,476
=========
Purchases of investment securities, (excluding short-term investments)
from February 1, 1996 through March 31, 1996, aggregated $24,101,413.
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
Sector breakdown of the Fund's equity securities is noted on page 21.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
63
<PAGE>
AARP CAPITAL GROWTH FUND
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
- -------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENTS 2.9%
21,996,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 3/29/96 at 5.35% to be repurchased at $22,005,807
on 4/1/96, collateralized by a $22,471,000 U.S.
Treasury Bill, 6/20/96 (COST $21,996,000) .............. 21,996,000
----------
PREFERRED STOCKS 0.3%
Shares
- ------
TECHNOLOGY
Computer Software
16,200 SAP AG (COST $2,524,657) ...................................... 2,332,861
----------
COMMON STOCKS 97.8%
CONSUMER DISCRETIONARY 8.4%
Department & Chain Stores 3.6%
200,000 J.C. Penney Co., Inc. ......................................... 9,950,000
200,000 May Department Stores ......................................... 9,650,000
250,000 Walgreen Co. .................................................. 8,156,250
----------
27,756,250
----------
Hotels & Casinos 0.9%
235,000 Grand Casinos Inc.* ........................................... 7,050,000
----------
Restaurants 2.0%
310,000 McDonald's Corp. .............................................. 14,880,000
----------
Specialty Retail 1.9%
346,800 Intimate Brands, Inc. ......................................... 6,719,250
300,000 Toys "R" Us Inc.* ............................................. 8,100,000
----------
14,819,250
----------
CONSUMER STAPLES 4.9%
Food & Beverage 0.9%
185,000 Albertson's Inc. .............................................. 6,868,125
----------
Package Goods/Cosmetics 3.5%
150,000 Clorox Co. .................................................... 12,918,750
145,600 Estee Lauder Companies "A" .................................... 5,205,200
100,000 Procter & Gamble Co. .......................................... 8,475,000
----------
26,598,950
----------
Textiles 0.5%
87,500 Gucci Group* (New York Shares) ................................ 4,200,000
----------
HEALTH 14.2%
Health Industry Services 1.0%
300,000 Bergen Brunswig Corp. "A" ..................................... 7,837,500
----------
Hospital Management 3.2%
420,000 Columbia/HCA Healthcare Corp. ................................. 24,255,000
----------
Medical Supply & Specialty 3.0%
179,000 Becton, Dickinson & Co. ....................................... 14,655,625
134,000 Medtronic Inc. ................................................ 7,989,750
----------
22,645,375
----------
Pharmaceuticals 7.0%
115,000 American Home Products Corp. .................................. 12,463,125
315,000 Astra AB "B" (Free) ........................................... 14,474,481
90,000 Johnson & Johnson ............................................. 8,302,500
</TABLE>
The accompanying notes are an integral part of the financial statements
64
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------
<S> <C>
150,000 Merck & Co. Inc. ..................... 9,337,500
150,000 Schering-Plough Corp. ................ 8,718,750
----------
53,296,356
----------
COMMUNICATIONS 0.8%
Telephone/Communications
225,000 Tele Danmark A/S (ADR) ............... 5,821,875
----------
FINANCIAL 15.5%
Banks 4.0%
125,000 First Chicago NBD Corp. .............. 5,187,500
80,000 J.P. Morgan & Co., Inc. .............. 6,640,000
141,600 MBNA Corp. ........................... 4,194,900
200,000 Norwest Corp. ........................ 7,350,000
160,000 Wachovia Corp. ....................... 7,160,000
----------
30,532,400
----------
Insurance 6.4%
180,000 American International Group, Inc. ... 16,852,500
26,900 Chubb Corp. .......................... 2,525,238
180,000 EXEL, Ltd. ........................... 12,420,000
24,000 General Re Corp. ..................... 3,498,000
176,000 MBIA Inc. ............................ 13,200,000
----------
48,495,738
----------
Other Financial Companies 5.1%
330,000 American Express Credit Corp. ........ 16,293,750
720,000 Federal National Mortgage Association 22,950,000
----------
39,243,750
----------
MEDIA 2.8%
Broadcasting & Entertainment 2.3%
280,000 Walt Disney Co. ...................... 17,885,000
----------
Print Media 0.5%
56,000 Gannett Co., Inc. .................... 3,766,000
----------
SERVICE INDUSTRIES 2.8%
Environmental Services 0.2%
145,500 Destec Energy Inc.* .................. 1,800,563
----------
Investment 2.6%
75,000 Dean Witter, Discover & Co. .......... 4,293,750
265,000 Franklin Resources Inc. .............. 15,105,000
----------
19,398,750
----------
DURABLES 4.8%
Aerospace 4.4%
100,000 Lockheed Martin Corp. ................ 7,587,500
235,000 Rockwell International Corp. ......... 13,835,625
110,000 United Technologies Corp. ............ 12,347,500
----------
33,770,625
----------
Telecommunications Equipment 0.4%
95,000 DSC Communications Corp.* ............ 2,565,000
----------
MANUFACTURING 12.4%
Chemicals 2.8%
140,000 E.I. du Pont de Nemours & Co. ........ 11,620,000
98,700 Praxair Inc. ......................... 3,935,663
100,000 Sigma-Aldrich Corp. .................. 5,725,000
----------
21,280,663
----------
Diversified Manufacturing 4.4%
300,000 Canadian Pacific Ltd. ................ 6,000,000
95,000 General Electric Co. ................. 7,398,125
</TABLE>
The accompanying notes are an integral part of the financial statements
65
<PAGE>
AARP CAPITAL GROWTH FUND
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -----------------------------------------------------------------------
<S> <C>
120,000 TRW Inc. .................................. 10,695,000
120,000 Textron, Inc. ............................. 9,600,000
----------
33,693,125
----------
Electrical Products 2.7%
60,000 ASEA AB (ADR) ............................. 6,195,000
83,000 Emerson Electric Co. ...................... 6,702,250
200,000 Philips NV (New York shares) .............. 7,275,000
----------
20,172,250
----------
Machinery/Components/Controls 2.5%
200,000 Ingersoll-Rand Co. ........................ 8,150,000
297,000 Parker-Hannifin Group ..................... 11,137,500
----------
19,287,500
----------
TECHNOLOGY 14.4%
Computer Software 0.1%
9,700 Xylan Corp.* .............................. 504,400
----------
Diverse Electronic Products 3.3%
475,000 Applied Materials, Inc.* .................. 16,565,625
140,000 General Motors Corp. "H" .................. 8,855,000
----------
25,420,625
----------
Electronic Components/Distributors 0.0%
72 Samsung Electronics Co., Ltd. ............. 8,468
21 Samsung Electronics Co., Ltd. (New) ....... 2,292
----------
10,760
----------
Electronic Data Processing 4.6%
150,000 Compaq Computer Corp.* .................... 5,793,750
275,000 Hewlett-Packard Co. ....................... 25,850,000
35,000 International Business Machines Corp. ..... 3,889,373
----------
35,533,123
----------
Office/Plant Automation 4.2%
150,000 3Com Corp.* ............................... 5,981,250
110,000 Cabletron Systems Inc.* ................... 7,287,500
400,000 Cisco Systems, Inc.* ...................... 18,550,000
----------
31,818,750
----------
Semiconductors 2.2%
280,000 Atmel Corp.* .............................. 7,140,000
82,900 Intel Corp. ............................... 4,714,938
91,000 Texas Instruments Inc. .................... 4,629,625
----------
16,484,563
----------
ENERGY 9.2%
Engineering 1.0%
110,000 Fluor Corp. ............................... 7,507,500
----------
Oil Companies 7.2%
175,000 Amoco Corp. ............................... 12,643,750
135,000 Exxon Corp. ............................... 11,019,375
70,000 Mobil Corp. ............................... 8,111,250
204,800 Repsol SA (ADR) ........................... 7,654,400
110,000 Royal Dutch Petroleum Co. (New York shares) 15,537,500
----------
54,966,275
----------
Oil/Gas Transmission 1.0%
200,000 Enron Corp. ............................... 7,375,000
----------
CONSTRUCTION 1.1%
Forest Products
330,000 Louisiana-Pacific Corp. ................... 8,043,750
----------
</TABLE>
The accompanying notes are an integral part of the financial statements
66
<PAGE>
LIST OF INVESTMENTS AS OF MARCH 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Market
Shares Value ($)
- -------------------------------------------------------------------------------------
<S> <C>
TRANSPORTATION 3.3%
Airlines 1.9%
160,000 AMR Corp.* ............................................. 14,320,000
-----------
Railroads 1.4%
100,000 Consolidated Rail Corp. ................................ 7,162,500
60,000 Wisconsin Central Transportation Co.* .................. 3,990,000
-----------
11,152,500
-----------
UTILITIES 3.2%
Electric Utilities
350,000 Eastern Utilities Association .......................... 7,525,000
130,000 Houston Industries Inc. ................................ 2,811,250
60,000 Illinova Corp. ......................................... 1,687,500
150,000 NIPSCO Industries Inc. ................................. 5,587,500
285,000 PowerGen PLC (ADR)* .................................... 6,840,000
-----------
24,451,250
-----------
TOTAL COMMON STOCKS (COST $596,126,467)................. 745,508,541
-----------
<CAPTION>
% OF NET
SUMMARY ASSETS
<S> <C> <C>
TOTAL INVESTMENT PORTFOLIO (COST $620,647,124)(a)..... 101.0 769,837,402
OTHER ASSETS AND LIABILITIES, NET..................... (1.0) (7,404,668)
----- -----------
NET ASSETS............................................ 100.0 762,432,734
===== ===========
- -------------------------------------------------------------------------------------
<FN>
* Nonincome producing security.
(a) At March 31, 1996, the net unrealized appreciation on investments based
on cost for federal income tax purposes of $620,647,124 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost ...................................................... $161,253,197
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value .................................................... (12,062,919)
------------
Net unrealized appreciation ................................... $149,190,278
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities, (excluding short-term
investments), for the six months ended March 31, 1996, aggregated
$276,713,787 and $267,858,048, respectively.
- --------------------------------------------------------------------------------
Percentage breakdown of investments is based on total net assets of the
Fund. The total net assets of the Fund are comprised of the Fund's
investment portfolio, other assets and liabilities. The percentage of the
investment portfolio may be greater or less than 100% due to the
inclusion of the Fund's assets and liabilities in the calculation. The
Fund's other assets and liabilities are disclosed in the Statement of
Assets and Liabilities.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
67
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
AARP HIGH AARP HIGH AARP GNMA AARP HIGH
QUALITY QUALITY TAX FREE AND U.S. QUALITY
MARCH 31, 1996 (UNAUDITED) MONEY FUND MONEY FUND TREASURY FUND BOND FUND
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios).......... $ 378,736,503 $ 114,361,160 $ 5,091,647,540 $ 548,835,367
Cash.................................................... 385,786 24,782 1,067,574 1,001
Receivable on investments sold.......................... - - - 5,317,119
Dividends and interest receivable....................... 2,728,121 1,126,097 46,805,780 5,673,174
Receivable on Fund shares sold.......................... 1,249,065 113,486 1,020,549 298,662
Unrealized appreciation on forward currency
exchange contracts (Notes 1 and 3).................... - - - -
Deferred organization expenses (Note 1)................. - - - -
Due from Fund Manager (Note 2).......................... - - - -
Other assets............................................ 3,624 1,214 46,575 1,969
------------- --------------- ----------------- --------------
Total assets............................................ 383,103,099 115,626,739 5,140,588,018 560,127,292
LIABILITIES
Investments purchased................................... - - 1,010,246 29,341,146
Fund shares redeemed.................................... 1,334,345 97,377 3,629,252 351,765
Dividends payable....................................... 131,857 48,204 11,605,999 738,899
Management fee (Note 2)................................. 126,752 38,561 1,799,820 219,312
Transfer and dividend disbursing agent (Note 2)......... 127,633 25,130 618,939 135,150
Daily variation margin on open futures
contracts (Note 1).................................... - - - -
Other accrued expenses.................................. 162,218 52,220 843,835 223,637
------------- --------------- ----------------- --------------
Total liabilities....................................... 1,882,805 261,492 19,508,091 31,009,909
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at value..................................... $ 381,220,294 $ 115,365,247 $ 5,121,079,927 $ 529,117,383
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Accumulated undistributed (overdistributed)
net investment income................................. $ - $ - $ - $ 304,913
Net unrealized appreciation (depreciation) on:
Investments........................................... (331,437) - 13,481,805 (3,645,899)
Futures contracts..................................... - - - -
Foreign currency related transactions................. - - - -
Accumulated net realized capital gain (loss)............ (64,327) (1,226,724) (301,359,596) (6,527,894)
Shares of beneficial interest, at par................... 3,815,517 115,372 3,400,767 332,413
Additional paid-in capital.............................. 377,800,541 116,476,599 5,405,556,951 538,653,850
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at value..................................... $ 381,220,294 $ 115,365,247 $ 5,121,079,927 $ 529,117,383
- ---------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding, $.01
par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value........... 381,551,731 115,372,286 340,076,707 33,241,292
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, offering and redemption
price per share (net assets at value, per
fund, divided by the respective shares
of beneficial interest outstanding)............. $ 1.00 $ 1.00 $ 15.06 $ 15.92
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
68
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED)
<TABLE>
<CAPTION>
AARP INSURED AARP BALANCED AARP GROWTH
TAX FREE GENERAL STOCK AND BOND AND INCOME
MARCH 31, 1996 (UNAUDITED) BOND FUND FUND FUND
<S> <C> <C> <C>
ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios).......... $ 1,778,920,671 $ 324,208,868 $ 3,652,001,718
Cash.................................................... 51,090 448,940 135,281
Receivable on investments sold.......................... -- 373,450 17,794,237
Dividends and interest receivable....................... 23,260,940 2,049,902 11,289,154
Receivable on Fund shares sold.......................... 403,402 -- 3,959,447
Unrealized appreciation on forward currency
exchange contracts (Notes 1 and 3).................... -- 4,157 --
Deferred organization expenses (Note 1)................. -- 25,269 --
Due from Fund Manager (Note 2).......................... -- -- --
Other assets............................................ 4,388 -- 4,287
---------------- ------------- ---------------
Total assets............................................ 1,802,640,491 327,110,586 3,685,184,124
LIABILITIES
Investments purchased................................... 11,210,000 7,313,392 12,859,956
Fund shares redeemed.................................... 701,276 -- 1,052,818
Dividends payable....................................... 2,862,555 -- --
Management fee (Note 2)................................. 735,974 139,400 1,485,762
Transfer and dividend disbursing agent (Note 2)......... 161,930 62,008 331,518
Daily variation margin on open futures
contracts (Note 1).................................... 862,500 -- --
Other accrued expenses.................................. 266,436 260,486 802,395
---------------- ------------- ---------------
Total liabilities....................................... 16,800,671 7,775,286 16,532,449
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at value..................................... $ 1,785,839,820 $ 319,335,300 $ 3,668,651,675
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Accumulated undistributed (overdistributed)
net investment income................................. $ -- $ (56,851) $ 4,901,544
Net unrealized appreciation (depreciation) on:
Investments........................................... 80,029,739 32,040,228 830,380,305
Futures contracts..................................... 1,324,812 -- --
Foreign currency related transactions................. -- (5,857) (37,717)
Accumulated net realized capital gain (loss)............ (17,368,574) 3,807,649 103,034,483
Shares of beneficial interest, at par................... 999,560 186,051 873,176
Additional paid-in capital.............................. 1,720,854,283 283,364,080 2,729,499,884
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at value..................................... $ 1,785,839,820 $ 319,335,300 $ 3,668,651,675
- ----------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding, $.01
par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value........... 99,955,966 18,605,061 87,317,641
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, offering and redemption
price per share (net assets at value, per
fund, divided by the respective shares
of beneficial interest outstanding)............. $ 17.87 $ 17.16 $ 42.02
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
AARP GLOBAL AARP CAPITAL
GROWTH GROWTH
MARCH 31, 1996 (UNAUDITED) FUND FUND
<S> <C> <C>
ASSETS
Investments, at value (for identified cost, see
accompanying lists of investment portfolios).......... $ 30,087,503 $769,837,402
Cash.................................................... 143 45
Receivable on investments sold.......................... -- 2,158,991
Dividends and interest receivable....................... 19,825 759,401
Receivable on Fund shares sold.......................... 677,806 369,914
Unrealized appreciation on forward currency
exchange contracts (Notes 1 and 3).................... -- --
Deferred organization expenses (Note 1)................. 14,507 --
Due from Fund Manager (Note 2).......................... 120,693 --
Other assets............................................ -- --
------------ ------------
Total assets............................................ 30,920,477 773,125,753
LIABILITIES
Investments purchased................................... 2,777,550 9,608,479
Fund shares redeemed.................................... 5,063 375,466
Dividends payable....................................... -- --
Management fee (Note 2)................................. 12,238 395,440
Transfer and dividend disbursing agent (Note 2)......... 42,284 100,396
Daily variation margin on open futures
contracts (Note 1).................................... -- --
Other accrued expenses.................................. 74,732 213,238
------------ ------------
Total liabilities....................................... 2,911,867 10,693,019
- ---------------------------------------------------------------------------------------------------------
Net assets at value..................................... $ 28,008,610 $762,432,734
- ---------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Accumulated undistributed (overdistributed)
net investment income................................. $ 29,187 $ 2,690,900
Net unrealized appreciation (depreciation) on:
Investments........................................... 387,476 149,190,278
Futures contracts..................................... -- --
Foreign currency related transactions................. (2,273) --
Accumulated net realized capital gain (loss)............ (11,269) 48,045,507
Shares of beneficial interest, at par................... 18,344 186,136
Additional paid-in capital.............................. 27,587,145 562,319,913
- ---------------------------------------------------------------------------------------------------------
Net assets at value..................................... $ 28,008,610 $762,432,734
- ---------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding, $.01
par value, unlimited number of shares
authorized. (Note) AARP High Quality Tax
Free Money Fund has a $.001 par value........... 1,834,377 18,613,576
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, offering and redemption
price per share (net assets at value, per
fund, divided by the respective shares
of beneficial interest outstanding)............. $ 15.27 $ 40.96
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
69
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
AARP HIGH AARP HIGH AARP GNMA AARP HIGH
SIX MONTHS ENDED MARCH 31, 1996 QUALITY QUALITY TAX FREE AND U.S. QUALITY
(UNAUDITED) MONEY FUND MONEY FUND TREASURY FUND BOND FUND
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest....................................... $ 10,613,268 $ 2,176,139 $ 190,927,048 $ 18,100,411
Dividends...................................... - - - -
------------ ----------- -------------- --------------
10,613,268 2,176,139 190,927,048 18,100,411
------------ ----------- -------------- --------------
Less foreign taxes withheld.................... - - - -
------------ ----------- -------------- --------------
10,613,268 2,176,139 190,927,048 18,100,411
- -----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fee (Note 2)........................ 751,538 231,336 10,831,770 1,305,675
Services to shareholders:
Transfer and dividend disbursing
expense (Note 2)..................... 755,473 155,238 3,743,410 799,397
Other expenses......................... 201,319 35,180 817,443 226,313
Trustees' fees and expenses (Note 2)........... 9,295 13,576 13,394 13,406
Shareholder communications..................... 81,258 23,700 614,964 79,305
Legal.......................................... 4,321 3,751 4,783 3,961
Auditing....................................... 14,000 14,000 34,000 25,450
Custodian and accounting fees (Note 2)......... 42,786 27,289 598,330 68,564
Registration expenses.......................... 40,591 11,385 48,965 15,029
Amortization of organization expenses
(Note 1)..................................... - - - -
Other.......................................... 13,983 6,314 97,558 13,097
------------ ----------- -------------- --------------
Total Expenses before reductions....................... 1,914,564 521,769 16,804,617 2,550,197
Expense reductions (Note 2)............................ - - - -
------------ ----------- -------------- --------------
Expenses, net.......................................... 1,914,564 521,769 16,804,617 2,550,197
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income.................................. 8,698,704 1,654,370 174,122,431 15,550,214
- -----------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investments............................ 2,594 - 57,937,663 2,053,849
Futures contracts (Note 1)............. - - - 1,704,048
Foreign currency related transactions
(Note 1)............................. - - - -
Net unrealized appreciation (depreciation) on:
Investments............................ 159,278 - (101,174,657) (6,920,280)
Futures contracts...................... - - - -
Foreign currency related transactions - - - -
------------ ----------- -------------- --------------
Net gain (loss) on investments......................... 161,872 - (43,236,994) (3,162,383)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations...................................... $ 8,860,576 $ 1,654,370 $ 130,885,437 $ 12,387,831
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
70
<PAGE>
<TABLE>
<CAPTION>
AARP Insured AARP Balanced AARP Growth AARP Global AARP Capital
SIX MONTHS ENDED MARCH 31, 1996 Tax Free General Stock and Bond and Income Growth Growth
(UNAUDITED) Bond Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest....................................... $ 49,444,772 $ 4,021,249 $ 5,991,254 $ 34,588 $ 565,746
Dividends...................................... -- 2,513,398 49,522,879 20,923 6,155,206
------------ ------------ ------------- --------- ------------
49,444,772 6,534,647 55,514,133 55,511 6,720,952
------------ ------------ ------------- --------- ------------
Less foreign taxes withheld.................... -- (13,630) (330,767) (1,526) (74,588)
------------ ------------ ------------- --------- ------------
49,444,772 6,521,017 55,183,366 53,985 6,646,364
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fee (Note 2)........................ 4,423,663 688,877 7,966,962 12,238 2,218,024
Services to shareholders:
Transfer and dividend disbursing
expense (Note 2)..................... 980,156 320,261 1,806,427 42,284 573,478
Other expenses......................... 217,053 35,941 728,490 6,127 190,087
Trustees' fees and expenses (Note 2)........... 13,576 13,539 13,522 4,473 13,002
Shareholder communications..................... 172,376 179,117 448,574 13,417 122,624
Legal.......................................... 4,491 1,945 5,769 1,421 7,063
Auditing....................................... 30,250 7,888 24,650 1,000 23,250
Custodian and accounting fees (Note 2)......... 172,139 30,779 322,543 28,776 125,074
Registration expenses.......................... 36,060 101,097 95,480 33,269 1,329
Amortization of organization expenses
(Note 1)..................................... -- 4,466 -- 500 --
Other.......................................... 37,609 22,128 61,888 1,986 7,997
------------ ------------ ------------- --------- ------------
Total Expenses before reductions....................... 6,087,373 1,406,038 11,474,305 145,491 3,281,928
Expense reductions (Note 2)............................ -- -- -- (120,693) --
------------ ------------ ------------- --------- ------------
Expenses, net.......................................... 6,087,373 1,406,038 11,474,305 24,798 3,281,928
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income.................................. 43,357,399 5,114,979 43,709,061 29,187 3,364,436
- -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) from:
Investments............................ 12,712,046 4,791,863 117,785,191 (491) 53,543,930
Futures contracts (Note 1)............. (1,156,315) 34,435 -- -- --
Foreign currency related transactions
(Note 1)............................. -- 304,147 (256,070) (10,778) (27,653)
Net unrealized appreciation (depreciation) on:
Investments............................ (7,242) 10,965,134 250,177,706 387,476 7,474,671
Futures contracts...................... 1,954,701 3,391 -- -- --
Foreign currency related transactions -- (165,806) (43,545) (2,273) 4,789
------------ ------------ ------------- --------- ------------
Net gain (loss) on investments......................... 13,503,190 15,933,164 367,663,282 373,934 60,995,737
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations...................................... $ 56,860,589 $ 21,048,143 $ 411,372,343 $ 403,121 $ 64,360,173
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
71
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
AARP HIGH AARP HIGH
QUALITY QUALITY TAX FREE
MONEY FUND MONEY FUND
INCREASE (DECREASE) IN NET ASSETS:
Six Months Ended Year Six Months Ended Year
March 31, Ended March 31, Ended
1996 Sept. 30, 1996 Sept. 30,
(Unaudited) 1995 (Unaudited) 1995
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Operations:
Net investment income .......................... $ 8,698,704 $ 18,316,417 $ 1,654,370 $ 3,691,193
Net realized gain (loss) from:
Investments ............................ 2,594 (2,594) -- (5,140)
Futures contracts ...................... -- -- -- --
Foreign currency related transactions .. -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ............................ 159,278 (235,013) -- --
Futures contracts ...................... -- -- -- --
Foreign currency related transactions .. -- -- -- --
------------- ------------- ------------- -------------
Net increase (decrease) in net assets resulting
from operations ................................ 8,860,576 18,078,810 1,654,370 3,686,053
------------- ------------- ------------- -------------
Distributions to shareholders:
Net investment income .......................... (8,698,704) (18,316,417) (1,654,370) (3,691,193)
Net realized gains ............................. -- -- -- --
Tax return of capital .......................... -- -- -- --
------------- ------------- ------------- -------------
(8,698,704) (18,316,417) (1,654,370) (3,691,193)
------------- ------------- ------------- -------------
Fund share transactions:
Proceeds from sale of shares ................... 169,270,293 405,381,235 15,149,738 41,129,795
Net asset value of shares issued to
shareholders in reinvestment of
distributions .......................... 7,761,867 16,274,697 1,315,720 2,929,152
Cost of shares redeemed ........................ (179,869,790) (370,960,332) (20,846,182) (53,717,481)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from Fund
share transactions ............................. (2,837,630) 50,695,600 (4,380,724) (9,658,534)
------------- ------------- ------------- -------------
Increase (decrease) in net assets ...................... (2,675,758) 50,457,993 (4,380,724) (9,663,674)
Net assets at beginning of period ...................... 383,896,052 333,438,059 119,745,971 129,409,645
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ........................ $ 381,220,294 $ 383,896,052 $ 115,365,247 $ 119,745,971
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning of period .............. 384,389,361 333,693,761 119,753,010 129,411,544
------------- ------------- ------------- -------------
Shares sold .................................... 169,270,293 405,381,235 15,149,738 41,129,795
Shares issued to shareholders in
reinvestment of distributions ......... 7,761,867 16,274,697 1,315,720 2,929,152
Shares redeemed ................................ (179,869,790) (370,960,332) (20,846,182) (53,717,481)
------------- ------------- ------------- -------------
Net increase (decrease) in Fund shares ................. (2,837,630) 50,695,600 (4,380,724) (9,658,534)
------------- ------------- ------------- -------------
Shares outstanding at end of period .................... 381,551,731 384,389,361 115,372,286 119,753,010
- ---------------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed (overdistributed)
net investment income .............................. $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
AARP GNMA AARP High
and U.S. Quality
Treasury Fund Bond Fund
INCREASE (DECREASE) IN NET ASSETS:
Six Months Ended Year Six Months Ended Year
March 31, Ended March 31, Ended
1996 Sept. 30, 1996 Sept. 30,
(Unaudited) 1995 (Unaudited) 1995
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Operations:
Net investment income .......................... $ 174,122,431 $ 358,090,095 $ 15,550,214 $ 32,695,491
Net realized gain (loss) from:
Investments ............................ 57,937,663 (68,679,536) 2,053,849 6,264,433
Futures contracts ...................... -- -- 1,704,048 462,444
Foreign currency related transactions .. -- -- -- --
Net unrealized appreciation (depreciation) on:
Investments ............................ (101,174,657) 224,571,191 (6,920,280) 25,349,000
Futures contracts ...................... -- -- -- (235,464)
Foreign currency related transactions .. -- -- -- --
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets resulting
from operations ................................ 130,885,437 513,981,750 12,387,831 64,535,904
--------------- --------------- --------------- ---------------
Distributions to shareholders:
Net investment income .......................... (174,122,431) (347,262,513) (15,550,214) (32,238,660)
Net realized gains ............................. -- -- -- --
Tax return of capital .......................... -- (10,827,582) -- --
--------------- --------------- --------------- ---------------
(174,122,431) (358,090,095) (15,550,214) (32,238,660)
--------------- --------------- --------------- ---------------
Fund share transactions:
Proceeds from sale of shares ................... 182,586,082 313,574,493 32,979,906 38,133,943
Net asset value of shares issued to
shareholders in reinvestment of
distributions .......................... 101,305,738 209,361,883 11,015,827 22,872,960
Cost of shares redeemed ........................ (371,625,373) (1,012,262,747) (45,138,264) (127,867,757)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions ............................. (87,733,553) (489,326,371) (1,142,531) (66,860,854)
--------------- --------------- --------------- ---------------
Increase (decrease) in net assets ...................... (130,970,547) (333,434,716) (4,304,914) (34,563,610)
Net assets at beginning of period ...................... 5,252,050,474 5,585,485,190 533,422,297 567,985,907
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ........................ $ 5,121,079,927 $ 5,252,050,474 $ 529,117,383 $ 533,422,297
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning of period .............. 345,829,087 379,121,168 33,312,382 37,734,181
--------------- --------------- --------------- ---------------
Shares sold .................................... 11,966,664 21,222,249 2,030,000 2,475,377
Shares issued to shareholders in
reinvestment of distributions ......... 6,644,158 14,034,160 678,509 1,481,640
Shares redeemed ................................ (24,363,202) (68,548,490) (2,779,599) (8,378,816)
--------------- --------------- --------------- ---------------
Net increase (decrease) in Fund shares ................. (5,752,380) (33,292,081) (71,090) (4,421,799)
--------------- --------------- --------------- ---------------
Shares outstanding at end of period .................... 340,076,707 345,829,087 33,241,292 33,312,382
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed (overdistributed)
net investment income .............................. $ -- $ -- $ 304,913 $ 304,913
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
AARP Insured AARP Balanced
Tax Free General Stock and Bond
Bond Fund Fund
INCREASE (DECREASE) IN NET ASSETS:
Six Months Ended Year Six Months Ended Year
March 31, Ended March 31, Ended
1996 Sept. 30, 1996 Sept. 30,
(Unaudited) 1995 (Unaudited) 1995
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Operations:
Net investment income .......................... $ 43,357,399 $ 91,515,925 $ 5,114,979 $ 8,110,687
Net realized gain (loss) from:
Investments ............................ 12,712,046 1,141,498 4,791,863 2,922,966
Futures contracts ...................... (1,156,315) (22,927,127) 34,435 66,437
Foreign currency related transactions .. -- -- 304,147 (8,944)
Net unrealized appreciation (depreciation) on:
Investments ............................ (7,242) 102,468,526 10,965,134 20,344,202
Futures contracts ...................... 1,954,701 (843,714) 3,391 (3,391)
Foreign currency related transactions .. -- -- (165,806) 159,949
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets resulting
from operations ................................ 56,860,589 171,355,108 21,048,143 31,591,906
--------------- --------------- --------------- ---------------
Distributions to shareholders:
Net investment income .......................... (43,357,399) (91,515,925) (5,493,796) (7,923,700)
Net realized gains ............................. -- -- (3,378,368) (479,306)
Tax return of capital .......................... -- -- -- --
--------------- --------------- --------------- ---------------
(43,357,399) (91,515,925) (8,872,164) (8,403,006)
--------------- --------------- --------------- ---------------
Fund share transactions:
Proceeds from sale of shares ................... 62,059,896 128,807,008 71,213,172 82,046,020
Net asset value of shares issued to
shareholders in reinvestment of
distributions .......................... 26,371,919 56,102,941 8,119,521 7,595,827
Cost of shares redeemed ........................ (123,142,507) (371,972,763) (19,380,327) (41,121,662)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions ............................. (34,710,692) (187,062,814) 59,952,366 48,520,185
--------------- --------------- --------------- ---------------
Increase (decrease) in net assets ...................... (21,207,502) (107,223,631) 72,128,345 71,709,085
Net assets at beginning of period ...................... 1,807,047,322 1,914,270,953 247,206,955 175,497,870
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ........................ $ 1,785,839,820 $ 1,807,047,322 $ 319,335,300 $ 247,206,955
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning of period .............. 101,872,699 113,066,680 15,074,610 11,983,629
--------------- --------------- --------------- ---------------
Shares sold .................................... 3,420,940 7,482,591 4,192,246 5,336,478
Shares issued to shareholders in
reinvestment of distributions ......... 1,452,204 3,261,074 480,340 497,020
Shares redeemed ................................ (6,789,877) (21,937,646) (1,142,135) (2,742,517)
--------------- --------------- --------------- ---------------
Net increase (decrease) in Fund shares ................. (1,916,733) (11,193,981) 3,530,451 3,090,981
--------------- --------------- --------------- ---------------
Shares outstanding at end of period .................... 99,955,966 101,872,699 18,605,061 15,074,610
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed (overdistributed)
net investment income .............................. $ -- $ -- $ (56,851) $ 321,966
</TABLE>
The accompanying notes are an integral part of the financial statements.
73
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
AARP GROWTH AARP GLOBAL
AND INCOME GROWTH
FUND FUND
INCREASE (DECREASE) IN NET ASSETS:
Six Months Ended Year For the Period
March 31, Ended February 1, 1996 (b) to
1996 Sept. 30, March 31, 1996
(Unaudited) 1995 (Unaudited)
----------- ---- -----------
<S> <C> <C> <C>
Operations:
Net investment income ........................ $ 43,709,061 $ 83,288,031 $ 29,187
Net realized gain (loss) from:
Investments .......................... 117,785,191 82,525,735 (491)
Futures contracts .................... -- -- --
Foreign currency related transactions (256,070) 23,310 (10,778)
Net unrealized appreciation (depreciation) on:
Investments .......................... 250,177,706 331,251,054 387,476
Futures contracts .................... -- -- --
Foreign currency related transactions (43,545) 5,828 (2,273)
--------------- --------------- ---------------
Net increase (decrease) in net assets resulting
from operations .............................. 411,372,343 497,093,958 403,121
--------------- --------------- ---------------
Distributions to shareholders:
Net investment income ........................ (44,879,985) (81,086,105) --
Net realized gains ........................... (67,064,704) (85,015,819) --
Tax return of capital ........................ -- -- --
--------------- --------------- ---------------
(111,944,689) (166,101,924) --
--------------- --------------- ---------------
Fund share transactions:
Proceeds from sale of shares ................. 444,194,008 589,883,371 27,771,879
Net asset value of shares issued to
shareholders in reinvestment of
distributions ........................ 101,703,065 149,554,221 --
Cost of shares redeemed ...................... (183,191,629) (376,048,965) (167,890)
--------------- --------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions ........................... 362,705,444 363,388,627 27,603,989
--------------- --------------- ---------------
Increase (decrease) in net assets .................... 662,133,098 694,380,661 28,007,110
Net assets at beginning of period .................... 3,006,518,577 2,312,137,916 1,500
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (a) ...................... $ 3,668,651,675 $ 3,006,518,577 $ 28,008,610
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning of period ............ 78,371,684 67,740,274 100
--------------- --------------- ---------------
Shares sold .................................. 10,950,533 17,103,571 1,845,356
Shares issued to shareholders in
reinvestment of distributions ....... 2,540,844 4,523,324 --
Shares redeemed .............................. (4,545,420) (10,995,485) (11,079)
--------------- --------------- ---------------
Net increase (decrease) in Fund shares ............... 8,945,957 10,631,410 1,834,277
--------------- --------------- ---------------
Shares outstanding at end of period .................. 87,317,641 78,371,684 1,834,377
- ---------------------------------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
(overdistributed) net investment income .......... $ 4,901,544 $ 6,072,468 $ 29,187
(b) Commencement of Operations
<CAPTION>
FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
AARP CAPITAL
GROWTH
FUND
INCREASE (DECREASE) IN NET ASSETS:
Six Months Ended Year
March 31, Ended
1996 Sept. 30,
(Unaudited) 1995
----------- ----
<S> <C> <C>
Operations:
Net investment income ........................ $ 3,364,436 $ 6,448,989
Net realized gain (loss) from:
Investments .......................... 53,543,930 3,854,142
Futures contracts .................... -- --
Foreign currency related transactions (27,653) (49,230)
Net unrealized appreciation (depreciation) on:
Investments .......................... 7,474,671 124,391,488
Futures contracts .................... -- --
Foreign currency related transactions 4,789 (4,789)
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations .............................. 64,360,173 134,640,600
--------------- ---------------
Distributions to shareholders:
Net investment income ........................ (7,038,882) (216,094)
Net realized gains ........................... (9,204,690) (13,160,374)
Tax return of capital ........................ -- --
--------------- ---------------
(16,243,572) (13,376,468)
--------------- ---------------
Fund share transactions:
Proceeds from sale of shares ................. 64,912,037 68,276,671
Net asset value of shares issued to
shareholders in reinvestment of
distributions ........................ 15,425,567 12,786,953
Cost of shares redeemed ...................... (58,030,417) (193,118,723)
--------------- ---------------
Net increase (decrease) in net assets from Fund
share transactions ........................... 22,307,187 (112,055,099)
--------------- ---------------
Increase (decrease) in net assets .................... 70,423,788 9,209,033
Net assets at beginning of period .................... 692,008,946 682,799,913
- ---------------------------------------------------------------------------------------------
Net assets at end of period (a) ...................... $ 762,432,734 $ 692,008,946
- ---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN FUND SHARES:
Shares outstanding at beginning of period ............ 18,041,977 21,513,985
--------------- ---------------
Shares sold .................................. 1,645,004 2,055,946
Shares issued to shareholders in
reinvestment of distributions ....... 400,664 424,681
Shares redeemed .............................. (1,474,069) (5,952,635)
--------------- ---------------
Net increase (decrease) in Fund shares ............... 571,599 (3,472,008)
--------------- ---------------
Shares outstanding at end of period .................. 18,613,576 18,041,977
- ---------------------------------------------------------------------------------------------
(a) Includes accumulated undistributed
(overdistributed) net investment income .......... $ 2,690,900 $ 6,365,346
(b) Commencement of Operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
74
<PAGE>
FINANCIAL HIGHLIGHTS
AARP HIGH QUALITY MONEY FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1996 -----------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ........................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------------------------
Net investment income (a) .............................. .023 .049 .028 .021 .040 .060
Distributions from net investment income ............... (.023) (.049) (.028) (.021) (.040)(b) (.060)
--------------------------------------------------------------
Net asset value, end of period ................................. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------------------------
TOTAL RETURN (%)(c) ............................................ 2.30(d) 4.99 2.84 2.13 4.12 6.22
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ......................... 381 384 333 254 323 357
Ratio of operating expenses to average net assets (%)(a) ....... .988(e) .978 1.125 1.312 1.151 1.053
Ratio of net investment income to average net assets (%) ....... 4.490(e) 4.887 2.889 2.123 3.613 6.050
(a) Reflects a per share reimbursement of expenses
during the period by the Fund Manager of: .................. $ -- $ -- $ -- $ -- $ .000 $ .001
(b) Includes approximately $.005 per share of net realized
short--term capital gains.
(c) Total returns would have been lower had certain expenses
not been reduced.
(d) Not Annualized (e) Annualized
</TABLE>
AARP HIGH QUALITY TAX FREE MONEY FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1996 -------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991(b)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ...................... $1.000 $1.000 $1.000 $1.000 $1.000 $.996
--------------------------------------------------------------
Income from investment operations:
Net investment income (a) ......................... .014 .029 .017 .016 .026 .055
Net realized and unrealized gain on investments ... -- -- -- -- -- .004
--------------------------------------------------------------
Total from investment operations .......................... .014 .029 .017 .016 .026 .059
--------------------------------------------------------------
Less distributions from net investment income ............. (.014) (.029) (.017) (.016) (.026) (.055)
--------------------------------------------------------------
Net asset value, end of period ............................ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
--------------------------------------------------------------
TOTAL RETURN (%)(c) 1.42(d) 2.99 1.76 1.62 2.58 6.10
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) 115 120 129 134 127 119
Ratio of operating expenses to average net assets (%)(a)... .89(e) .87 .90 .93 .95 1.06
Ratio of net investment income to average net assets (%)... 2.82(e) 2.94 1.75 1.60 2.54 5.43
(a) Reflects a per share reimbursement of expenses
during the period by the Fund Manager of: ............. $ -- $ -- $ .000 $ .002 $ .002 $ .001
(b) On August 1, 1991 the Fund implemented a 15.17 to 1.00
stock split and adopted its present name and investment
objectives. Prior to that date, the Fund was known as
the AARP Insured Tax Free Short Term Fund. Financial
Highlights, for the year ended September 30, 1991, have
been restated to reflect the stock split and should not
be considered representative of the present Fund.
(c) Total returns would have been lower had certain expenses
not been reduced.
(d) Not Annualized (e) Annualized
</TABLE>
75
<PAGE>
FINANCIAL HIGHLIGHTS
AARP GNMA AND U.S. TREASURY FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1996 --------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 15.19 $ 14.73 $ 15.96 $ 16.19 $15.72 $14.95
-----------------------------------------------------------------
Income from investment operations:
Net investment income ................................ .51 1.01 .93 1.15 1.22 1.26
Net realized and unrealized gain (loss) on investments (.13) .46 (1.23) (.23) .47 .77
-----------------------------------------------------------------
Total from investment operations ............................. .38 1.47 (.30) .92 1.69 2.03
-----------------------------------------------------------------
Less distributions:
Net investment income ................................ (.51) (.98) (.93) (1.15) (1.22) (1.26)
Tax return of capital ................................ -- (.03) -- -- -- --
-----------------------------------------------------------------
Total distributions .................................. (.51) (1.01) (.93) (1.15) (1.22) (1.26)
-----------------------------------------------------------------
Net asset value, end of period ............................... $ 15.06 $ 15.19 $ 14.73 $ 15.96 $16.19 $15.72
-----------------------------------------------------------------
TOTAL RETURN (%) ............................................. 2.49(a) 10.31 (1.90) 5.89 11.19 14.12
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ....................... 5,121 5,252 5,585 6,712 5,232 3,311
Ratio of operating expenses to average net assets (%) ........ .64(b) .67 .66 .70 .72 .74
Ratio of net investment income to average net assets (%) ..... 6.66(b) 6.77 6.09 7.15 7.69 8.23
Portfolio turnover rate (%) .................................. 56.28(b) 70.35 114.54 105.49 74.33 86.64
(a) Not Annualized (b) Annualized
</TABLE>
AARP HIGH QUALITY BOND FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1996 --------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......................... $ 16.01 $ 15.05 $ 17.19 $ 16.44 $ 15.71 $ 14.63
-----------------------------------------------------------------
Income from investment operations:
Net investment income ................................. .47 .94 .85 .93 1.03 1.10
Net realized and unrealized gain (loss) on investments (.09) .95 (1.76) .93 .73 1.08
-----------------------------------------------------------------
Total from investment operations .............................. .38 1.89 (.91) 1.86 1.76 2.18
-----------------------------------------------------------------
Less distributions:
Net investment income ................................. (.47) (.93) (.85) (.93) (1.03) (1.10)
Net realized gains on investments ..................... -- -- -- (.18) -- --
In excess of net realized gains on investments ........ -- -- (.38) -- -- --
-----------------------------------------------------------------
Total distributions ........................................... (.47) (.93) (1.23) (1.11) (1.03) (1.10)
-----------------------------------------------------------------
Net asset value, end of period ................................ $ 15.92 $ 16.01 $ 15.05 $ 17.19 $ 16.44 $ 15.71
-----------------------------------------------------------------
TOTAL RETURN (%) .............................................. 2.35(a) 12.98 (5.55) 11.88 11.56 15.44
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ........................ 529 533 568 604 384 201
Ratio of operating expenses to average net assets (%) ......... .95(b) .95 .95 1.01 1.13 1.17
Ratio of net investment income to average net assets (%) ...... 5.78(b) 6.13 5.31 5.64 6.40 7.26
Portfolio turnover rate (%) ................................... 199.17(b) 201.07 63.75 100.98 63.00 90.43
(a) Not Annualized (b) Annualized
</TABLE>
76
<PAGE>
AARP INSURED TAX FREE GENERAL BOND FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1996 ----------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................... $ 17.74 $ 16.93 $ 19.00 $ 17.88 $ 17.30 $ 16.12
-------------------------------------------------------------------------
Income from investment operations:
Net investment income .......................... .43 .87 .86 .90 .93 1.00
Net realized and unrealized gain (loss) on
investments .................................... .13 .81 (1.67) 1.55 .75 1.18
-------------------------------------------------------------------------
Total from investment operations ............... .56 1.68 (.81) 2.45 1.68 2.18
-------------------------------------------------------------------------
Less distributions:
Net investment income .......................... (.43) (.87) (.86) (.90) (.93) (1.00)
Net realized gains on investments .............. -- -- (.34) (.43) (.17) --
In excess of net realized gains on investments . -- -- (.06) -- -- --
-------------------------------------------------------------------------
Total distributions .................................... (.43) (.87) (1.26) (1.33) (1.10) (1.00)
-------------------------------------------------------------------------
Net asset value, end of period ......................... $ 17.87 $ 17.74 $ 16.93 $ 19.00 $ 17.88 $ 17.30
-------------------------------------------------------------------------
TOTAL RETURN (%) ....................................... 3.15(a) 10.21 (4.48) 14.31 10.01 13.85
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ................. 1,786 1,807 1,914 2,087 1,487 1,068
Ratio of operating expenses to average net assets (%) .. .67(b) .69 .68 .72 .74 .77
Ratio of net investment income to average net assets (%) 4.75(b) 5.06 4.80 4.90 5.31 5.92
Portfolio turnover rate (%) ............................ 41.37(b) 17.45 38.39 47.96 62.45 32.18
(a) Not Annualized (b) Annualized
</TABLE>
AARP BALANCED STOCK AND BOND FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR FOR THE PERIOD
MARCH 31, ENDED FEBRUARY 1, 1994(a)
1996 SEPTEMBER 30, TO SEPTEMBER 30,
(UNAUDITED) 1995 1994
----------- ------------- -------------------
<S> <C> <C> <C>
Net asset value, beginning of period ......................... $ 16.40 $ 14.64 $ 15.00
------------------------------------------------------
Income from investment operations:
Net investment income ................................ .30 .61 .25
Net realized and unrealized gain (loss) on investments .99 1.79 (.37)(b)
------------------------------------------------------
Total from investment operations ............................. 1.29 2.40 (.12)
------------------------------------------------------
Less distributions:
Net investment income ................................ (.32) (.60) (.24)
Net realized gains on investments .................... (.21) (.04) --
------------------------------------------------------
Total distributions .......................................... (.53) (.64) (.24)
------------------------------------------------------
Net asset value, end of period ............................... $ 17.16 $ 16.40 $ 14.64
------------------------------------------------------
TOTAL RETURN (%) ............................................. 7.94(d) 16.80 (.78)(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) ....................... 319 247 175
Ratio of operating expenses to average net assets (%) ........ 1.01(e) 1.01 1.31(e)
Ratio of net investment income to average net assets (%) ..... 3.66(e) 4.12 3.58(e)
Portfolio turnover rate (%) .................................. 40.57(e) 63.77 49.32(e)
Average commission rate paid (c) ............................. $ .0551 $ -- $ --
</TABLE>
(a) Commencement of operations
(b) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and repurchases
of Fund shares in relation to fluctuating market values during the period.
(c) Average commission rate paid per share is calculated for fiscal years
beginning on or after September 1, 1995.
(d) Not Annualized (e) Annualized
77
<PAGE>
FINANCIAL HIGHLIGHTS
AARP GROWTH AND INCOME FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEARS ENDED SEPTEMBER 30,
1996 ----------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
--------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $38.36 $34.13 $32.91 $ 28.67 $ 26.97 $ 22.30
----------------------------------------------------------------------------
Income from investment operations:
Net investment income............ .52 1.11 .94 .83 .97 1.11
Net realized and unrealized
gain on investments............ 4.52 5.44 1.62 4.58 2.11 4.78
----------------------------------------------------------------------------
Total from investment operations......... 5.04 6.55 2.56 5.41 3.08 5.89
----------------------------------------------------------------------------
Less distributions from:
Net investment income............ (.54) (1.09) (1.13) (.87) (.90) (1.17)
Net realized gains on investments (.84) (1.23) (.21) (.30) (.48) (.05)
----------------------------------------------------------------------------
Total distributions...................... (1.38) (2.32) (1.34) (1.17) (1.38) (1.22)
----------------------------------------------------------------------------
Net asset value, end of period........... $42.02 $38.36 $34.13 $ 32.91 $ 28.67 $ 26.97
----------------------------------------------------------------------------
TOTAL RETURN (%).......................... 13.34(b) 20.43 7.99 19.38 11.59 27.19
RATIOS AND SUPPLEMENTAL DATA..............
Net assets, end of period ($ millions).... 3,669 3,007 2,312 1,560 748 392
Ratio of operating expenses to average
net assets (%).......................... .70(c) .72 .76 .84 .91 .96
Ratio of net investment income to average
net assets (%).......................... 2.66(c) 3.28 3.00 3.08 3.84 4.61
Portfolio turnover rate (%)............... 30.45(c) 31.26 31.82 17.44 36.40 53.68
Average commission rate paid (a).......... $.0499 $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Average commission rate paid per share is calculated for fiscal years
beginning on or after September 1, 1995.
(b) Not Annualized (c) Annualized
AARP GLOBAL GROWTH FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 1, 1996
(COMMENCEMENT)
OF OPERATIONS)
TO MARCH 31, 1996
(UNAUDITED)
-----------
<S> <C>
Net asset value, beginning of period......................................... $ 15.00
-----------
Income from investment operations:
Net investment income (a)............................................ .02
-----------
Net realized and unrealized gain (loss) on investments............... .25
-----------
Total from investment operations............................................. .27
-----------
Net asset value, end of period............................................... $ 15.27
-----------
Total Return (%) (b)......................................................... 1.80(d)
Ratios and Supplemental Data
Net assets, end of period ($ millions)....................................... 28
Ratio of operating expenses to average net assets (%) (a).................... 1.75(e)
Ratio of net investment income to average net assets (%)..................... 2.06(e)
Portfolio turnover rate (%).................................................. --
Average commission rate paid (c)............................................. $ .0172
(a) Reflects a per share reimbursement of expenses during the period by the
Fund Manager of:........................................................ $ .07
Operating expense ratio including expense reductions (%)............. 10.27(e)
</TABLE>
(b) Total returns would have been lower had certain expenses not been
reduced.
(c) Average commission rate paid per share is calculated for fiscal years
beginning on or after September 1, 1995.
(d) Not Annualized (e) Annualized
78
<PAGE>
AARP CAPITAL GROWTH FUND
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED SEPTEMBER 30,
MARCH 31, -------------------------------------------------
1996
(UNAUDITED) 1995 1994 1993 1992 1991
--------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $ 38.36 $31.74 $36.20 $ 30.30 $ 30.23 $ 23.32
------- ------ ------ ------- -------- -------
Income from investment operations:
Net investment income............... .18 .36 .00 .06 .15 .24
Net realized and unrealized
gain (loss) on investments........ 3.32 6.91 (1.51) 7.19 1.09 9.05
---------------------------------------------------------------
Total from investment operations............ 3.50 7.27 (1.51) 7.25 1.24 9.29
---------------------------------------------------------------
Less distributions from:
Net investment income............... (.39) (.01) (.05) (.14) (.23) (.59)
Net realized gains on investments... (.51) (.64) (2.90) (1.21) (.94) (1.79)
---------------------------------------------------------------
Total distributions......................... (.90) (.65) (2.95) (1.35) (1.17) (2.38)
---------------------------------------------------------------
Net asset value, end of period.............. $ 40.96 $38.36 $ 31.74 $ 36.20 $ 30.30 $ 30.23
---------------------------------------------------------------
TOTAL RETURN (%)............................ 9.27(b) 23.47 (4.70) 24.53 3.94 42.81
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)...... 762 692 683 607 424 242
Ratio of operating expenses to average
net assets (%)............................ .91(c) .95 .97 1.05 1.13 1.17
Ratio of net investment income to
average net assets (%).................... .93(c) 1.00 .02 .22 .61 .90
Portfolio turnover rate (%)................. 75.90(c) 98.44 79.65 100.63 89.20 99.62
Average commission rate paid (a)............ $ .0617 $ - $ - $ - $ - $ -
</TABLE>
(a) Average commission rate paid per share is calculated for fiscal years
beginning on or after September 1, 1995.
(b) Not Annualized
(c) Annualized
79
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.
The AARP Cash Investment Funds, consisting of the AARP High Quality
Money Fund, the AARP Income Trust, consisting of the AARP GNMA and U.S. Treasury
Fund and the AARP High Quality Bond Fund, the AARP Tax Free Income Trust,
consisting of the AARP High Quality Tax Free Money Fund, (formerly AARP Insured
Tax Free Short Term Fund), and the AARP Insured Tax Free General Bond Fund, and
the AARP Growth Trust, consisting of the AARP Balanced Stock and Bond Fund, AARP
Growth and Income Fund, AARP Global Growth Fund, and the AARP Capital Growth
Fund are each Massachusetts business trusts and are registered under the
Investment Company Act of 1940, as amended, as open-end management investment
companies. All funds are diversified. The AARP Cash Investment Funds, has one
series, the AARP Growth Trust has four series and each of the other Trusts have
two series. The Declaration of Trust of each Trust permits its Trustees to
create an unlimited number of series and to issue an unlimited number of full
and fractional shares of each separate series.
The Fund's financial statements are prepared in accordance with
generally accepted accounting principles which require the use of management
estimates. The policies described below are followed consistently by the funds
in preparation of their financial statements.
A. SECURITY VALUATION. The AARP High Quality Money Fund uses the penny
rounding method of security valuation as permitted under Rule 2a-7 of the
Investment Company Act of 1940. Under this method, securities for which market
quotations are readily available and which have remaining maturities of
sixty-one days or more from the date of valuation are valued at the mean between
the over-the-counter bid and asked prices by an independent registered
broker/dealer. On the sixtieth day prior to maturity and thereafter until
maturity, securities originally purchased with more than sixty days remaining to
maturity are valued at amortized cost calculated daily, based upon the market
valuation of the securities on the sixty-first day prior to maturity. The AARP
High Quality Tax Free Money Fund uses the amortized cost method of security
valuation as permitted under Rule 2a-7 of the Investment Company Act of 1940.
Under this method, the value of a security is determined by adjusting its
original cost to face value through the amortization of any acquisition discount
or premium at a constant rate until maturity, which approximates market.
Security valuation with respect to each of the remaining funds is performed in
the following manner:
Common and preferred stocks traded on national securities exchanges are
valued at the most recent sale price on such exchange where the security is
principally traded. If no sale occurred, the security is valued at the mean
between the most recent bid and asked quotations on such exchanges. If there is
no such bid and asked quotations the most recent bid quotation is used. Unlisted
securities quoted on the National Association of Securities Dealers Automatic
Quotation ("NASDAQ") System, for which there have been sales, are valued at the
most recent sale price reported on such system. If there are no such sales, the
value is the high or "inside" bid quotation. Unlisted securities which are not
quoted on the NASDAQ System but are traded in another over-the-counter market
are valued at the most recent sale price on such market. If no sale occurred,
the security is valued at the mean between the most recent bid and asked
quotations. If there are no such bid and asked quotations the most recent bid
quotation is used.
Portfolio debt securities with remaining maturities greater than sixty
days are valued by pricing agents approved by the Trustees, which prices reflect
broker/dealer-supplied valuations and electronic data processing techniques. If
the pricing agents are unable to provide such quotations, the most recent bid
quotation supplied by a bona fide market maker shall be used.
Short-term investments with remaining maturities of 60 days or less
are valued at amortized cost. Variable rate demand notes are carried at cost
which together with accrued interest approximates market.
80
<PAGE>
The value of all other securities is determined in good faith under the
direction of the Trustees.
B. REPURCHASE AGREEMENTS. The AARP High Quality Money Fund, AARP Growth
Funds and AARP GNMA and U.S. Treasury Fund regularly invest in repurchase
agreements. Each of the AARP funds may enter into repurchase agreements with
selected banks and broker/dealers whereby each fund, through its custodian,
receives delivery of the securities collateralizing repurchase agreements, the
amount of which at the time of purchase and each subsequent business day is
required to be maintained at such a level that the market value, depending on
the maturity of the underlying collateral, is equal to at least 101% of the
resale price.
C. FUTURES CONTRACTS. Each of the funds in the AARP Income Trust, the
AARP Insured Tax Free General Bond Fund, the AARP Balanced Stock and Bond Fund,
and AARP Global Growth Fund may enter into futures contracts. A futures contract
is an agreement between a buyer or seller and an established futures exchange or
its clearinghouse in which the buyer or seller agrees to take or make a delivery
of a specific amount of an item at a specified price on a specific date
(settlement date). During the period the AARP Balanced Stock and Bond Fund sold
interest rate futures as a temporary substitute for selling selected
investments. Also, during the period, the AARP High Quality Bond Fund and the
AARP Insured Tax Free General Bond Fund purchased and sold interest rate futures
to hedge against declines in the value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit
with a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out a futures contract prior to the settlement date and that a change in
the value of a futures contract may not correlate exactly with changes in the
value of the securities or currencies hedged. When utilizing futures contracts
to hedge, the Fund gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
D. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each of the funds in the
AARP Growth Trust, in connection with portfolio purchases and sales of
securities denominated in a foreign currency, may enter into forward foreign
currency exchange contracts ("forward contracts"). Additionally, from time to
time, each fund may enter into contracts to hedge certain foreign currency
denominated assets. A forward contract is a commitment to purchase or sell a
foreign currency at the settlement date at a negotiated rate. During the period,
the AARP Balanced Stock and Bond Fund utilized forward contracts as a hedge
against changes in exchange rates relating to foreign currency denominated
assets. Also, during the period, the AARP Balanced Stock and Bond Fund and the
AARP Growth and Income Fund utilized forward contracts as a hedge in connection
with portfolio purchases and sales of securities denominated in foreign
currencies.
Forward contracts are valued at the prevailing forward exchange rate of
the underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the
potential inability of counterparties to meet the terms of
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS
their contracts. Additionally, when utilizing forward contracts to hedge, the
Fund gives up the opportunity to profit from favorable exchange rate movements
during the term of the contract.
E. FOREIGN CURRENCY TRANSLATIONS. Foreign currency transactions from
foreign investment activity are translated into U.S. dollars on the following
basis:
(i) market value of investment securities, other assets and
liabilities at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and
interest income and certain expenses at the rates of exchange
prevailing on the respective dates of such transactions.
The Funds do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
F. SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME. Securities
transactions are accounted for on the trade date basis and dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Original issue discount on securities purchased is accreted on an
effective yield basis over the life of the security. Acquisition discount is
accreted on taxable securities purchased with original maturity dates of one
year or less. Premium on securities purchased by the AARP Tax Free Income Trust
is amortized on an effective yield basis over the life of the security.
Each fund uses the specific identification method for determining the
realized gain or loss on investments sold for both financial and federal income
tax reporting purposes.
G. FEDERAL INCOME TAXES. Each of the funds is treated as a single entity
for federal income tax purposes. It is the policy of each fund to comply with
the requirements of the Internal Revenue Code as amended which are applicable to
regulated investment companies, and to distribute all of its taxable and tax
exempt income to its shareholders. Accordingly, the funds paid no U.S. federal
income taxes, and no provisions for federal income taxes were required.
H. DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of
each fund is declared as a dividend to shareholders. The dividends from AARP
High Quality Money Fund and each of the funds in the AARP Income Trust and the
AARP Tax Free Income Trust are declared daily and distributed monthly. The
dividends from AARP Balanced Stock and Bond Fund and AARP Growth and Income Fund
are declared and paid quarterly. The dividends from AARP Global Growth Fund and
AARP Capital Growth Fund are declared and paid annually. During any particular
year, net realized gains from securities transactions for each fund which are in
excess of any available capital loss carryforwards, would be taxable to the fund
if not distributed and, therefore, will be distributed to shareholders in the
following fiscal year. The AARP High Quality Money Fund takes into account
realized gains and losses on the sales of securities held less than one year in
its daily distributions. An additional distribution may be made by each fund to
the extent necessary to avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal income tax
rules and regulations which may differ from generally accepted accounting
principles. These differences relate primarily to investments in options,
futures, forward contracts, foreign denominated investments, mortgage backed
securities, REITs and certain securities sold at a loss. As a result, net
investment income and net realized gain (loss) on investment transactions for a
reporting period may differ significantly from distributions during such period.
Accordingly, the Fund may periodically make reclassifications among certain of
its
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<PAGE>
capital accounts without impacting the net asset value of the Fund.
I. EXPENSES. Each fund is charged for those expenses that are directly
attributable to it, such as management, custodian, audit, and certain
shareholder service fees. Expenses that are not directly attributable to a fund,
such as reports to shareholders, portions of Trustees' and legal fees, are
allocated among all the funds.
J. ORGANIZATION COST. Costs incurred by the AARP Balanced Stock and Bond
Fund and the AARP Global Growth Fund in connection with its organization and
initial registration of shares have been deferred and are being amortized on a
straight-line basis over a five-year period.
K. PORTFOLIO INSURANCE. The cost of premiums paid by the AARP Insured
Tax Free General Bond Fund for insurance, which covers individual securities, is
non-cancellable and runs the life of such securities, is added to the cost basis
of such securities. This insurance provides for the timely payment of principal
and interest on these securities when due and protects the fund against loss
from default by the Municipal issuer. It does not protect the investor from
losses due to changes in market values.
L. SECURITIES PURCHASED ON A FORWARD DELIVERY OR WHEN-ISSUED BASIS. The
AARP High Quality Money Fund, each of the funds in the AARP Income Trust and
AARP Tax Free Income Trust, and AARP Balanced Stock and Bond Fund may purchase
securities on a forward delivery or when-issued basis. Municipal, corporate and
government securities are frequently offered on a forward delivery or
when-issued basis. At the time the fund makes the commitment to purchase a
security on a forward delivery or when-issued basis, the price of the underlying
security is fixed. The fund will record the transaction at the time of the
commitment and reflect the value of the security in determining its net asset
value. The settlement date of the transaction can occur within one month or more
after the date the commitment was made. During the period between purchase and
settlement date, no payment is made on behalf of the fund and no interest
accrues to the fund.
NOTE 2. MANAGEMENT FEE AND OTHER RELATED TRANSACTIONS.
Under the investment management and advisory agreement (the "Management
Agreement") between each Trust and Scudder, Stevens & Clark, Inc. (the "Fund
Manager") the management fee consists of two elements: a Base Fee and an
Individual Fund Fee. The Base Fee is calculated as a percentage of the combined
net assets of all of the AARP Funds ("Program Assets"). Each AARP Fund pays, as
its portion of the Base Fee, an amount equal to the ratio of its daily net
assets to the daily net assets of all of the AARP Funds. The Annual Base Fee is
calculated as follows: .35%, of the first $2.0 billion of such assets, .33% of
the next $2.0 billion of such assets, .30% of the next $2.0 billion of such
assets, .28% of the next $2.0 billion of such assets, .26% of the next $3.0
billion of such assets, .25% of the next $3.0 billion of such assets, .24% of
such assets thereafter.
In addition to the Base Fee Rate, each Fund agrees to pay the Fund
Manager a flat Individual Fund Fee based on the average daily net assets of that
Fund. The Individual Fund Fee Rate recognizes the different characteristics of
each Fund, the varying levels of complexity of investment research and
securities trading required to manage each Fund. The Individual Fund Fee Rate is
calculated at the following percentages of the average daily net assets of each
fund: .10% for AARP High Quality Money Fund and AARP High Quality Tax Free Money
Fund; .12% for AARP GNMA and U.S. Treasury Fund; .19% for AARP High Quality Bond
Fund, AARP Insured Tax Free General Bond Fund, AARP Balanced Stock and Bond Fund
and AARP Growth and Income Fund; .55% for AARP Global Growth Fund; .32% for AARP
Capital Growth Fund. The amount for each fund is shown in the Statement of
Operations as Management Fee.
As manager of the assets of each Fund, the Fund Manager directs the
investments of each Fund in accordance with its investment objectives, policies
and restrictions. In addition to portfolio management services, the Fund Manager
under the Management Agreement will provide certain administrative services in
accordance with such Agreement. The Fund Manager has also entered into a Member
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NOTES TO FINANCIAL STATEMENTS
Services Agreement with AARP Financial Services Corp. ("AFSC"), a subsidiary of
AARP, and pays portions of its investment management and advisory fee to AFSC.
The Management Agreement also provides that the Fund Manager will
reimburse the funds for annual expenses in excess of the lowest state
limitations imposed, exclusive of taxes, brokerage commissions, interest and
extraordinary expenses. The Fund Manager agreed to maintain the annualized
expenses of the AARP High Quality Tax Free Money Fund at not more than 0.90% of
average daily net assets until February 1, 1996. Effective February 1, 1996, the
Fund Manager agreed to maintain the annualized expenses of the AARP Global
Growth Fund at not more than 1.75% of average net assets until September 30,
1996. The amount of expenses reimbursed by the Fund Manager, if any, for each
fund has been shown in the Statement of Operations as Expense Reductions.
Each Trust has a shareholder servicing agreement with Scudder Service
Corporation ("SSC"), a subsidiary of Scudder. As shareholder servicing agent,
SSC provides various transfer agent, dividend disbursing, and shareholder
communication functions. The amount for each fund has been shown in the
Statement of Operations as Transfer and Dividend Disbursing Expense.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Fund
Manager, is responsible for determining the daily net asset value per share and
maintaining the portfolio and general accounting records of AARP Growth and
Income Fund, AARP Global Growth Fund and AARP Capital Growth Fund. For the six
months ended March 31, 1996, the amount charged to the Funds by SFAC aggregated
$133,845, $8,313, and $54,768, respectively, of which $21,210, $8,313, and
$8,057, respectively, is unpaid at March 31, 1996. Effective October 6, 1995,
for AARP High Quality Money Fund and AARP High Quality Tax Free Money Fund;
October 10, 1995, for AARP High Quality Bond Fund; October 20, 1995, for AARP
Balanced Stock and Bond Fund; November 10, 1995, for AARP GNMA and U.S. Treasury
Fund; and November 13, 1995 for AARP Insured Tax Free General Bond Fund, SFAC
assumed responsibility for determining the daily net asset value per share and
maintaining the portfolio and general accounting records. For the six months
ended March 31, 1996, the amount charged to the Funds by SFAC aggregated
$23,765, $15,176, $39,459, $33,669, $229,083 and $66,916, respectively, of which
$4,112, $2,612, $7,230, $6,737, $49,456, and $14,185, respectively, is unpaid at
March 31, 1996.
Each fund pays each Trustee not affiliated with Scudder or AARP $2,000
annually, $270 for each Trustees' meeting, $200 for each audit committee meeting
attended, and $100 for other committee meetings, plus expenses, subject to
certain maximums per Trustee for meetings held jointly with other funds. The
amount for each fund has been shown in the Statement of Operations as Trustees'
fees and expenses.
NOTE 3. COMMITMENTS
As of March 31, 1996, the AARP Balanced Stock and Bond Fund had entered into
the following forward currency exchange contracts resulting in net unrealized
appreciation of $4,157.
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR SETTLEMENT DATE (U.S.$)
- -------------------- --------------- --------------- -------
<S> <C> <C> <C> <C> <C>
DEM 625,588 USD 426,324 6/24/96 512
DEM 2,840,141 USD 1,936,812 6/24/96 3,645
-----
4,157
=====
</TABLE>
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O F F I C E R S A N D T R U S T E E S
A N D S E R V I C E I N F O R M A T I O N
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OFFICERS AND TRUSTEES
---------------------
CAROLE LEWIS ANDERSON
Trustee of AARP Cash Investment Funds and AARP Income Trust; President,
MASDUN Capital Advisors; Formerly Principal, Suburban Capital Markets;
Director, VICORP Restaurants, Inc.; Member of the Board, Association for
Corporate Growth of Washington, D.C.; Trustee, Hasbro Children's
Foundation and Mary Baldwin College.
ADELAIDE ATTARD
Trustee of AARP Income Trust and AARP Growth Trust; Member, New York
City Department of Aging Advisory Council--Appointed by Mayor (1995);
Consultant, Gerontology; Commissioner, County of Nassau, NY, Department
of Senior Citizen Affairs (1971-1991); Board Member, American
Association of International Aging (1981 to present); Member, NYS
Community Services for the Elderly Advisory Council--Appointed by
Governor (1987-1991); Chairperson, Federal Council on Aging (1981-1986);
U.S. Delegate to 1982 United Nations World Assembly on Aging.
CYRIL F. BRICKFIELD
Trustee of AARP Income Trust, AARP Tax Free Income Trust, AARP Growth
Trust; Honorary Trustee, AARP Cash Investment Funds; Honorary President
and Special Counsel, American Association of Retired Persons; Board
Member: American Association of International Aging, National
Alzheimer's Association, and American Federation of Aging Research
(AFAR).
ROBERT N. BUTLER, M.D.
Trustee of AARP Income Trust and AARP Growth Trust; Director,
International Longevity Center and Professor of Geriatrics and Adult
Development; Chairman, Henry L. Schwartz Department of Geriatrics and
Adult Development, Mount Sinai Medical Center; Formerly Director,
National Institute on Aging, National Institute of Health (1976-1982).
LINDA C. COUGHLIN
President and Trustee of AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust and AARP Growth Trust; Managing Director and
Member, Board of Directors of Scudder, Stevens & Clark, Inc.; Director
of Scudder Investor Services, Inc.
HORACE B. DEETS
Vice Chairman and Trustee of AARP Cash Investment Funds, AARP Income
Trust, AARP Tax Free Income Trust and AARP Growth Trust; Executive
Director, American Association of Retired Persons; Member, Board of
Councilors, Andrus Gerontology Center; Member of the Board, HelpAge
International.
MARY JOHNSTON EVANS
Trustee of AARP Cash Investment Funds, AARP Tax Free Income Trust and
AARP Growth Trust; Director: Baxter International, Inc., Delta Air
Lines, Inc., Household International, Inc., The Sun Company, Dun &
Bradstreet Corporation and Saint-Gobain Corporation.
EDGAR R. FIEDLER
Trustee of AARP Cash Investment Funds, AARP Income Trust and AARP Tax
Free Income Trust; Vice President and Economic Counselor, The Conference
Board, Inc.; Director: The Stanley Works, Zurich-American Insurance
Company, HT Insight Funds, and Emerging Mexico Fund.
CUYLER W. FINDLAY
Chairman and Trustee of AARP Cash Investment Funds, AARP Income Trust,
AARP Tax Free Income Trust, and AARP Growth Trust; Managing Director of
Scudder, Stevens & Clark, Inc., Senior Vice President and Director,
Scudder Investor Services, Inc.
EUGENE P. FORRESTER
Trustee of AARP Income Trust and AARP Tax Free Income Trust; Consultant;
International Trade Counselor; Lt. General (Retired), U.S. Army; Command
General, U.S. Army Western Command, Honolulu; Consultant: Digital
Equipment Corp., DHI, Philip Morris, PICS Previews, and Whittle
Communications.
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<PAGE>
WAYNE F. HAEFER
Trustee of AARP Income Trust, AARP Tax Free Income Trust, and AARP Growth
Trust; Director, Membership Division of AARP; Formerly Secretary,
Employee's Pension and Welfare Trusts of AARP and Retired Persons
Services, Inc.; Formerly Director, Administration and Data Management
Division of AARP.
GEORGE I. MADDOX, JR.
Trustee of AARP Income Trust and AARP Tax Free Income Trust; Professor
Emeritus and Director, Long Term Care Resources Program, Duke University
Medical Center; Senior Fellow, Center for the Study of Aging and Human
Development, Duke University; Professor Emeritus of Sociology, Departments
of Sociology and Psychiatry, Duke University.
ROBERT J. MYERS
Trustee of AARP Cash Investment Funds, AARP Income Trust and AARP Growth
Trust; Actuarial Consultant; Formerly Executive Director, National
Commission on Social Security Reform; Director: NASL Series Trust, Inc.
and North American Funds, Inc.; Formerly Director, Board of Pensions,
Evangelical Lutheran Church in America; Formerly Chairman, Commission
on Railroad Retirement Reform; Member, U.S. Office of Technology
Assessment, Prospective Payment Assessment Commission.
JOSEPH S. PERKINS
Trustee of AARP Cash Investment Funds, AARP Income Trust, AARP Tax Free
Income Trust, and AARP Growth Trust; Director, American Association of
Retired Persons; Formerly Corporate Retirement Manager, Polaroid
Corporation.
JAMES H. SCHULZ
Trustee of AARP Tax Free Income Trust and AARP Growth Trust; Professor of
Economics and Kirstein Professor of Aging Policy, Policy Center of Aging,
Florence Heller School, Brandeis University.
GORDON SHILLINGLAW
Trustee of AARP Cash Investment Funds, AARP Tax Free Income Trust, AARP
Growth Trust; Professor Emeritus of Accounting, Columbia University
Graduate School of Business; Formerly Director and Treasurer,
FERIS Foundation of America.
<TABLE>
<C> <C>
EDWARD V. CREED* PAMELA A. MCGRATH*
Vice President Vice President and Treasurer
THOMAS W. JOSEPH* EDWARD J. O'CONNELL*
Vice President Vice President and Assistant Treasurer
DAVID S. LEE* KATHRYN L. QUIRK*
Vice President and Assistant Treasurer Vice President and Secretary
DOUGLAS M. LOUDON* HOWARD SCHNEIDER*
Vice President Vice President
THOMAS F. MCDONOUGH* CORNELIA M. SMALL*
Vice President and Assistant Secretary Vice President
*Scudder, Stevens & Clark, Inc.
</TABLE>
Effective January 1, 1995, each member of and nominee for the Board of
Trustees must own shares of one or more of the Funds within the AARP
Investment Program of which he/she serves as Trustee.
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<PAGE>
SERVICE INFORMATION
-------------------
<TABLE>
<S> <C>
SHAREHOLDER Our knowledgeable AARP Mutual Fund Representatives are available
SERVICE LINE to answer questions about the Program or your account Monday
1-800-253-2277 through Friday, between 8:00 a.m. and 8:00 p.m., eastern time.
Transactions can be made Monday through Friday between 8:00 a.m.
and 4:00 p.m., eastern time.
Write: AARP Investment Program from Scudder
P.O. Box 2540
Boston, MA 02208-2540
For overnight AARP Investment Program from Scudder
and certified mail: 42 Longwater Drive
Norwell, MA 02061-1612
EASY-ACCESS LINE Shareholders with a touch-tone telephone may call this automated
1-800-631-4636 line to obtain AARP Fund performance and account information or to
exchange or sell (redeem) AARP Mutual Fund shares. This service is
available 24 hours a day, 7 days a week.
TRANSACTIONS BY FAX If you have access to a fax machine, you can fax transaction requests.
1-800-821-6234 Any exchange or redemption request received after 4:00 p.m.
business days or on weekends, will be processed the next business
day. All faxes are kept confidential.
TDD (TELECOMMUNICATIONS AARP members with hearing or speech impairments and access to
DEVICE FOR THE DEAF AND TDD equipment can communicate with the AARP Investment
SPEECH IMPAIRED) Program Monday through Friday between 8:00 a.m. and 6:00 p.m.,
1-800-634-9454 eastern time. Transactions can be made between 8:00 a.m. and
4:00 p.m., eastern time.
</TABLE>
88
